As
filed with the Securities and Exchange Commission on May 4, 2007.
Registration
No. 333-141205
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Pre-Effective
Amendment No. 1 to
FORM
S-4
Registration
Statement
Under
The
Securities Act of 1933
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1st
Source Corporation
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(Exact
name of registrant as specified in its charter)
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Indiana
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6022
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35-1068133
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(State
or other jurisdiction of incorporation)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer Identification No.)
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100
North Michigan Street, South Bend, Indiana
46601
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(574)
235-2000
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(Address,
including zip code, and telephone number, including area code, of
registrant’s principal executive offices)
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John
B. Griffith, Esquire
General
Counsel
1st
Source Corporation
100
North Michigan Street
South
Bend, Indiana 46601
(574)
235-2000
(Name,
address, including zip code, and telephone number, including area code, of
agent
for service)
With
copies to:
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Eric
R. Moy, Esquire
Barnes
& Thornburg LLP
11
South Meridian Street
Indianapolis,
Indiana 46204
(317)
231-7298
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John
W. Tanselle, Esquire
Krieg
DeVault LLP
One
Indiana Square, Suite 2800
Indianapolis,
Indiana 46204
(317)
238-6216
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Approximate
date of commencement of proposed sale to the public: As
soon as practicable following the effective date of this Registration Statement
If
the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box. ¨
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
CALCULATION
OF REGISTRATION FEE
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Title
of each class
of
securities
to
be registered
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Amount
to
be registered (1)
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Proposed
maximum offering
price
per share
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Proposed
maximum aggregate
offering
price
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Amount
of
Registration
Fee
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Common
Stock, without par value
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2,300,000
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N/A
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(2)
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$0
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(1)
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This
amount is based upon the estimated maximum number of shares of
Registrant
that Registrant may issue at closing of the proposed merger
(determined pursuant to the Agreement and Plan of Merger dated
as of
February 19, 2007, as amended, among the Registrant, Hickory Acquisition,
Inc., FINA Bancorp, Inc., and Wayne B. Welter, as shareholders’ agent,
described in the proxy statement/prospectus which is a part of
this
registration statement, assuming the price adjustment provisions
require a
price increase of not more than $1.5 million). Pursuant to Rule
416, this
registration statement also covers an indeterminate number of shares
of
common stock as may become issuable as a result of stock splits,
stock
dividends or similar transactions.
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(2)
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Estimated
solely for the purpose of calculating the registration fee required
by
Section 6(b) of the Securities Act of 1933, as amended and computed
pursuant to Rule 457(f)(2) and (f)(3) of the Securities Act. The
proposed maximum offering price is equal to (1) the aggregate book
value of the outstanding common stock of FINA Bancorp, Inc. to be
acquired
by Registrant in the merger of $69,900,000, as of December 31, 2006;
less
(2) the minimum cash portion of the merger consideration to be paid
by the Registrant in the transaction (assuming the price adjustment
provisions require a price decrease of $1.5 million), which will
be
$77,430,000. As this is a negative number, no fee is required to
be paid.
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The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
THE
INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT ISSUE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE
IS NOT PERMITTED.
SUBJECT
TO COMPLETION, DATED MAY 4, 2007
FINA
Bancorp, Inc.
Dear
Fellow Shareholders:
You
are
cordially invited to attend a special meeting of shareholders of FINA Bancorp,
Inc. to be held at our corporate offices at 14 Indiana Avenue, Valparaiso,
Indiana, at 10:00 a.m. local time on May 30, 2007.
At
the
special meeting, you will be asked to approve the Agreement and Plan of Merger,
by and among 1st Source Corporation, Hickory Acquisition, Inc., FINA Bancorp,
Inc. and Wayne B. Welter, as shareholders’ agent, pursuant to which FINA Bancorp
will merge with and into Hickory Acquisition, Inc. and the separate existence
of
FINA Bancorp will cease and First National Bank, Valparaiso, will become a
wholly owned subsidiary of 1st Source Corporation.
The
aggregate value of the merger consideration to be paid by 1st Source to FINA
Bancorp shareholders is approximately $135,000,000, which shall consist of
up to
approximately $56,700,000 in 1st Source common stock and the remainder will
be
paid in cash. Based on 42,101 shares of FINA Bancorp common stock issued
and
outstanding, upon completion of the merger, FINA Bancorp shareholders are
expected to receive merger consideration equal to approximately $3,206.57
per
share of FINA Bancorp common stock. FINA Bancorp shareholders will be entitled
to elect whether to receive cash or 1st Source common stock or a combination
thereof, in exchange for their FINA Bancorp shares; provided that no more
than
42% or less than 40% of the aggregate consideration will be paid in the form
of
stock. To the extent FINA Bancorp shareholders’ elections in aggregate would
call for the payment of less than 58% of the aggregate consideration in cash,
the available 1st Source common stock will be allocated among shareholders
electing to receive common stock on a pro rata basis, based on the amount
of 1st
Source common stock they initially elect to receive. Similarly, and subject
to
the obligation of 1st Source under certain conditions to pay all of the
aggregate consideration in cash, to the extent FINA Bancorp shareholders’
elections in aggregate would call for the payment of more than 60% of the
aggregate consideration in cash, the available cash will be allocated among
shareholders electing to receive cash on a pro rata basis, based on the amount
of cash they initially elect to receive.
If
you
elect or become entitled to receive 1st Source common stock in the merger,
the
number of shares you receive will depend in part on the average closing price
of
1st Source common stock on the Nasdaq Global Select Market for the ten full
trading days ending on the third full trading day before the anticipated
completion of the merger. The average closing price of 1st Source common
stock
for the ten trading days ending on May 3, 2007 was $24.97.
Because
the amount of cash and shares of 1st Source common stock you will receive in
the
merger is subject to adjustment based on the elections of all FINA Bancorp
shareholders, and the number of shares of 1st Source common stock to be issued
in the merger will be based in part on the average closing price of 1st Source
common stock on the Nasdaq Global Select Market for the ten full trading days
ending on the third full trading day before the anticipated completion date
of
the merger, you will not know the exact number of shares of 1st Source common
stock you will receive, or the value of those shares, when you vote on the
agreement and plan of merger.
1st
Source common stock is quoted on the Nasdaq Global Select Market under the
trading symbol “SRCE.”
After
careful consideration, FINA Bancorp’s board of directors recommends that you
vote “FOR” approval of the agreement and plan of merger.
To
complete the merger, holders of at least a majority of the outstanding shares
of
FINA Bancorp common stock must approve the agreement and plan of merger.
This
document provides you with detailed information about the merger. In addition
to
being a proxy statement of FINA Bancorp, this document is also the prospectus
of
1st Source for shares of 1st Source common stock that will be issued in
connection with the merger. We encourage you to read the entire document
carefully. Please
pay particular attention to “Risk Factors” beginning on page 14 for a discussion
of the risks related to the merger and owning 1st Source common stock after
the
merger.
I
hope to
see you on May 30, 2007 at our offices in Valparaiso, Indiana.
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Sincerely,
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Wayne
B. Welter
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President
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FINA
Bancorp, Inc.
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NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORS
HAVE
APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN THE MERGER OR
DETERMINED IF THIS DOCUMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE
CONTRARY IS A CRIMINAL OFFENSE.
THE
SHARES OF 1ST SOURCE COMMON STOCK TO BE ISSUED IN THE MERGER ARE NOT DEPOSITS
OR
SAVINGS ACCOUNTS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION, AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
This
proxy statement/prospectus is dated May 4,
2007
and is first being mailed to FINA Bancorp’s shareholders on or about May
7,
2007.
GENERAL
INFORMATION
You
should rely only on the information contained in this document in determining
how to vote your shares at the special meeting. 1st Source and FINA Bancorp
have
not authorized anyone to provide you with information that is different from
what is contained in this document. This document is dated May 4,
2007.
You should not assume that the information contained in this document is
accurate as of any date other than that date, and neither the mailing of
this
document to shareholders nor the issuance of 1st Source’s common stock in the
merger creates any implication to the contrary.
See
“Where You Can Find More Information” on page 68.
FINA
BANCORP, INC.
14
Indiana Avenue
Valparaiso,
Indiana
46383
NOTICE
OF SPECIAL MEETING OF SHAREHOLDERS
TO
BE HELD ON MAY 30, 2007
To
the
Shareholders of FINA Bancorp, Inc.:
FINA
Bancorp, Inc. will hold a special meeting of shareholders our corporate offices
at 14 Indiana Avenue, Valparaiso, Indiana, at 10:00 a.m. local time on May
30,
2007, for the following purposes:
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•
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To
consider and vote upon a proposal to approve and adopt the Agreement
and
Plan of Merger, as amended, dated as of February 19, 2007, by and
between
1st Source Corporation, Hickory Acquisition, Inc., FINA Bancorp,
Inc. and
Wayne B. Welter, as shareholders’ agent, which provides for the merger of
FINA Bancorp with and into Hickory Acquisition, Inc. A copy of
the
agreement and plan of merger is attached as Appendix
A
to
the accompanying proxy statement/prospectus of which this notice
is a
part. This proposal is described more fully in the proxy
statement/prospectus of which this notice is a part.
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•
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For
the transaction of such other matters as may properly come before
the
special meeting.
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We
have
fixed the close of business on April 16, 2007 as the record date for determining
those shareholders entitled to vote at the special meeting. Only FINA Bancorp
shareholders of record at the close of business on that date are entitled
to
notice of the special meeting, and only the shareholders of record of FINA
Bancorp common stock at the close of business on that date are entitled to
vote
at the special meeting. For the agreement and plan of merger to be approved
by
FINA Bancorp’s shareholders, the holders of at least a majority of the
outstanding shares of FINA Bancorp common stock must vote for approval of
the
agreement and plan of merger. Abstentions and broker non-votes will have
the
same effect as votes against approval of the agreement and plan of merger
and
any other proposals being presented. If you wish to attend the special meeting
and your shares are held in the name of a broker, trust, bank or other nominee,
you must bring with you a proxy or letter from the broker, trustee, bank
or
nominee to confirm your beneficial ownership of the shares. A list of
shareholders entitled to vote at the special meeting will be available for
inspection by any shareholder at the offices of FINA Bancorp during usual
business hours for a period of five business days before the special meeting.
The list of shareholders will also be available for inspection during the
special meeting and any adjournment of the special meeting.
If
you do
not vote in favor of the agreement and plan of merger and you strictly comply
with the procedures set forth in Chapter 44 of the Indiana Business Corporation
Law, you will be entitled to obtain payment in cash of the fair value of your
shares of FINA Bancorp common stock as determined under this statute. A copy
of
these provisions is included as Appendix
D
to this
document, and a summary of these provisions can be found in the section titled
“Rights of Dissenting Shareholders” beginning on page 45 of this document.
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By
Order of the Board of Directors,
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Wayne
B. Welter
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President
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FINA
Bancorp, Inc.
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Valparaiso,
Indiana
May
4,
2007
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU MAY OWN. FINA
BANCORP’S BOARD OF DIRECTORS SINCERELY WELCOMES YOUR PRESENCE AT THE SPECIAL
MEETING. HOWEVER, SO THAT FINA BANCORP MAY BE SURE THAT YOUR VOTE WILL BE
INCLUDED, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED AT THE
MEETING. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
FINA
BANCORP’S BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF THE
AGREEMENT AND PLAN OF MERGER.
TABLE
OF CONTENTS
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QUESTIONS
AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
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1
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SUMMARY
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3
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Who
We Are
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3
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The
Special Meeting of FINA Bancorp
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4
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The
Merger
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4
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Structure
of the Merger
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4
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FINA
Bancorp’s Board Recommends that You Vote “For” the Agreement and Plan of
Merger; FINA Bancorp’s Reasons for Merger
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4
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1st
Source’s Reasons for Merger
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5
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FINA
Bancorp’s Financial Advisors Have Provided an Opinion as to the Fairness
of the Merger Consideration, from a Financial Point of View, to FINA
Bancorp’s Shareholders
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5
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FINA
Bancorp’s Shareholders Will Receive Cash and Shares of 1st Source Common
Stock in the Merger Allocated Based on Their Elections and the Provisions
of the Merger Agreement
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5
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Material
Federal Income Tax Consequences of the Merger
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5
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FINA
Bancorp Shareholder Vote Required to Approve the Agreement and Plan
of
Merger
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6
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Dissenters’
and Appraisal Rights
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6
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Certain
FINA Bancorp Directors and Executive Officers May Have Interests
in the
Merger that are Different from, or in Addition to, Their Interests
as
Shareholders
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6
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FINA
Bancorp Has Agreed When and How FINA Bancorp and its Subsidiaries
Can
Consider Third-Party Acquisition Proposals
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7
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Accounting
Treatment
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7
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The
Completion of the Merger is Subject to Certain Conditions
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7
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We
Have Not Yet Obtained All Regulatory Approvals
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7
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Termination
of the Agreement and Plan of Merger
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8
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Termination
Fee
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8
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Voting
Agreement
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8
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Shareholders’
Agent
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9
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SELECTED
HISTORICAL FINANCIAL DATA
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10
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1st
Source
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10
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FINA
Bancorp
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11
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Comparative
Historical and Pro Forma Per Share Data
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12
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RISK
FACTORS
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14
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Risk
Factors Relating to the Merger
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14
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Risk
Factors Relating to 1st Source
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17
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CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
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21
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FINA
BANCORP SPECIAL MEETING
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23
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General
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23
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Date,
Time and Place of Special Meeting
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23
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Purpose
of the Special Meeting
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23
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Record
Date; Shares Entitled to Vote; Quorum
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23
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Vote
of FINA Bancorp Shareholders Required for Adoption of the Agreement
and
Plan of Merger
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22
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Voting
By Proxy
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23
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Solicitation
of Proxies; Expenses
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25
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THE
MERGER
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25
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General
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25
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Background
of the Merger
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26
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FINA
Bancorp’s Reasons for the Merger and Recommendation of FINA Bancorp’s
Board Of Directors
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27
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1st
Source’s Reasons for the Merger
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27
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Opinion
of FINA Bancorp’s Financial Advisor
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28
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Interests
of Certain Persons in the Merger
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31
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-i-
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Indemnification
and Insurance
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32
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Completion
and Effectiveness of the Merger
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32
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Merger
Consideration
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32
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Exchange
of FINA Bancorp Stock Certificates for 1st Source Stock Certificates
and
Cash
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35
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Accounting
Treatment
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37
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Management
After the Merger
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37
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Material
Federal Income Tax Consequences of the Merger
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37
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Governmental
and Regulatory Approvals
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43
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Status
of Applications and Notices
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43
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Restrictions
on Resales by Affiliates
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44
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Listing
on the Nasdaq Global Select Market of 1st Source Common Stock to
be Issued
in the Merger
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44
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RIGHTS
OF DISSENTING SHAREHOLDERS
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45
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Dissenters’
Rights Procedures
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45
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THE
AGREEMENT AND PLAN OF MERGER
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49
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Representations
and Warranties
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49
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Conduct
of FINA Bancorp’s Business Pending the Merger
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50
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Additional
Covenants and Agreements
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51
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No
Solicitation of Other Acquisition Proposals
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52
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Conditions
to Completion of the Merger
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53
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Termination
of the Agreement and Plan of Merger
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54
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Voting
Agreement
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54
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Shareholders’
Agent
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55
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Amendment
of Agreement and Plan of Merger
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55
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INFORMATION
ABOUT FINA BANCORP
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56
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General
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56
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Facilities
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57
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FINA
Bancorp, Inc. and First National Bank, Valparaiso
Facilities
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57
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Employees
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58
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Legal
Proceedings
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59
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Security
Ownership by Certain Beneficial Owners and Management of FINA
Bancorp
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60
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DESCRIPTION
OF 1ST SOURCE CAPITAL STOCK
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62
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Authorized
Capital Stock
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62
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1st
Source Common Stock
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62
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1st
Source Preferred Stock
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62
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COMPARISON
OF RIGHTS OF HOLDERS OF FINA BANCORP COMMON STOCK AND 1ST SOURCE
COMMON
STOCK
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63
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COMPARATIVE
MARKET PRICE AND DIVIDEND INFORMATION WITH RESPECT TO 1ST SOURCE
COMMON
STOCK AND FINA BANCORP COMMON STOCK
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67
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Market
Information
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67
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Dividends
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67
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OTHER
MATTERS
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68
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LEGAL
MATTERS
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68
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EXPERTS
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68
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WHERE
YOU CAN FIND MORE INFORMATION
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68
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APPENDIX
A: Agreement and Plan of Merger
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A-1
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APPENDIX
B: Fairness Opinion, dated May 4,
2007
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B-1
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APPENDIX
C: Shareholder Voting Agreement
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C-1
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APPENDIX
D: Provisions of Indiana Law Relating to Dissenting
Shareholders
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D-1
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APPENDIX
E: Supplemental Information Regarding 1st Source
Corporation
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E-1
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-ii-
About
the Merger
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Q:
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What
am I voting on?
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A:
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1st
Source, Hickory Acquisition, Inc., FINA Bancorp and Wayne B. Welter,
as
shareholders’ agent, have entered into an agreement and plan of merger
pursuant to which 1st Source has agreed to acquire FINA Bancorp.
You are
being asked to consider and vote upon a proposal to approve the agreement
and plan of merger through which FINA Bancorp will merge with and
into
Hickory Acquisition, Inc. As a result of the merger, FINA Bancorp
will
cease to exist and FINA Bancorp shareholders will exchange their
FINA
Bancorp common stock for shares of 1st Source common stock and/or
cash,
based on the election procedures described below.
|
|
Q:
|
What
will I receive in exchange for my shares of FINA Bancorp common
stock?
|
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A:
|
Based
on 42,101 shares of FINA Bancorp common stock issued and outstanding,
upon
completion of the merger, FINA Bancorp shareholders are expected
to
receive merger consideration equal to approximately $3,206.57 per
share of
FINA Bancorp common stock in the form of cash and (if you elect to
receive
shares and/or shares are allocated to you pursuant to the merger
agreement) shares of 1st Source common stock. The cash portion of
the
merger consideration will be between 58% and 60% of the aggregate
purchase
consideration. After setting aside between $4 million and $5.5 million
in
escrow for purposes of adjusting the purchase price and providing
indemnity to 1st Source, the balance of the purchase price will be
allocated among the FINA Bancorp shareholders based on their written
elections whether to take cash and 1st Source common stock or all
cash as
consideration for their shares. The amount in the escrow account
will be
paid out after satisfaction of all escrow conditions. Depending on
the
elections by all of the FINA Bancorp shareholders, the cash and stock
consideration may be reallocated among the FINA Bancorp shareholders
to
ensure that the total mix of cash and stock consideration is within
the
parameters required by the merger agreement. If you receive 1st Source
common stock in exchange for your shares of FINA Bancorp, the actual
number of shares that you receive will depend in part on the average
closing price of 1st Source common stock on the Nasdaq Global Select
Market for the ten full trading days ending on the third full trading
day
before the completion of the merger.
|
|
Q:
|
Will
I be able to trade the 1st Source common stock that I receive in
the
merger?
|
|
A:
|
Yes.
The 1st Source common stock issued in the merger will be quoted
on the
Nasdaq Global Select Market under the symbol “SRCE.” You may sell the
shares of 1st Source common stock you receive in the merger without
restriction unless, under United States securities laws, you are
considered an “affiliate” of FINA Bancorp at the time of the special
meeting or become an “affiliate” of 1st Source as a result of the merger.
Affiliates will need to comply with the restrictions described
in the
section titled “The Merger—Restrictions on Resale by Affiliates” beginning
on page 44.
|
|
Q:
|
What
is the required vote to approve the agreement and plan of
merger?
|
|
A:
|
The
holders of at least a majority of the outstanding shares of FINA
Bancorp
common stock as of April 16, 2007, the record date for the special
meeting, must vote to approve the agreement and plan of merger
in order
for the merger to be completed. Abstentions from voting and “broker
non-votes” are not considered affirmative votes and, therefore, will have
the same effect as a vote “against” the merger.
|
|
As
of the record date, FINA Bancorp’s executive officers and directors and
their affiliates, as a group, beneficially owned or had the power
to
direct the voting of approximately 82.9% of the common stock of
FINA
Bancorp. Individuals who are beneficial owners of and have the
power to
direct the voting of shares equal in the aggregate to approximately
72.3%
of the common stock of FINA Bancorp have agreed to vote in favor
of the
agreement and plan of merger by means of a Shareholder Voting agreement,
the form of which is attached as Appendix
C
to
this proxy statement/prospectus. Included in these shares are 9,396
shares, or approximately 22.3% of the common stock of FINA Bancorp,
held
by the William J. Welter Irrevocable Trust. The provisions of this
trust
are currently the subject of a pending lawsuit which may impact
the method
of voting of these shares. Neither FINA Bancorp nor 1st Source
is a party
to this lawsuit and we offer no assurance as to how or when such
lawsuit
may be resolved.
|
1
|
Q:
|
Are
1st Source shareholders voting on the merger?
|
|
A:
|
No
vote of 1st Source shareholders is required under applicable law
to
complete the merger.
|
|
Q:
|
What
does the FINA Bancorp board of directors recommend?
|
|
A:
|
The
board of directors of FINA Bancorp recommends by a majority vote
that FINA
Bancorp’s shareholders vote “FOR” the agreement and plan of merger.
|
|
Q:
|
Do
I have dissenters’ or appraisal rights with respect to the
merger?
|
|
A:
|
Yes.
Under Indiana law, you have the right to dissent from the merger.
To
exercise dissenters’ rights of appraisal, or appraisal rights, you must
strictly follow the procedures prescribed by the Indiana Business
Corporation Law, or IBCL. To review these procedures in more detail,
see
“Rights of Dissenting Shareholders” beginning on page 45 of this
proxy statement/prospectus and Appendix
D.
|
|
Q:
|
When
do you expect the merger to occur?
|
|
A:
|
We
expect to complete the merger promptly after FINA Bancorp’s shareholders
approve the agreement and plan of merger at the special meeting and
after
the receipt of all requisite governmental and regulatory approvals,
the
expiration of applicable waiting periods and the satisfaction or
waiver of
all other conditions to the merger. We currently expect this to occur
in
the second quarter of 2007, although delays may occur.
|
|
Q:
|
Are
there any risks I should consider in deciding whether I vote for
the
agreement and plan of merger and the merger?
|
|
A:
|
Yes.
Set out under the heading of “Risk Factors,” beginning on page 14 of this
document, a number of risk factors are discussed that you should
consider
carefully.
|
About
the Special Meeting
|
Q:
|
When
and where is the FINA Bancorp special shareholders
meeting?
|
|
A:
|
The
special meeting will be held at our corporate offices at 14 Indiana
Avenue, Valparaiso, Indiana on May 30, 2007, at 10:00 a.m. local
time.
|
|
Q:
|
Who
is entitled to vote at the special meeting?
|
|
A:
|
Holders
of record of FINA Bancorp common stock at the close of business
on April
16, 2007, which is the date FINA Bancorp’s board of directors has fixed as
the record date for the special meeting, are entitled to vote at
the
special meeting.
|
|
Q:
|
What
do I need to do now?
|
|
A:
|
First,
please mail your signed proxy card in the enclosed return envelope,
as
soon as possible, so your shares will be represented at the special
meeting. In order to be sure that your vote is counted, please vote
now
even if you plan to attend the special meeting in person.
|
|
Your
proxy card will instruct the persons named on the proxy card to vote
your
shares at the special meeting as you direct. If you sign and send
in your
proxy card and do not indicate how you want to vote, your proxy will
be
voted “FOR” the approval of the agreement and plan of
merger.
|
|
Second,
if you wish to make an election regarding whether you will become
entitled
to receive a combination of stock and cash, or only cash, in the
merger,
you must complete the enclosed Letter of Transmittal and Election
and
return it with your original FINA Bancorp stock certificates to
which it
applies, to the exchange agent, on or before May 31, 2007.
|
2
|
Q:
|
May
I change my vote after I have mailed my signed proxy
card?
|
|
A:
|
Yes.
You may change your vote at any time before your proxy is voted at
the
special meeting. You may change your vote by submitting a new proxy
with a
later date or by voting in person at the special meeting. Alternatively,
you may revoke your proxy altogether by notifying FINA Bancorp’s President
in writing before the special meeting that you have revoked your
proxy.
|
|
Q:
|
May
I vote in person?
|
|
A:
|
Yes.
You may attend the special meeting and vote your shares in person
rather
than completing, signing and mailing a proxy card.
|
|
Q:
|
Why
is it important for me to vote?
|
|
A:
|
We
cannot complete the merger without the holders of at least a majority
of
the outstanding shares of FINA Bancorp common stock as of the record
date
voting in favor of the agreement and plan of merger. If
you do not vote or fail to give instructions to your broker or bank
to
vote on your behalf, it will have the same effect as a vote against
the
merger.
|
|
Q:
|
Should
I send in my stock certificates with my proxy card?
|
|
A:
|
Yes.
If you wish to make an election regarding whether you will become
entitled
to receive a combination of stock and cash, or only cash, in the
merger,
you must complete the enclosed Letter of Transmittal and Election
and
return it with your original FINA Bancorp stock certificates to
which it
applies, to the exchange agent, on or before May 31, 2007. If you
do not
make such an election and do not submit your stock certificates
by that
date, promptly after the completion of the merger, the exchange
agent will
mail to you a letter of transmittal and instructions for exchanging
your
FINA Bancorp stock certificates for the merger consideration.
|
How
to Get More Information
|
Q:
|
Who
can help answer my questions?
|
|
A:
|
If
you have questions about the merger or about how to vote your shares,
please call Wayne B. Welter at FINA Bancorp at (219)
462-4165.
|
|
Q:
|
Where
can I find more information about 1st Source?
|
|
A:
|
You
can find more information about 1st Source from the various sources
described under the heading “Where You Can Find More Information”
beginning on page 68 of this proxy statement/prospectus.
|
SUMMARY
This
summary highlights selected information from this proxy statement/prospectus
and
may not contain all of the information that is important to you. To understand
the merger fully and for a more complete description of the legal terms of
the
merger, you should carefully read this entire document and the other documents
to which 1st Source and FINA Bancorp have referred you, including the Appendices
to this proxy statement/prospectus. For more information about 1st Source
and
FINA Bancorp see “Where You Can Find More Information” on page 68. We have
included page references in this Summary to direct you to other places in
this
proxy statement/prospectus where you can find a more complete description
of the
topics we have summarized.
1st
Source Corporation
100
North Michigan Street
South
Bend, Indiana 46601
(574)
235-2000
1st
Source Corporation, an Indiana corporation incorporated in 1971, is a bank
holding company headquartered in South Bend, Indiana that provides, through
its
subsidiaries (collectively referred to as "1st
3
Source"),
a broad array of financial products and services. 1st Source, through its
principal subsidiary 1st Source Bank, offers commercial and consumer banking
services, trust and investment management, and insurance, to individual and
business clients through most of its 67 banking center locations in 16 counties
in the Northern Indiana-Southwestern Michigan regional market area. 1st Source
Bank’s Specialty Finance Group, with 24 locations nationwide, offers specialized
financing services for new and used private and cargo aircraft, automobiles
and
light trucks for leasing and rental agencies, medium and heavy duty trucks,
construction equipment, and environmental equipment. 1st Source is not dependent
upon any single industry or client.
At
December 31, 2006, 1st Source had consolidated total assets of $3.81 billion,
loans and leases of $2.70 billion, deposits of $3.05 billion, and total
shareholders' equity of $368.90 million.
FINA
Bancorp, Inc.
14
Indiana Avenue
Valparaiso,
Indiana 46383
FINA
Bancorp, Inc., an Indiana corporation formed in 1973, is a bank holding company
headquartered in Valparaiso, Indiana. Its principal subsidiary is First National
Bank, Valparaiso, a full service bank founded in 1889 operating 26 banking
facilities located in Porter, LaPorte and Starke County, Indiana, and offering
a
broad complement of personal and business banking services, as well as trust
and
asset management services.
At
December 31, 2006, FINA Bancorp and its subsidiaries had total assets of
$607.4
million, loans and leases of $230.1 million, deposits of $509.3 million,
and
shareholders’ equity of $69.9 million.
FINA
Bancorp plans to hold a special meeting of its shareholders on May 30, 2007,
at
10:00 a.m. local time, at our corporate offices at 14 Indiana Avenue,
Valparaiso, Indiana, 46383. At the meeting you will be asked to consider
and
vote upon a proposal to approve the agreement and plan of merger.
You
can
vote at the special meeting if you owned FINA Bancorp common stock at the
close
of business on April 16, 2007. As of that date, there were 42,101 shares
of FINA
Bancorp common stock outstanding and entitled to vote. You can cast one vote
for
each share of FINA Bancorp common stock that you own.
The
agreement and plan of merger is attached as Appendix
A
to this
proxy statement/prospectus and is incorporated into this proxy
statement/prospectus by reference. You are encouraged to read the agreement
and
plan of merger as it is the legal document that governs the merger.
FINA
Bancorp will be merged with and into Hickory Acquisition, Inc., a wholly-owned
subsidiary of 1st Source, with Hickory Acquisition, Inc. as the surviving
corporation. Promptly following the merger, Hickory Acquisition, Inc. will
be
merged into 1st Source Corporation. The directors and officers of 1st Source
before the merger will continue to serve as the directors and officers of 1st
Source after the merger. First National Bank, Valparaiso will continue its
separate existence as a wholly owned subsidiary of 1st Source.
Based
on
the reasons discussed elsewhere in this proxy statement/prospectus, FINA
Bancorp’s board of directors has determined that the merger is advisable and in
your best interests and recommends that you vote “FOR”
the
agreement and plan of merger. One director voted against the proposal. For
a
discussion
4
of
the
circumstances surrounding the merger and the factors considered by FINA
Bancorp’s board of directors in approving the agreement and plan of merger, see
page 26.
1st
Source is a locally controlled, regional bank holding company serving
communities in Northern Indiana and Southwestern Michigan. Acquisition of FINA
Bancorp, and its subsidiary, First National Bank, Valparaiso, provides 1st
Source with an important opportunity to acquire another locally controlled
financial institution with a complementary geographic footprint and valuable
depositary relationships.
ASFI,
LLC
(d/b/a Austin Financial Services) delivered its oral opinion to FINA Bancorp’s
board of directors that, as of February 17, 2007 and based upon and subject
to
the factors and assumptions set forth in the opinion, the aggregate merger
consideration to be received by holders of the outstanding shares of common
stock of FINA Bancorp under the agreement and plan of merger was fair from
a
financial point of view to such holders.
The
full
text of the written opinion of AFSI, dated May 4, 2007, which sets forth
assumptions made, procedures followed, matters considered and limitations
on the
review undertaken in connection with the opinion, is attached as Appendix
B
to this
proxy statement/prospectus. FINA Bancorp’s shareholders should read the opinion
in its entirety. AFSI provided its opinion for the information and assistance
of
FINA Bancorp’s board of directors in connection with its consideration of the
transaction. The AFSI opinion is not a recommendation as to how any holder
of
FINA Bancorp common stock should vote or make any election with respect to
the
transaction.
Based
on
42,101 shares of FINA Bancorp common stock issued and outstanding, upon
completion of the merger, FINA Bancorp shareholders are expected to receive
merger consideration equal to approximately $3,206.57 per share of FINA Bancorp
common stock in the form of cash and (if you elect to receive shares and/or
shares are allocated to you pursuant to the merger agreement) shares of 1st
Source common stock. The cash portion of the merger consideration will be
between 58% and 60% of the aggregate purchase consideration. The aggregate
purchase price to be paid by 1st Source will be approximately $135 million,
subject to adjustment in accordance with the merger agreement. After setting
aside between $4 million and $5.5 million in cash in the escrow for purposes
of
adjusting the purchase price and providing indemnity to 1st Source, the balance
of the purchase price will be allocated among the FINA Bancorp shareholders
based on their written elections whether to take cash or 1st Source common
stock
as consideration for their shares. Depending on the elections by all of the
FINA
Bancorp shareholders, the cash and stock consideration may be reallocated among
the FINA Bancorp shareholders to ensure that the total mix of cash and stock
consideration is within the parameters required by the merger agreement. If
you
receive 1st Source common stock in exchange for your shares of FINA Bancorp,
the
actual number of shares that you receive will depend in part on the average
closing price of 1st Source common stock on the Nasdaq Global Select Market
for
the ten full trading days ending on the third full trading day before the
completion of the merger.
Material
Federal Income Tax Consequences of the Merger (page 37)
The
merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the
“Code”), generally referred to in this proxy statement/prospectus as the Code.
It is a condition to the closing of the merger that FINA Bancorp receive an
opinion of counsel, dated as of the closing date of the merger, to the effect
that the merger will be treated as a reorganization within the meaning of
Section 368(a) of the Code.
5
Assuming
the merger qualifies as a reorganization, in general, you will not recognize
any
gain or loss for federal income tax purposes on the exchange of your FINA
Bancorp shares for 1st Source shares in the merger. Taxable gain will result,
however, to the extent that you receive cash instead of 1st Source common stock
(including cash received in lieu of fractional shares of 1st Source common
stock) and the cash received exceeds your adjusted basis in the surrendered
stock.
In
the
event that you and all of the other FINA Bancorp shareholders receive solely
cash in exchange for your FINA Bancorp shares, the merger will not be treated
as
a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code and, therefore, taxable gain will result to the extent that you receive
cash and the cash received exceeds your adjusted basis in the surrendered shares
of FINA Bancorp stock.
You
should read “The Merger—Material Federal Income Tax Consequences of the Merger”
beginning on page 37 for a more complete discussion of the United States
federal income tax consequences of the merger. We urge you to consult with
your
tax advisor for a full understanding of the tax consequences of the merger
to
you.
FINA
Bancorp Shareholder Vote Required to Approve the Agreement and Plan of
Merger (page 23)
Approval
of the agreement and plan of merger requires the affirmative vote of the
holders
of at least a majority of the shares of FINA Bancorp common stock outstanding
as
of the close of business on April 16, 2007, the record date for the special
meeting of FINA Bancorp shareholders. At the close of business on the record
date, there were 42,101 shares of FINA Bancorp common stock outstanding held
by
80 holders of record. Each holder of record of FINA Bancorp common stock
on the
record date is entitled to one vote for each share held on all matters to
be
voted upon at the special meeting.
As
of the
record date, FINA Bancorp’s executive officers and directors and their
affiliates, as a group, beneficially owned approximately 82.9% of the common
stock of FINA Bancorp. Individuals who are beneficial owners of and have the
power to direct the voting of shares equal in the aggregate to approximately
72.3% of the common stock of FINA Bancorp have agreed to vote in favor of the
agreement and plan of merger by means of a Shareholder Voting agreement, the
form of which is attached as Appendix
C
to this
proxy statement/prospectus. Included in these shares are 9,396 shares, or
approximately 22.3% of the common stock of FINA Bancorp, held by the William
J.
Welter Irrevocable Trust. The provisions of this trust are currently the subject
of a pending lawsuit which may impact the method of voting of these shares.
Neither FINA Bancorp nor 1st Source is a party to this lawsuit and we offer
no
assurance as to how or when such lawsuit may be resolved.
The
Indiana Business Corporation Law grants dissenters’ rights in the merger to
holders of FINA Bancorp common stock. Under the Indiana Business Corporation
Law, FINA Bancorp shareholders may dissent from the share exchange and demand
in
writing that FINA Bancorp pay the fair value of their shares. Fair value
excludes any appreciation or depreciation in anticipation of the share exchange
unless the exclusion would be inequitable.
Chapter
44 of the Indiana Business Corporation Law sets forth the required procedures
a
shareholder requesting dissenters’ rights must follow. A copy of Chapter 44 of
the Indiana Business Corporation Law is attached as Appendix
D to
this
proxy statement/prospectus. Shareholders who elect to exercise dissenters’
rights must strictly comply with all of the procedures to preserve those
rights.
Certain
FINA Bancorp Directors and Executive Officers May Have Interests in the Merger
that are Different from, or in Addition to, Their Interests as
Shareholders (page 31)
You
should be aware that certain of FINA Bancorp’s directors and executive officers
may have interests in the merger that are different from, or in addition
to,
their interests as shareholders of FINA Bancorp. FINA Bancorp’s board of
directors was aware of these interests and took them into account at the
time
they approved the agreement and plan of merger. These interests include
provisions in the merger agreement relating to indemnification of directors
and
officers and insurance for directors and officers of
6
FINA
Bancorp for events occurring before the merger. These interests are more fully
described in this proxy statement/prospectus under the heading “The
Merger—Interests of Certain Persons in the Merger” beginning on page 31.
The
agreement and plan of merger contains detailed provisions prohibiting FINA
Bancorp, either directly or indirectly, from seeking or encouraging an
alternative acquisition proposal. The “no solicitation” provisions prohibit FINA
Bancorp and its subsidiaries, as well as their officers, directors, employees
and representatives, from taking any action to solicit an acquisition proposal
as described on page 52. However, the agreement and plan of merger does not
prohibit FINA Bancorp and its subsidiaries, and their respective officers,
directors, employees and representatives from providing confidential information
to third parties, engaging in negotiations with, and potentially recommending
an
alternative acquisition proposal as described on page 52 if FINA Bancorp’s board
of directors concludes in good faith, on the basis of written advice from
outside counsel, that failure to take such actions would be a breach of
fiduciary duties by the board of directors under applicable law.
Even
if
the FINA Bancorp board of directors resolves to change its recommendation in
favor of the agreement and plan of merger, FINA Bancorp must hold the special
meeting of shareholders unless the agreement has been terminated by FINA Bancorp
because it has accepted a third-party acquisition proposal, as discussed above,
or because 1st Source has accepted a third-party acquisition proposal. At any
shareholders’ meeting of FINA Bancorp at which the agreement is considered, the
FINA Bancorp shareholders who are parties to the voting agreement with 1st
Source will be required to honor the voting agreement, under which they have
agreed to vote the shares of FINA Bancorp common stock beneficially owned by
them or over which they have power to direct the vote (aggregating approximately
72.3% of FINA Bancorp’s outstanding shares) in favor of the agreement and plan
of merger.
The
combination of the two companies will be accounted for as an acquisition of
FINA
Bancorp by 1st Source using the purchase method of accounting.
Completion
of the merger is subject to various conditions, including the approval of the
agreement and plan of merger by FINA Bancorp’s shareholders, as well as receipt
of all required banking and other regulatory approvals. However, 1st Source
will
not be required to consummate the merger if any such regulatory approval
contains any condition which, in the reasonable good faith judgment of 1st
Source, adversely impacts the ability of 1st Source to conclude the merger
or
operate any business of 1st Source or FINA Bancorp as currently operated. Other
conditions include the accuracy of the other parties’ representations and
performance of their respective obligations, and receipt by FINA Bancorp of
an
opinion of counsel as to the tax treatment of the merger, unless the aggregate
merger consideration is all cash. There can be no assurance as to whether or
when all of the conditions will be satisfied or, where permissible, waived.
We
cannot
complete the merger unless we receive the prior written approval of the Board
of
Governors of the Federal Reserve System (sometimes called the “Federal Reserve”)
and the Indiana Department of Financial Institutions (sometimes called “IDFI”).
1st Source and FINA Bancorp and their relevant subsidiaries have filed all
required applications and notices with applicable regulatory authorities
in
connection with the merger. There can be no assurance that all requisite
approvals will be obtained or that such approvals will be received on a timely
basis. The Federal Reserve staff has advised 1st Source that due to the
concentration of deposits in Starke County that would likely exist following
completion of the merger, the Federal Reserve will condition its approval
of the
merger upon the agreement of 1st Source to divest itself of one of the current
Starke County branch offices of FINA Bancorp (located in
Hamlet,
7
Indiana
and North Judson, Indiana (see pages 57 and 58 of this proxy
statement/prospectus for information on FINA Bancorp’s current offices).
Termination
of the Agreement and Plan of Merger (page 54)
The
agreement and plan of merger may be terminated at any time prior to the
completion of the merger, whether before or after approval of the agreement
and
plan of merger by FINA Bancorp shareholders:
|
|
•
|
|
by
mutual consent of FINA Bancorp and 1st Source;
|
|
|
•
|
|
by
either FINA Bancorp or 1st Source, if the merger has not become effective
by August 31, 2007; provided, that the date will be extended for
any
period during which the merger is enjoined;
|
|
|
•
|
|
by
either FINA Bancorp or 1st Source, if the Federal Reserve or the
Indiana
Department of Financial Institutions has denied approval of the merger
and
such denial has become final and
nonappealable;
|
|
•
|
by
either FINA Bancorp or 1st Source, upon 60 days notice to the other
upon a
breach or failure of a representation, warranty or covenant by the
other
that causes a failure of the conditions to the closing of the merger,
which breach or failure has not been cured within the 60-day period
after
written notice of such breach is given, so long as the terminating
party
is not in material breach of any of its obligations under the agreement
and plan of merger; or
|
|
|
•
|
|
by
the board of directors of FINA Bancorp:
|
|
|
•
|
|
if
1st Source accepts a proposal from a third party to acquire 51% or
more of
its common stock; or
|
|
|
•
|
|
if
prior to the effective time of the merger, FINA Bancorp shall have
received an acquisition proposal and the board of directors of FINA
Bancorp determines, in good faith judgment based on the written opinion
of
its legal counsel and after consultation with its investment banking
firm,
that failure to terminate the agreement and plan of merger and accept
such
alternative acquisition proposal would violate the fiduciary duties
of
FINA Bancorp’s board of directors (subject to payment of a termination fee
to 1st Source).
|
Termination
Fee
If
FINA
Bancorp determines it is required to terminate the merger agreement in order
to
accept an alternative acquisition proposal, as described in the foregoing
paragraph, FINA Bancorp may only exercise such right of termination if it pays
a
termination fee of $4.5 million to 1st Source.
Voting
Agreement
In
connection with the execution of the agreement and plan of merger, and as a
condition to 1st Source’s willingness to enter into the agreement and plan of
merger, Donna D. Welter, Wendy N. Meyers, Wayne B. Welter and Cyril J. Welter,
who are the beneficial owners of and have the power to direct the voting of
shares equal in the aggregate to approximately 72.3% of FINA Bancorp’s
outstanding common stock, entered into a Shareholders Voting Agreement with
1st
Source. Included in these shares are 9,396 shares, or approximately 22.3% of
the
common stock of FINA Bancorp, held by the William J. Welter Irrevocable Trust.
The provisions of this trust are currently the subject of a pending lawsuit
which may impact the method of voting of these shares. FINA Bancorp is not
a
party to this lawsuit and is offering no assurance as to how or when such
lawsuit may be resolved. The voting agreement is attached to this proxy
statement/prospectus as Appendix
C. Under
the
voting agreement, each such shareholder has agreed (with respect to all shares
of FINA Bancorp common stock beneficially owned by that shareholder, and any
shares held of record by a fiduciary in respect of which such shareholder has
power to direct the vote) that at any meeting of the FINA Bancorp shareholders
or in connection with any written consent of the
8
shareholders
of FINA Bancorp with respect to the merger, the agreement and plan of merger
or
any other acquisition proposal, such shareholder will:
|
|
•
|
|
vote
(or direct the voting of) his or her shares in favor of the agreement
and
plan of merger, the merger and any transactions contemplated thereby;
and
|
|
|
•
|
|
vote
(or direct the voting of) his or her shares against approval of any
other
acquisition proposal.
|
The
voting agreement also contains restrictions on:
|
|
•
|
|
the
sale, transfer, assignment or other disposition of the shareholder’s
shares;
|
|
|
•
|
|
the
grant of any proxy, power-of-attorney or other authorization relating
to
the agreement and plan of merger; and
|
|
|
•
|
|
depositing
of the shareholder’s shares into a voting trust or entrance into a voting
agreement.
|
In
the
voting agreement, each signing shareholder agrees not to solicit or respond
to
any other acquisition proposal, and to promptly inform 1st Source of any other
acquisition proposal. The voting agreement will terminate upon the earlier
to
occur of (i) the completion date of the merger, (ii) the termination
of the agreement and plan of merger, or (iii) notification by 1st Source to
the Shareholders’ Agent.
Shareholders’
Agent
Prior
to
the effective time of the merger, the Board of Directors and the officers of
FINA Bancorp will continue to take action on behalf of FINA Bancorp under the
agreement and plan of merger. However, after the effective time of the merger,
since FINA Bancorp will have been merged out of existence and First National
Bank will become a wholly owned subsidiary of 1st Source, Wayne B. Welter has
been designated under the agreement and plan of merger to act as the
“Shareholders’ Agent” from and after the effective time of the merger for the
then former shareholders of FINA Bancorp.
9
SELECTED
HISTORICAL FINANCIAL DATA
1st
Source is providing the following table to aid you in your analysis of the
financial aspects of the merger. The following selected historical financial
data is derived from 1st Source’s audited consolidated financial statements as
of and for each of the years ended December 31, 2006, 2005, 2004, 2003, and
2002. The selected historical financial data as of December 31, 2006, 2005
and 2004 and for each of the three years in the period ended December 31,
2006 should be read in conjunction with the audited consolidated financial
statements and related notes for the year ended December 31, 2006,
included as part of Appendix E to this proxy statement/prospectus. The selected
historical consolidated financial data as of December 31, 2003 and 2002 and
for each of the two years ended December 31, 2003 is derived from 1st
Source’s audited consolidated financial statements and related notes not
incorporated herein. See “Where You Can Find More Information” on page 68.
1ST
SOURCE CORPORATION AND SUBSIDIARIES
(Dollars
in Thousands Except Per Share Data)
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Interest
income
|
$
|
208,994
|
$
|
168,532
|
$
|
151,437
|
$
|
162,322
|
$
|
199,503
|
||||||
|
Interest
expense
|
102,561
|
70,104
|
52,749
|
59,070
|
80,817
|
|||||||||||
|
Net
interest income
|
106,433
|
98,428
|
98,688
|
103,252
|
118,686
|
|||||||||||
|
(Recovery
of) provision for loan and lease losses
|
(2,736
|
)
|
(5,855
|
)
|
229
|
17,361
|
39,657
|
|||||||||
|
Net
interest income after (recovery of) provision for
|
||||||||||||||||
|
loan
and lease losses
|
109,169
|
104,283
|
98,459
|
85,891
|
79,029
|
|||||||||||
|
Noninterest
income
|
76,585
|
68,533
|
62,733
|
80,196
|
73,117
|
|||||||||||
|
Noninterest
expense
|
126,211
|
123,439
|
127,091
|
138,904
|
140,741
|
|||||||||||
|
Income
before income taxes
|
59,543
|
49,377
|
34,101
|
27,183
|
11,405
|
|||||||||||
|
Income
taxes
|
20,246
|
15,626
|
9,136
|
8,029
|
1,366
|
|||||||||||
|
Net
income
|
$
|
39,297
|
$
|
33,751
|
$
|
24,965
|
$
|
19,154
|
$
|
10,039
|
||||||
|
Assets
at year-end
|
$
|
3,807,315
|
$
|
3,511,277
|
$
|
3,563,715
|
$
|
3,330,153
|
$
|
3,407,468
|
||||||
|
Long-term
debt and mandatorily redeemable
|
||||||||||||||||
|
securities
at year-end
|
43,761
|
23,237
|
17,964
|
22,802
|
16,878
|
|||||||||||
|
Shareholders’
equity at year-end
|
368,904
|
345,576
|
326,600
|
314,691
|
309,429
|
|||||||||||
|
Basic
net income per common share *
|
1.74
|
1.48
|
1.10
|
0.83
|
0.44
|
|||||||||||
|
Diluted
net income per common share *
|
1.72
|
1.46
|
1.08
|
0.82
|
0.43
|
|||||||||||
|
Cash
dividends per common share*
|
.534
|
.445
|
.382
|
.336
|
.327
|
|||||||||||
|
Dividend
payout ratio
|
31.05
|
%
|
30.48
|
%
|
35.37
|
%
|
40.98
|
%
|
76.05
|
%
|
||||||
|
Return
on average assets
|
1.11
|
%
|
1.00
|
%
|
0.75
|
%
|
0.59
|
%
|
0.29
|
%
|
||||||
|
Return
on average common equity
|
10.98
|
%
|
10.12
|
%
|
7.81
|
%
|
6.12
|
%
|
3.23
|
%
|
||||||
|
Average
common equity to average assets
|
10.07
|
%
|
9.89
|
%
|
9.55
|
%
|
9.60
|
%
|
8.95
|
%
|
||||||
|
*
All per share amounts have been restated for stock dividends.
|
||||||||||||||||
10
FINA
Bancorp
FINA
Bancorp is providing the following information to aid you in your analysis
of
the financial aspects of the merger. The following selected historical financial
data as of and for each of the years in the five year period ended
December 31, 2006 is derived from FINA Bancorp’s audited financial
statements, which are not included in this proxy statement/prospectus. This
information is only a summary.
FINA
BANCORP, INC.
(Dollars
in Thousands Except Per Share Data)
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Interest
income
|
$
|
33,560
|
$
|
29,395
|
$
|
32,688
|
$
|
38,284
|
$
|
33,180
|
||||||
|
Interest
expense
|
14,030
|
11,052
|
8,472
|
8,966
|
10,113
|
|||||||||||
|
Net
interest income
|
19,530
|
18,343
|
24,216
|
25,318
|
23,061
|
|||||||||||
|
Provision
for loan and lease losses
|
-0-
|
250
|
-0-
|
-0-
|
545
|
|||||||||||
|
Net
interest income after provision for loan and lease losses
|
19,530
|
18,093
|
24,216
|
25,318
|
22,522
|
|||||||||||
|
Noninterest
income (loss)
|
(160
|
)
|
5,683
|
(1,067
|
)
|
8,950
|
5,348
|
|||||||||
|
Noninterest
expense
|
18,511
|
17,907
|
16,447
|
16,190
|
14,770
|
|||||||||||
|
Income
before income taxes
|
859
|
5,869
|
6,702
|
18,078
|
13,100
|
|||||||||||
|
Income
taxes
|
(94
|
)
|
1,970
|
2,365
|
6,522
|
4,682
|
||||||||||
|
Net
income
|
953
|
3,898
|
4,336
|
11,556
|
8,419
|
|||||||||||
|
Assets
at year-end
|
607,362
|
647,646
|
648,662
|
618,433
|
577,600
|
|||||||||||
|
Long-term
debt and mandatorily redeemable securities at year-end
|
--
|
--
|
--
|
--
|
--
|
|||||||||||
|
Shareholders’
equity at year-end
|
69,906
|
69,269
|
73,210
|
69,119
|
67,329
|
|||||||||||
|
Basic
net income per common share *
|
22.63
|
92.14
|
101.44
|
267.19
|
189.69
|
|||||||||||
|
Diluted
net income per common share *
|
22.63
|
92.14
|
101.44
|
267.19
|
189.69
|
|||||||||||
|
Cash
dividends per common share*
|
30.00
|
20.00
|
24.00
|
16.00
|
15.00
|
|||||||||||
|
Dividend
payout ratio
|
133.14
|
%
|
21.87
|
%
|
25.04
|
%
|
6.11
|
%
|
7.95
|
%
|
||||||
|
Return
on average assets
|
.15
|
%
|
.60
|
%
|
.68
|
%
|
1.93
|
%
|
1.47
|
%
|
||||||
|
Return
on average common equity
|
1.37
|
%
|
5.47
|
%
|
6.09
|
%
|
16.94
|
%
|
18.91
|
%
|
||||||
|
Average
common equity to average assets
|
11.09
|
%
|
10.99
|
%
|
11.23
|
%
|
10.53
|
%
|
10.56
|
%
|
||||||
|
*
All per share amounts have been restated for stock dividends.
|
||||||||||||||||
11
Comparative
Historical and Pro Forma Per Share Data
The
following table sets forth for 1st Source
and FINA Bancorp certain historical and pro forma per share financial
information. The pro forma per share information gives effect to the merger
as
if the merger had been effective on the dates presented in the case of the
book
value data, and as if the merger had been effective as of January 1 of the
fiscal year presented in the case of the earnings per share and the cash
dividends data. The pro forma and pro forma equivalent data in the tables assume
that the merger is accounted for using the purchase method of accounting and
represents a current estimate based on available information of the combined
company’s historical results of operations. The pro forma financial adjustments
are subject to change as additional information becomes available and as
additional analyses are performed. The information in the following table is
based on, and should be read together with, the historical financial information
presented in 1st Source’s prior filings with the Securities and Exchange
Commission.
The
pro
forma information, while helpful in illustrating the financial characteristics
of the combined company under one set of assumptions, does not reflect the
impact of possible revenue enhancements, expense efficiencies and other factors,
that may result as a consequence of the merger and, accordingly, does not
attempt to predict or suggest future results. It also does not necessarily
reflect the historical results of the combined company that actually would
have
occurred had the merger been in effect for the periods indicated. Upon
completion of the merger, the operating results of FINA Bancorp and its
subsidiaries will be reflected in the consolidated financial statements of
1st
Source on a prospective basis.
|
As of and for the year ended December 31, 2006
|
||||||||
|
|
|
1st
Source
Historical
|
|
FINA
Bancorp Historical
|
|
Pro Forma
Combined
|
|
FINA
Bancorp ProForma Equivalent
|
|
Net
income per share, basic
|
|
$1.74
|
$22.63
|
$1.60
|
$167.33
|
|||
|
Net
income per share, diluted
|
|
$1.72
|
$22.63
|
$1.58
|
$165.34
|
|||
|
Dividends
declared per share
|
|
$.534
|
$30.00
|
$.534
|
$55.99
|
|||
|
Book
value per common share
|
|
$16.40
|
$1,660.37
|
$17.26
|
$1,809.78
|
|||
The
foregoing data are presented on the basis of the following:
(1)
The
historical net book value per 1st Source and FINA Bancorp share is computed
by
dividing shareholders’ equity at the end of the period by the number of shares
of 1st Source and FINA Bancorp common stock outstanding at the same date. The
pro forma combined net book value per share is computed by dividing the pro
forma combined shareholders’ equity at the end of the period by the pro forma
number of shares of 1st Source common stock that would have been outstanding,
assuming the merger had occurred as of that date. For purposes of this
illustration, management assumed (i) a purchase price of $134,228,000 and (ii)
that 1,853,866 shares of 1st Source common stock valued at $29.16 per share
will
be issued for 40% of the merger consideration paid for the shares of FINA
Bancorp common stock. The remainder of the merger consideration is assumed
to be
paid in cash.
(2)
The
pro forma combined amounts for the year ended December 31, 2006 were
derived from (a) the audited consolidated financial statements of 1st
Source contained in Appendix E of this document and
(b) the audited financial statements of FINA Bancorp for the year ended
December 31, 2006 after giving effect to pro forma adjustments for the
estimated impact of purchase accounting relating to the merger. Pro forma
adjustments made to net income per share for purposes of this illustration
include estimated amortization expense, net of taxes, totaling $1,323,000
for
the year. Pro forma adjustments for the acquisition related expenses of
$1,328,000 after taxes were included in book value per share, but not net
income
per share, for purposes of this illustration. This illustration does not
include
adjustment for any
12
efficiencies
associated with the combined operation or changes which may be made after
completion of the merger.
(3)
Shares used to calculate pro forma combined income per share (basic and diluted)
were computed by adding the 1,853,866 shares assumed to be issued in the merger
to 1st Source’s weighted average shares (basic and diluted) for the respective
periods.
(4)
The
pro forma combined equivalent data is calculated by multiplying the pro forma
combined data amounts by an exchange ratio averaging in aggregate 104.845 shares
of 1st Source common stock for each outstanding share of FINA Bancorp common
stock.
(5)
The
pro forma combined dividend information incorporates historical dividends of
1st
Source because 1st Source currently has no intention of changing its dividend
policy as a result of the merger.
13
RISK
FACTORS
In
addition to the other information included in this proxy statement/prospectus,
you should carefully read and consider the following factors in evaluating
the
proposals to be voted on at the special meeting and in deciding whether to
elect
to receive cash or shares of 1st Source common stock in the merger. See
also “Where You Can Find More Information” on page 68.
The
proportions of cash or 1st Source common stock you will receive as consideration
in the merger is uncertain and will not be known until the merger is effective.
Even
if
you elect to receive cash consideration in exchange for your FINA Bancorp shares
instead of shares of 1st Source common stock, depending on the elections of
other FINA Bancorp shareholders and other factors described in the merger
agreement, shares of 1st Source common stock may nevertheless be allocated
to
you in the merger. Similarly, even if you elect to receive stock consideration
in exchange for your FINA Bancorp shares instead of cash, depending on the
elections of other FINA Bancorp shareholders and other factors described in
the
merger agreement, incremental cash may nevertheless be allocated to you in
the
merger instead of shares of 1st Source common stock. Accordingly, you will
not
know the exact proportions of cash or stock consideration you will become
entitled to receive until the merger is effective.
If
you receive shares of 1st Source common stock in the merger, you will not be
certain of the number of shares you will receive until the effective time of
the
merger.
The
number of shares of 1st Source common stock received by a FINA Bancorp
shareholder who receives 1st Source stock will depend in part on the average
closing price of 1st Source common stock on the Nasdaq Global Select Market
for
the ten full trading days ending on the third full trading day before the
anticipated completion of the merger. In addition, if the value of 1st Source
common stock at closing falls below $25.663, the 1st Source common stock
received by FINA Bancorp shareholders will be initially determined on the basis
of a value of $25.663, but 1st Source will be required to compensate FINA
Bancorp shareholders receiving 1st Source stock for the deficiency in the
closing value of 1st Source common stock below $25.663, in the form of cash
or
stock or both, as 1st Source determines. Accordingly, FINA Bancorp shareholders
will not know the exact number of shares of 1st Source common stock they will
receive in the merger until the effective time of the merger.
FINA
Bancorp will be subject to business uncertainties and contractual restrictions
while the merger is pending.
Uncertainty
about the effect of the merger on employees and customers may have an adverse
effect on FINA Bancorp and consequently on 1st Source. These uncertainties
may
impair FINA Bancorp’s ability to attract, retain and motivate key personnel
until the merger is consummated, and could cause customers and others that
deal
with FINA Bancorp to seek to change existing business relationships with FINA
Bancorp. Retention of certain employees may be challenging while the merger
is
pending, as certain employees may experience uncertainty about their future
roles with 1st Source. If key employees depart because of issues relating to
the
uncertainty and difficulty of integration or a desire not to remain with 1st
Source, 1st Source’s business after the merger could be harmed. In addition, the
agreement and plan of merger restricts FINA Bancorp from making acquisitions
and
taking other specified actions until the merger occurs. These restrictions
may
prevent FINA Bancorp from pursuing attractive business opportunities that may
arise before the completion of the merger. Please see the section entitled
“The
Agreement and Plan of Merger—Conduct of FINA Bancorp Business Pending the
Merger” beginning on page 50 of this proxy statement/prospectus for a
description of the restrictive covenants to which FINA Bancorp is subject.
14
1st
Source may fail to realize the anticipated benefits of the merger.
To
realize the anticipated benefits from the merger, 1st Source must successfully
combine the businesses of 1st Source and FINA Bancorp. The anticipated benefits
of the merger also depend on the continued operating performance of FINA
Bancorp’s businesses after the merger. If 1st Source is not able to successfully
combine the businesses of 1st Source and FINA Bancorp, or if FINA Bancorp’s
businesses do not perform as anticipated after the merger, the anticipated
benefits of the merger may not be realized fully or at all or may take longer
to
realize than expected.
It
is
possible that the introduction of new ownership, or arrangements to coordinate
the operations of FINA Bancorp with 1st Source’s operations could result in the
loss of key employees, the disruption of each company’s ongoing businesses or
inconsistencies in standards, controls, procedures and policies that could
adversely affect our ability to maintain relationships with clients, customers,
depositors and employees or to achieve the anticipated benefits of the merger.
The
opinion obtained by FINA Bancorp from its financial advisor will not reflect
subsequent changes.
AFSI,
the
financial advisor to FINA Bancorp, has delivered a “fairness opinion” to the
board of directors of FINA Bancorp. The opinion which is dated May 4, 2007,
states that, based upon and subject to the assumptions and limitations on
review
set forth in the opinion, the merger consideration to be paid to FINA Bancorp
shareholders is fair, from a financial point of view, to those shareholders.
The
opinion does not reflect changes that may occur or may have occurred after
the
date of this opinion, including changes to the operations and prospects of
1st
Source or FINA Bancorp, changes in general market and economic conditions
or
regulatory or other factors. Any such changes, or other factors on which
the
opinion is based, may alter the relative value of 1st Source and FINA Bancorp.
Some
of the directors and executive officers of FINA Bancorp may have interests
and
arrangements that may have influenced their decisions to support or recommend
that you approve the merger.
The
interests of some of the directors and executive officers of FINA Bancorp
may be
different from those of FINA Bancorp’s shareholders, and directors and officers
of FINA Bancorp may be participants in arrangements that are different from,
or
in addition to, those of FINA Bancorp’s shareholders. These interests are
described in more detail in the section of this proxy statement/prospectus
entitled “The Merger—Interests of Certain Persons in the Merger” beginning on
page 31.
The
agreement and plan of merger limits FINA Bancorp’s ability to pursue
alternatives to the merger.
The
agreement and plan of merger contains provisions that limit FINA Bancorp’s
ability to consider competing third-party proposals to acquire all or a
significant part of FINA Bancorp. It also would required FINA Bancorp to
pay 1st
Source a significant termination fee if it determined it was obligated to
terminate the merger agreement in order to accept an alternative proposal.
See
“The Agreement and Plan of Merger—No Solicitation or Other Acquisition
Proposals” beginning on page 52 of this proxy statement/prospectus. These
provisions might discourage a potential competing acquirer that might have
an
interest in acquiring all or a significant part of FINA Bancorp from considering
or proposing an acquisition even if it were prepared to pay consideration
with a
higher per share market price than that proposed in the merger, or might
result
in a potential competing acquirer proposing to pay a lower per share price
to
acquire FINA Bancorp than it might otherwise have proposed to pay.
If
the merger is not completed by August 31, 2007, either 1st Source or FINA
Bancorp may choose not to proceed with the merger.
Either
1st Source or FINA Bancorp may terminate the agreement and plan of merger
if the
merger has not been completed by August 31, 2007, unless the failure of the
merger to have been completed has resulted from the failure of the party
seeking
to terminate the agreement and plan of merger to have performed its obligations.
See “The Agreement and Plan of Merger—Termination of the Agreement and Plan of
Merger,” beginning at page 54 of this proxy statement/prospectus.
15
Regulatory
approvals may not be received, may take longer than expected or may impose
conditions which are not presently anticipated.
The
merger must be approved by the Federal Reserve (or that approval must be
waived), and the Indiana Department of Financial Institutions. The Federal
Reserve will consider, among other factors, the competitive impact of the
merger, the financial and managerial resources of our companies and their
subsidiary banks and the convenience and needs of the communities to be served.
As part of that consideration, we expect that the Federal Reserve will review
capital position, safety and soundness, and legal and regulatory compliance,
including compliance with anti-money laundering laws.
There
can
be no assurance as to whether this and other regulatory approvals will be
received, the timing of those approvals, or whether any conditions will be
imposed. Moreover, if conditions imposed by regulatory agencies are unduly
burdensome, 1st Source may choose to terminate the merger agreement.
The
Federal Reserve staff has advised 1st Source that due to the concentration
of
deposits in Starke County that would likely exist following completion of
the
merger, the Federal Reserve will condition its approval of the merger upon
the
agreement of 1st Source to divest itself of one of the current Starke County
branch offices of FINA Bancorp (located in Hamlet, Indiana and North Judson,
Indiana (see pages 57 and 58 of this proxy statement/prospectus for information
on FINA Bancorp’s current offices). 1st Source does not view this condition as
material or adversely impacting its ability to conclude the merger or to
operate
the business of 1st Source and FINA Bancorp in Starke County following the
merger, and so is prepared to accept this condition of the Federal Reserve’s
approval. However, before the merger may be consummated, 1st Source will
be
required to have executed a definitive agreement with a qualified third party
to
dispose of one of FINA Bancorp’s Starke County branches and there is no
assurance as to when, or the terms upon which, 1st Source will be able to
enter
into such an agreement. Alternatively, 1st Source will be required to place
one
of the Starke County branches in trust with an independent trustee prior
to the
Closing on terms acceptable to the Federal Reserve. Such trustee will be
directed to arrange for the sale of such branch.
FINA
Bancorp’s shareholders will have less influence as shareholders of 1st Source
than as shareholders of FINA Bancorp.
You
currently have the right to vote in the election of the board of directors
of
FINA Bancorp and on other matters affecting FINA Bancorp. The merger will
transfer control of FINA Bancorp to 1st Source. If the merger occurs and you
receive shares of 1st Source common stock in the merger, you will become a
shareholder of 1st Source with a percentage ownership of 1st Source that is
much
smaller than your percentage ownership of FINA Bancorp. Because of this, you
will no longer be able to influence the management policies of FINA Bancorp’s
operations (to the extent you were able to do so before the merger), and as
a
shareholder of 1st Source with a small ownership percentage you will not be
able
to influence the management policies of 1st Source.
Unanticipated
costs relating to the merger could reduce 1st Source’s future earnings per
share.
1st
Source believes it has reasonably estimated the likely costs of integrating
the
operations of FINA Bancorp into 1st Source and the incremental costs of
operating as a combined company. However, it is possible that unexpected
transaction costs such as taxes, fees or professional expenses or unexpected
future operating expenses such as increased personnel costs or increased taxes,
as well as other types of unanticipated adverse developments, could have a
material adverse effect on the results of operations and financial condition
of
1st Source after the merger. If unexpected costs are incurred, the merger could
have a significant dilutive effect on 1st Source’s earnings per share. In other
words, if the merger is completed and 1st Source incurs unexpected costs and
expenses as a result of the merger, 1st Source believes that the earnings per
share of 1st Source common stock could be less than they would have been if
the
merger had not been completed.
It
is uncertain when you will receive all of the consideration to which you are
entitled in the merger.
Because
of the funds that will be deposited into the escrow account, shareholders of
FINA Bancorp may not receive $3,206.57 per share in consideration for their
shares in the merger. Furthermore, even if the amount is received, the total
price may not be paid to the shareholders for six years following
the
16
merger.
The escrow account is described in more detail in the section of the proxy
statement / prospectus entitled “The Merger - Merger Consideration -
Escrow
Arrangements”
beginning at page 32.
Fluctuations
in interest rates could reduce 1st Source’s profitability and affect the value
of its assets.
Like
other financial institutions, 1st Source is subject to interest rate risk.
Its
primary source of income is net interest income, which is the difference between
interest earned on loans and leases and investments, and interest paid on
deposits and borrowings. 1st Source expects to periodically experience
imbalances in the interest rate sensitivities of its assets and liabilities
and
the relationships of various interest rates to each other. Over any defined
period of time, its interest-earning assets may be more sensitive to changes
in
market interest rates than its interest-bearing liabilities, or vice-versa.
In
addition, the individual market interest rates underlying its loan and lease
and
deposit products may not change to the same degree over a given time period.
In
any event, if market interest rates should move contrary to 1st Source’s
position, earnings may be negatively affected. In addition, loan and lease
volume and quality and deposit volume and mix can be affected by market interest
rates as can the businesses of 1st Source’s clients. Changes in levels of market
interest rates could have a material adverse affect on 1st Source’s net interest
spread, asset quality, origination volume, and overall
profitability.
Over
the
last two years, the Federal Reserve increased its target for Federal funds
rate
400 basis points. While these short-term market interest rates (which are used
as a guide for pricing deposits) have increased, longer-term market interest
rates (which are used as a guide for pricing longer-term loans and leases)
have
not increased at the same rate. If short-term interest rates continue to rise,
and if rates on 1st Source deposits and borrowings continue to reprice upwards
faster than the rates on long-term loans and leases and investments, 1st Source
could experience continued compression of 1st Source’s interest rate spread and
net interest margin, which could have a negative effect on its
profitability.
1st
Source principally manages interest rate risk by managing the volume and mix
of
its earning assets and funding liabilities. In a changing interest rate
environment, 1st Source may not be able to manage this risk effectively. If
1st
Source is unable to manage interest rate risk effectively, its business,
financial condition and results of operations could be materially
harmed.
Changes
in the level of interest rates also may negatively affect 1st Source’s ability
to originate loans and leases, the value of its assets and its ability to
realize gains from the sale of assets, all of which ultimately could affect
its
earnings.
Future
expansion involves risks.
In
the
future, 1st Source may acquire all or part of other financial institutions
and
may establish de novo branch offices. There could be considerable costs involved
in executing 1st Source’s growth strategy. For instance, new branches generally
require a period of time to generate sufficient revenues to offset their costs,
especially in areas in which 1st Source does not have an established presence.
Accordingly, any new branch expansion could be expected to negatively impact
earnings for some period of time until the branch reaches certain economies
of
scale. Acquisitions and mergers involve a number of risks, including the risk
that:
· 1st
Source may incur substantial costs identifying and evaluating potential
acquisitions and merger partners, or in evaluating new markets, hiring
experienced local managers, and opening new offices;
· 1st
Source’s estimates and judgments used to evaluate credit, operations,
management, and market risks relating to target institutions may not be
accurate;
· There
may
be substantial lag-time between completing an acquisition or opening a new
office and generating sufficient assets and deposits to support costs of the
expansion;
· 1st
Source may not be able to finance an acquisition, or the financing obtained
may
have an adverse effect on its operating results or cause dilution of existing
shareholders;
17
· The
attention of 1st Source management in negotiating a transaction and integrating
the operations and personnel of the combining businesses may be diverted from
existing business;
· Acquisitions
typically involve the payment of a premium over book and market values and;
therefore, some dilution of tangible book value and net income per common share
may occur in connection with any future transaction;
· 1st
Source may enter new markets where it lacks local experience;
· 1st
Source may incur goodwill in connection with an acquisition, or the goodwill
it
incurs may become impaired, which results in adverse short-term effects on
its
operating results; or
· 1st
Source may lose key employees and clients.
Competition
from other financial services providers could adversely
impact 1st
Source’s
results
of operations.
The
banking and financial services business is highly competitive. 1st Source faces
competition in making loans and leases, attracting deposits and providing
insurance, investment, trust, and other financial services. Increased
competition in the banking and financial services businesses may reduce 1st
Source’s market share, impair 1st Source’s growth or cause the prices it charges
for services to decline. 1st Source’s results of operations may be adversely
impacted in future periods depending upon the level and nature of competition
it
encounters in its various market areas.
1st
Source is dependent upon the services of its management
team.
1st
Source’s future success and profitability is substantially dependent upon its
management and the banking abilities of its senior executives. 1st Source
believes that its future results will also depend in part upon its ability
to
attract and retain highly skilled and qualified management. 1st Source is
especially dependent on a limited number of key management personnel, many
of
whom do not have employment agreements with 1st Source. The loss of the chief
executive officer and other senior management and key personnel could have
a
material adverse impact on 1st Source’s operations because other officers may
not have the experience and expertise to readily replace these individuals.
Many
of these senior officers have primary contact with 1st Source’s clients and are
extremely important in maintaining personalized relationships with 1st Source’s
client base. The unexpected loss of services of one or more of these key
employees could have a material adverse effect on 1st Source’s operations and
possibly result in reduced revenues if 1st Source were unable to find suitable
replacements promptly. Competition for senior personnel is intense, and 1st
Source may not be successful in attracting and retaining such personnel. Changes
in key personnel and their responsibilities may be disruptive to 1st Source’s
businesses and could have a material adverse effect on its businesses, financial
condition, and results of operations.
Technology
security breaches could expose 1st Source to possible liability and damage
its
reputation.
Any
compromise of 1st Source’s security also could deter clients from using 1st
Source’s internet banking services that involve the transmission of confidential
information. 1st Source relies on standard internet security systems to provide
the security and authentication necessary to effect secure transmission of
data.
These precautions may not protect its systems from compromises or breaches
of
its security measures that could result in damage to 1st Source’s reputation and
business.
Planned
conversion of core data processing systems may involve difficulties or delays
that could disrupt 1st Source’s business.
Failure
to successfully implement a pending project 1st Source has undertaken to replace
the majority of its core and ancillary data processing systems, would negatively
impact its business. During 2006, 1st Source continued to work toward the
implementation of a new core system. Complete conversion is slated for 2007.
The
replacement of the core systems has wide-reaching impacts on 1st
18
Source’s
internal operations and business. 1st Source can provide no assurance that
the
amount of this investment will not exceed its expectations and result in
materially increased levels of expense or asset impairment charges. There is
no
assurance that this initiative will achieve the expected cost savings or result
in a positive return on investment. Additionally, if the new core system does
not operate as intended, or is not implemented as planned, there could be
disruptions in 1st Source’s business which could adversely affect its financial
condition and results of operations.
1st
Source is subject to credit risks relating to its loan and lease
portfolios.
If
1st Source’s allowance for credit losses is not sufficient to cover actual loan
losses, 1st Source’s earnings could decrease.
In
the
financial services industry, there is always a risk that certain borrowers
may
not repay borrowings. 1st Source’s reserve for loan and lease losses may not be
sufficient to cover the loan and lease losses that it may actually incur. If
1st
Source experiences defaults by borrowers in any of its businesses, its earnings
could be negatively affected. Changes in local economic conditions could
adversely affect credit quality, particularly in 1st Source’s local business
loan and lease portfolio. Changes in national economic conditions could also
adversely affect the quality of 1st Source’s loan and lease portfolio and
negate, to some extent, the benefits of national diversification through its
Specialty Finance Group’s portfolio.
Commercial
and commercial real estate loans generally involve higher credit risks than
residential real estate and consumer loans. Because payments on loans secured
by
commercial real estate or equipment are often dependent upon the successful
operation and management of the underlying assets, repayment of such loans
may
be influenced to a great extent by conditions in the market or the economy.
1st
Source offers both fixed-rate and adjustable-rate consumer mortgage loans
secured by properties, substantially all of which are located in its primary
market area. Adjustable-rate mortgage loans help reduce exposure to changes
in
interest rates; however, during periods of rising interest rates, the risk
of
default on adjustable-rate mortgage loans may increase as a result of repricing
and the increased payments required from the borrower.
Consumer
loans can entail risk, particularly in the case of loans that are unsecured
or
secured by rapidly depreciating assets. In these cases, any repossessed
collateral may not provide an adequate source of repayment of the outstanding
loan balance. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on
the
borrower’s continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness, or personal
bankruptcy.
1st
Source’s construction and transportation related lending businesses could be
adversely affected by slow downs in the economy. Clients who rely on the use
of
assets financed through 1st Source’s Specialty Finance Group to produce income
could be negatively affected, and 1st Source could experience substantial loan
and lease losses. By the nature of the businesses these clients operate in,
1st
Source could be adversely affected by continued rapid increases of fuel costs.
Since some of the relationships in these industries are large (up to $15
million), a slow down could have a significant adverse impact on 1st Source’s
performance.
1st
Source’s construction and transportation related businesses could be adversely
impacted by the negative effects caused by high fuel costs, actual or threatened
terrorist attacks, and other destabilizing events. These factors could
contribute to the deterioration of the quality of 1st Source’s loan and lease
portfolio, as they could have a negative impact on the travel sensitive
businesses for which its specialty finance businesses provide
financing.
In
addition, 1st Source’s leasing and equipment financing activity is subject to
the risk of cyclical downturns, industry concentration and clumping, and other
adverse economic developments affecting these industries and markets. This
area
of lending, with transportation in particular, is dependent upon general
economic conditions and the strength of the travel, construction, and
transportation industries.
1st
Source operates in a highly regulated environment and may be adversely affected
by changes in federal and local laws and regulations.
1st
Source is subject to extensive regulation, supervision and examination by
federal and state banking authorities. Any change in applicable regulations
or
federal or state legislation could have a
19
substantial
impact on 1st Source and its operations. Additional legislation and regulations
may be enacted or adopted in the future that could significantly affect 1st
Source’s powers, authority and operations, which could have a material adverse
effect on its financial condition and results of operations. Further, regulators
have significant discretion and power to prevent or remedy unsafe or unsound
practices or violations of laws by banks and bank holding companies in the
performance of their supervisory and enforcement duties. The exercise of
this
regulatory discretion and power may have a negative impact on 1st Source.
20
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This
proxy statement/prospectus contains forward-looking statements that
have been made pursuant to the provisions of, and in reliance on the safe
harbor
under, the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include statements with respect to management’s beliefs, plans,
objectives, goals, expectations, anticipations, assumptions, estimates,
intentions, and future performance, and involve known and unknown risks,
uncertainties and other factors, which may be beyond the control of 1st Source,
and which may cause actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements.
All
statements other than statements of historical fact are statements that could
be
forward-looking statements. Words such as “believe”, “contemplate”, “seek”,
“estimate”, “plan”, “project”, “anticipate”, “assume”, “expect”, “intend”,
“targeted”, “continue”, “remain”, “will”, “should”, “indicate”, “would”, “may”
and other similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements provide current expectations or forecasts of future
events and are not guarantees of future performance, nor should they be relied
upon as representing management’s views as of any subsequent date. The
forward-looking statements are based on management’s expectations and are
subject to a number of risks and uncertainties.
All
written or oral forward-looking statements that are made by or attributable
to
1st Source or FINA Bancorp are expressly qualified in their entirety by this
cautionary notice. 1st Source has no obligation and does not undertake to
update, revise, or correct any of the forward-looking statements after the
date
of this prospectus, or after the respective dates on which such statements
otherwise are made. 1st Source has expressed its expectations, beliefs, and
projections in good faith and believes they have a reasonable basis. However,
1st Source makes no assurances that its expectations, beliefs, or projections
will be achieved or accomplished. These forward-looking statements may not
be
realized due to a variety of factors, including, without limitation, the
following:
· Local,
regional, national, and international economic conditions and the impact they
may have on 1st Source and its clients and its assessment of that
impact.
· Changes
in the level of nonperforming assets and charge-offs.
· Changes
in estimates of future cash reserve requirements based upon the periodic review
thereof under relevant regulatory and accounting requirements.
· The
effects of and changes in trade and monetary and fiscal policies and laws,
including the interest rate policies of the Federal Reserve Board.
· Inflation,
interest rate, securities market, and monetary fluctuations.
· Political
instability.
· Acts
of
war or terrorism.
· Substantial
increases in the cost of fuel.
· The
timely development and acceptance of new products and services and perceived
overall value of these products and services by others.
· Changes
in consumer spending, borrowings, and savings habits.
· Changes
in the financial performance and/or condition of borrowers.
· Technological
changes.
· Acquisitions
and integration of acquired businesses.
· The
ability to increase market share and control expenses.
· Changes
in the competitive environment among bank holding companies.
21
· The
effect of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities, and insurance) with which 1st Source
and
its subsidiaries must comply.
· The
effect of changes in accounting policies and practices and auditing
requirements, as may be adopted by the regulatory agencies, as well as the
Public Company Accounting Oversight Board, the Financial Accounting Standards
Board, and other accounting standard setters.
· Changes
in 1st Source’s organization, compensation, and benefit plans.
· The
costs
and effects of legal and regulatory developments including the resolution of
legal proceedings or regulatory or other governmental inquires and the results
of regulatory examinations or reviews.
· Greater
than expected costs or difficulties related to the integration of new products
and lines of business.
· The
factors described above under “Risk Factors”.
Additional
factors that could cause 1st Source’s results to differ materially from those
described in the forward-looking statements can be found in 1st Source’s Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form
8-K filed with the SEC.
22
FINA
Bancorp is sending you this proxy statement/prospectus to provide you with
information concerning the Agreement and Plan of Merger, dated as of February
19, 2007, by and between 1st Source, FINA Bancorp, Hickory Acquisition, Inc.
and
Wayne B. Welter, as the shareholders’ agent. The agreement and plan of merger
provides for the merger of FINA Bancorp with and into Hickory Acquisition,
Inc.
FINA Bancorp’s board of directors is soliciting your proxy for use at the
special meeting for the purpose of approving the merger.
This
proxy statement/prospectus is also being furnished by 1st Source to FINA
Bancorp’s shareholders as a prospectus in connection with the issuance by 1st
Source of shares of 1st Source common stock upon completion of the merger.
This
proxy statement/prospectus is first being furnished to the shareholders of
FINA
Bancorp on or about May 7,
2007.
The
special meeting of FINA Bancorp shareholders is to scheduled to be held as
follows:
May
30, 2007
10:00
a.m. local time
FINA
Bancorp, Inc.
Valparaiso,
Indiana
46383
Purpose
of the Special Meeting
At
the
special meeting, the shareholders of FINA Bancorp entitled to vote at the
special meeting will consider and vote upon a proposal to approve and adopt
the
agreement and plan of merger and the merger. THE
FINA BANCORP BOARD OF DIRECTORS HAS APPROVED THE AGREEMENT AND PLAN OF MERGER
AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT HOLDERS OF
FINA
BANCORP COMMON STOCK VOTE FOR THE AGREEMENT AND PLAN OF MERGER AND THE MERGER.
SEE “THE MERGER—BACKGROUND OF THE MERGER” BEGINNING ON PAGE
26.
The
FINA
Bancorp board of directors has fixed the close of business on April 16, 2007,
as
the record date for determining holders entitled to notice of and to vote
at the
special meeting. As of the record date, there were 42,101 shares of FINA
Bancorp
common stock issued and outstanding, each of which entitles its holder to
one
vote. The presence, either in person or by proxy, of the holders of a majority
of the issued and outstanding shares of FINA Bancorp common stock is necessary
to constitute a quorum for the transaction of business at the special meeting.
Abstentions and broker non-votes (which are signed proxies returned by a
broker
that indicate that the broker has not received voting instructions from the
beneficial owner of the shares and does not have discretionary authority
to vote
the shares) will be counted for purposes of determining whether a quorum
exists.
The
affirmative vote of the holders of at least a majority of the outstanding shares
of FINA Bancorp common stock on the record date is required for approval of
the
agreement and plan of merger. Votes cast by proxy or in person at the special
meeting will be tabulated by the election inspectors appointed for
the
23
meeting
and the election inspectors will determine whether or not a quorum is present
and if the agreement and plan of merger is approved.
As
of the
record date, beneficial owners of FINA Bancorp common stock, with power to
direct the vote of approximately 72.3% of the outstanding shares have signed
a
voting agreement with 1st Source agreeing to vote in favor of the merger.
See
“Agreement
and Plan of Merger - Voting Agreement”
on
page
54.
All
properly completed and signed proxies delivered and not properly revoked will
be
voted at the special meeting in the manner specified in those proxies. If you
do
not specify a choice, your shares represented by an authorized proxy will be
voted “FOR” the approval of the agreement and plan of merger. The failure to
submit a vote by proxy or in person at the special meeting, abstentions and
broker non-votes will have the same effect as a vote “AGAINST” each of the
proposals presented.
Voting
Your Proxy
You
may
vote in person at the special meeting or by proxy. We recommend you vote by
proxy even if you plan to attend the special meeting. You can change your vote
at the special meeting.
You
may
vote by proxy by completing and mailing the enclosed proxy card. If you properly
submit your proxy in time to vote, one of the individuals named as your proxy
will vote your shares of common stock as you have directed. You may vote for
or
against the proposals submitted at the special meeting or you may abstain from
voting.
How
to Vote
If
you are a shareholder of record and you hold shares of FINA Bancorp common
stock
in your name, you may vote by signing, dating and returning the enclosed proxy
card in the postage-paid envelope provided.
If
you
hold shares of FINA Bancorp common stock through a trustee, custodian or other
fiduciary, please follow the voting instructions that the applicable fiduciary
requires. If you (or, as appropriate, your fiduciary) do not return your proxy
card those shares will not be voted at the special meeting.
If
you
submit your proxy but do not make specific choices, your proxy will be voted
“FOR” each of the proposals presented, and at the discretion of the proxy
holders with respect to any other business properly brought before the meeting.
Revoking
Your Proxy
If
you
hold shares registered in your name and you wish to change any proxy granted
on
the proxy card, you may revoke your proxy before it is voted by:
|
|
•
|
|
submitting
a new proxy with a later date;
|
|
|
•
|
|
notifying
FINA Bancorp’s President, Wayne B. Welter, at FINA Bancorp, Inc., 14
Indiana Avenue, Valparaiso, Indiana 46383, in writing before the
special
meeting that you have revoked your proxy; or
|
|
|
•
|
|
voting
in person at the special meeting.
|
Voting
in Person
If
you
are a registered holder and plan to attend the special meeting and wish to
vote
in person, you will be permitted to do so at the special meeting.
24
Solicitation
of Proxies; Expenses
Proxies
will be solicited by mail, and may also be solicited personally, by telephone,
facsimile transmission or other means by the directors, officers and employees
of FINA Bancorp, with no special or extra compensation therefor, although such
officers, directors and employees may be reimbursed for out-of-pocket expenses
incurred in connection with the solicitation. Arrangements will also be made
with custodians, nominees and fiduciaries for the forwarding of soliciting
material to the beneficial owners of FINA Bancorp common stock held of record
by
such persons, and FINA Bancorp may reimburse such custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses that they incur in that
regard. Expenses incurred in connection with the merger, including those
attributable to the solicitation of proxies, will be paid by the party to the
agreement and plan of merger incurring the expense.
THE
MATTER TO BE CONSIDERED AT THE SPECIAL MEETING IS OF GREAT IMPORTANCE TO THE
SHAREHOLDERS OF FINA BANCORP. ACCORDINGLY, HOLDERS OF FINA BANCORP COMMON STOCK
ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS
PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
This
section of the proxy statement/prospectus describes material aspects of the
proposed merger. While we believe that the description covers the material
terms
of the merger, this summary may not contain all of the information that is
important to you. You should read this entire proxy statement/prospectus
and the
other documents that we refer to carefully for more detailed information
regarding the merger.
FINA
Bancorp’s board of directors has approved and adopted the agreement and plan of
merger, the merger and the transactions contemplated thereby. The agreement
and
plan of merger provides for the merger of FINA Bancorp with and into Hickory
Acquisition, Inc., a wholly-owned subsidiary of 1st Source. Hickory Acquisition,
Inc. will be the surviving entity in the merger and the separate existence
of
FINA Bancorp will cease. After the effective time of the merger, the officers
and directors of Hickory Acquisition, Inc. will continue as the officers and
directors of the surviving entity.
Promptly
after the merger of FINA Bancorp into Hickory Acquisition, Inc., Hickory
Acquisition, Inc. will be merged into 1st Source Corporation. First National
Bank, Valparaiso will become a wholly owned subsidiary of 1st Source
Corporation.
FINA
Bancorp’s shareholders will be entitled to receive upon completion of the merger
shares of 1st Source common stock and cash for each share of FINA Bancorp’s
common stock. Shares of 1st Source common stock issued and outstanding at the
time the merger is completed will remain outstanding and those stock
certificates will be unaffected by the merger. 1st Source’s common stock will
continue to be quoted on the Nasdaq Global Select Market under the 1st Source
Corporation name with the symbol “SRCE” after the merger.
Please
see “The Agreement and Plan of Merger” beginning on page 49 for additional and
more detailed information regarding the legal documents that govern the merger,
including information about the conditions to the merger and the provisions
for
terminating or amending the agreement and plan of merger.
25
Background
of the Merger
Members
of the Board of Directors of FINA Bancorp who beneficially own approximately
72.3% of the outstanding shares of FINA Bancorp became interested in liquidating
their investment in FINA Bancorp in a manner which would allow the participation
of all shareholders of FINA Bancorp. On May 15, 2006 the Board of Directors
authorized FINA Bancorp to engage Renninger & Associates as its financial
advisor in connection with its efforts to assess its strategic alternatives
and
to pursue a possible strategic affiliation with other entities, while balancing
the needs of its shareholders with the potential impact on FINA Bancorp’s
employees, customers and communities.
Renninger
& Associates conducted an internal review of FINA Bancorp and, working with
FINA Bancorp, prepared a confidential information memorandum containing
financial and operating information about FINA Bancorp. In early September
2006,
Renninger & Associates, on behalf of FINA Bancorp, began a confidential
inquiry by contacting thirty-seven parties about their interest in pursuing
a
merger. Renninger & Associates developed the list of potential merger
partners based on its assessment of each party’s expected financial ability,
regulatory acceptability, geographic interest and, with the input of FINA
Bancorp, cultural suitability. Twenty of those potential merger partners
executed confidentiality agreements, including 1st Source, and received the
confidential information memorandum. Seven of those twenty potential merger
partners submitted preliminary non-binding indications of interest to acquire
FINA Bancorp.
In
early
October 2006, Renninger & Associates reviewed with the FINA Bancorp board of
directors the pricing and terms of each of the seven non-binding indications
of
interest. After discussion about the merits of the proposals, the FINA Bancorp
board chose to provide four potential merger partners (including 1st Source)
with access to additional information and management of FINA Bancorp and to
answer questions about the operations of FINA Bancorp. Three potential merger
partners ultimately completed due diligence procedures during the month of
November 2006.
In
early
December 2006, two potential merger partners, including 1st Source, elected
to
significantly improve and refine their respective proposals. On December 16,
2006 the board of directors of FINA Bancorp met with Renninger & Associates
and its legal counsel to discuss and analyze financial and non-financial aspects
of the two superior proposals. In addition to engaging AFSI to provide a
fairness opinion, the board of directors directed Renninger & Associates to
have further discussions with and seek clarifications from the two potential
merger partners and to arrange oral presentations. Oral presentations were
conducted in late December 2006.
On
January 6, 2007 the board of directors of FINA Bancorp met again with Renninger
& Associates for further discussion and analysis of the two proposals. FINA
Bancorp’s board of directors determined that 1st Source’s proposal was
acceptable and further discussions commenced on more complete terms. Negotiation
of the merger agreement commenced between the parties and their counsel in
mid-January 2007.
During
January 2007, Renninger & Associates, AFSI, and legal counsel conducted a
review of certain information regarding 1st Source at 1st Source’s headquarters.
FINA Bancorp (represented by Renninger & Associates), 1st Source and their
respective counsel negotiated the terms of the merger agreement and related
documents and FINA Bancorp and 1st Source prepared their disclosure schedules
to
the merger agreement.
On
February 17, 2007, FINA Bancorp’s board of directors met with Renninger &
Associates, AFSI, and legal counsel to review the terms of the merger agreement
in detail. AFSI provided an oral opinion as to the fairness of the proposed
transaction to FINA Bancorp shareholders from a financial point of view.
On
February 19, 2007, FINA Bancorp’s board of directors met again with Renninger
& Associates and legal counsel to discuss the proposed acquisition terms and
voted to approve the agreement and plan of
26
merger.
They authorized Wayne B. Welter, as president of FINA Bancorp, to execute the
agreement in the form presented to the board. All but one of the directors
voted
for the merger. The parties executed and publicly announced the agreement and
plan of merger later that day.
FINA
Bancorp’s Reasons for the Merger and Recommendation of the Board of
Directors
FINA
Bancorp’s board of directors determined that the merger agreement and the merger
consideration were in the best interests of FINA Bancorp and its shareholders
and recommends that FINA Bancorp shareholders vote in favor of the approval
of
the merger agreement and the transactions contemplated by the merger agreement.
One director of FINA Bancorp voted against the merger agreement and
recommendation.
In
its
deliberations and in making its determination, FINA Bancorp’s board of directors
considered many factors including, without limitation, the
following:
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·
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the
business, earnings, operations, financial condition, management,
prospects, capital levels and asset quality of both FINA Bancorp
and 1st
Source;
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·
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1st
Source’s access to capital and managerial resources relative to that of
FINA Bancorp;
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·
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the
premium represented by the value of the merger consideration over
the
current book value of FINA Bancorp common stock and the trading prices of
the 1st Source Common Stock prior to the announcement of the
merger;
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·
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its
desire to provide shareholders with the prospects for greater future
appreciation on their investments in FINA Bancorp common stock than
the
amount the board of directors believes that FINA Bancorp could achieve
independently;
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·
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the
greater liquidity of 1st Source common stock, which is traded on
the
Nasdaq Global Select Market;
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·
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the
oral opinion delivered by AFSI that the merger consideration is fair,
from
a financial standpoint, to the shareholders of FINA
Bancorp;
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·
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FINA
Bancorp’s potential to better serve its customers and enhance its
competitive position in the communities in which it operates due
to 1st
Source’s more diverse financial products and
services;
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·
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the
effect of the merger on FINA Bancorp’s employees, customers and community;
and
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·
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1st
Source’s long-term growth strategy.
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The
above
discussion of the information and factors considered by FINA Bancorp’s board of
directors is not intended to be exhaustive, but includes all material factors
considered by the board in arriving at its determination to approve, and to
recommend that the FINA Bancorp shareholders vote to approve the merger
agreement and related transactions. The FINA Bancorp board of directors did
not
assign any relative or specific weights to the above factors, and individual
directors may have given differing weights to different factors.
The
FINA
Bancorp board of directors recommends that FINA Bancorp’s shareholders approve
the merger agreement and the related transactions.
1st
Source’s Reasons for the Merger
1st
Source is a locally controlled, regional bank holding company serving
communities in Northern Indiana and Southern Michigan. Acquisition of FINA
Bancorp, and its subsidiary, First National Bank,
27
Valparaiso,
provides 1st Source with an important opportunity to acquire another locally
controlled financial institution with a complementary geographic footprint
and
valuable depositary relationships. 1st Source believes that its culture, as
a
business organization, is consistent with the existing culture of FINA Bancorp
and First National Bank, Valparaiso as a business organization.
FINA
Bancorp retained AFSI, LLC, d/b/a Austin Financial Services (“AFSI”) to act as
its financial advisor for purposes of rendering a fairness opinion. AFSI is
a
nationally recognized investment banking firm specializing in the banking and
financial services industry. In the ordinary course of its investment banking
business, AFSI is regularly engaged in the valuation of financial institutions
and their securities in connection with mergers and acquisitions and other
corporate transactions. FINA Bancorp selected AFSI as its financial advisor
based upon AFSI’s qualifications, expertise and reputation in such capacity.
Neither AFSI nor any of its affiliates has a material relationship with FINA
Bancorp or 1st Source or any material financial interest in FINA Bancorp or
1st
Source.
In
connection with AFSI’s engagement, FINA Bancorp asked AFSI to evaluate the
fairness of the merger consideration to FINA Bancorp shareholders from a
financial point of view. At the February 17, 2007 meeting of the board to
evaluate the merger, AFSI delivered to the FINA Bancorp board its oral opinion
that the merger consideration was fair to FINA Bancorp shareholders from
a
financial point of view. Subsequently, the FINA Bancorp board voted to approve
the merger and executed the agreement and plan of merger on February 19,
2006.
AFSI provided its written opinion on May 4, 2007.
You
should consider the following when reading the discussion of AFSI’s opinion in
this document:
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•
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The
summary of the opinion of AFSI set forth in this proxy statement
is
qualified in its entirety by reference to the full text of the opinion
that is attached as Appendix
B
to
this document. You should read the opinion in its entirety for a
full
discussion to the procedures followed, assumptions made, matters
considered and qualification and limitation on the review undertaken
by
AFSI in connection with its opinion.
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•
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AFSI’s
opinion does not address the merits of the merger relative to other
business strategies, whether or not considered by FINA Bancorp’s board,
nor does it address the decision by FINA Bancorp’s board to proceed with
the merger.
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•
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AFSI’s
opinion to FINA Bancorp’s board of directors rendered in connection with
the merger does not constitute a recommendation to any FINA Bancorp
shareholder as to how he or she should vote at the special meeting.
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The
preparation of a financial fairness opinion involves various determinations
as
to the most appropriate methods of financial analysis and the application of
those methods to the particular circumstances. It is therefore not readily
susceptible to partial analysis or summary description. In connection with
rendering its opinion, AFSI performed a variety of financial analyses. AFSI
believes that its analyses must be considered together as a whole and that
selecting portions of its analyses and the facts considered in its analyses,
without considering all other factors and analyses, could create an incomplete
or inaccurate view of the analyses and the process underlying the rendering
of
AFSI’s opinion.
In
performing its analyses, AFSI made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of FINA Bancorp and may not be realized. Any estimates
contained in AFSI’s analyses are not necessarily predictive of future results or
values, which may be significantly more or less favorable than the estimates.
Estimates of values of companies do not purport to be appraisals or necessarily
reflect the prices at which the companies or their securities may actually
be
sold. Except as described below, none of the analyses performed by AFSI was
assigned a greater significance by AFSI than any other. The relative importance
or weight given to these analyses by AFSI is not necessarily reflected by the
order of presentation of the analyses herein (and the corresponding results).
The summaries of financial analyses include information presented in tabular
format. The tables should be read together with the text of those summaries.
28
AFSI
has
relied, without independent verification, upon the accuracy and completeness
of
the information it reviewed for the purpose of rendering its opinion. AFSI
did
not undertake any independent evaluation or appraisal of the assets and
liabilities of FINA Bancorp or 1st Source nor was it furnished with any
appraisals.
AFSI
is
not an expert in the evaluation of loan portfolios, including under-performing
or non-performing assets, charge-offs or the allowance for loan losses; it
has
not reviewed any individual credit files of FINA Bancorp or 1st Source; and
it
has assumed that the allowances of FINA Bancorp and 1st Source are in the
aggregate adequate to cover potential losses. AFSI’s opinion is necessarily
based on economic, market and other conditions existing on the date of its
opinion and on information as of various earlier dates made available to it
which is not necessarily indicative of current market conditions.
In
rendering its opinion, AFSI made the following assumptions:
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•
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that
the merger will be accounted for as a purchase in accordance with
generally accepted accounting principles;
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•
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that
all material governmental, regulatory and other consents and approvals
necessary for the consummation of the merger would be obtained without
any
adverse effect on FINA Bancorp, 1st Source or on the anticipated
benefits
of the merger;
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•
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that
FINA Bancorp had provided it with all of the information prepared
by FINA
Bancorp or its other representatives that might be material to AFSI
in its
review; and
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•
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that
the financial projections it reviewed were reasonably prepared on
a basis
reflecting the best currently available estimates and judgment of
the
management of FINA Bancorp as to the future operating and financial
performance of FINA Bancorp.
|
In
connection with its opinion dated May 4, 2007, AFSI reviewed:
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•
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the
agreement and plan of merger;
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•
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the
audited financial statements of 1st Source for the five years ended
December 31, 2006;
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•
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Consolidated
Reports of Condition and Income of First National Bank, Valparaiso
for the
five years ended December 31, 2006;
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•
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Consolidated
Reports of Condition and Income of 1st Source Bank for the year ended
December 31, 2006;
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•
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the
audited financial statements of FINA Bancorp for the years ended
December 31, 2004 and 2005; and
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•
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financial
and operating information with respect to the business, operations
and
prospects of FINA Bancorp and 1st Source.
|
In
addition, AFSI:
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•
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|
held
discussions with members of management of FINA Bancorp and 1st Source
regarding the historical and current business operations, financial
condition and future prospects of their respective companies;
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•
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reviewed
the historical market prices and trading activity for the common
stock of
FINA Bancorp and 1st Source;
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•
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|
compared
the results of operations of FINA Bancorp and 1st Source with those
of
certain financial institutions which it deemed to be relevant;
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•
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compared
the financial terms of the merger with the financial terms, to the
extent
publicly available, of certain other recent business combinations
of
financial institutions; and
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•
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conducted
such other studies, analyses, inquiries and examinations as AFSI
deemed
appropriate.
|
As
part
of preparing its fairness opinion, AFSI performed due diligence investigations
in January, 2007 including a visitation to 1st Source on January 25, 2007.
As
part of the due diligence, AFSI requested
29
information
regarding the financial condition and performance of the 1st Source Corporation
including budgets, an allowance for loan losses reconciliation and delinquent
loans; information regarding pending or potential environmental, shareholder,
regulatory and general litigation or claims; information regarding any
outstanding stock options or planned programs; board and committee minutes;
director meeting information packages; information regarding regulatory
administrative orders or other actions imposed on 1st Source Corporation or
its
affiliates; regulatory exams; and other items.
In
conjunction with the on-site review of these materials, AFSI met with 1st Source
Corporation officers Richard Q. Stifel, Executive Vice President and Chief
Credit Officer; Larry E. Lentych, Senior Vice President, Treasurer and Chief
Financial Officer; and John B. Griffith, Senior Vice President, General Counsel
and Secretary. In addition, AFSI addressed a series of questions regarding
any
current, known or suspected and undisclosed issues or matters that would have
a
materially adverse impact on the current or future financial condition or
performance of 1st Source Bank to 1st Source Corporation officers Lentych and
Griffith.
Valuation
Methodology
The
following is a summary of all material analyses performed by AFSI in
connection
with its written opinion provided to the FINA Bancorp board of directors
dated
May 4, 2007. The summary does not purport to be a complete description
of the
analyses performed by AFSI.
The
principal step in determining the fair market value of FINA Bancorp is
to
evaluate its wholly owned subsidiary, First National Bank, Valparaiso.
First
National Bank, Valparaiso represented 96.84% of the total assets (excluding
cash) of FINA Bancorp at March 31, 2007. In evaluating FINA Bancorp,
AFSI
considered numerous appraisal methods and eventually determined that
two methods
were proper in calculating FINA Bancorp’s fair market value. The two selected
methods were the discounted cash flow and the adjusted book
value.
Discounted
Cash Flow.
Using a
discounted future cash flow analysis, AFSI projected cash flows of FINA
Bancorp’s wholly owned subsidiary bank, First National Bank, five years into
the
future. The principal behind the discounted future cash flow analysis
is that
the worth of a business is equal to the present value of the future expected
cash flows of the business. Besides determining five years of future
cash flows,
AFSI also estimated First National Bank’s residual value. The residual value
represents the value of the institution beyond the explicit forecast
period.
This value is based on the cash flow during the year following the final
projected year. The steps involved in determining First National Bank’s value
utilizing the discounted future cash flow analysis included the following:
(1)
the projected earnings in excess of the amount necessary to maintain
a 6.00%
equity capital to asset ratio were added to book charges such as depreciation
less any projected capital expenditures in order to determine future
cash flow;
(2) the future cash flows were then converted to a present value equivalent
using a discount rate of 15.61%, which was determined from the use of
the
Capital Asset Pricing Model (“CAPM”); (3) the residual value was then calculated
by dividing the projected cash flows for the 6th
year by
the capitalization rate. The capitalization rate not only includes all
aspects
of the CAPM but also reflects the long-term income growth prospects of
First
National Bank, as well as specific company risk factors; (4) the present
value
equivalent of the projected residual value was calculated using the 15.61%
discount rate; and (5) the present value of the cash flows and the residual
value were added together. The value per share of First National Bank’s common
stock resulting from this analysis was $62.96 million.
Adjusted
Book Value.
AFSI
also determined the fair market value of First National Bank utilizing
the
adjusted book method as an alternative valuation method. The adjusted
book value
approach requires a three-step process. First, the book value is determined.
This figure, representing the summary measure of stockholders’ claims against
the assets on a historical cost basis, is derived from the March 31,
2007
balance sheet. Second, assets and liabilities are restated to their fair
market
values. The adjusted book value calculation considers each major asset
and
liability account classification. Finally, additional “off-balance sheet”
adjustments are calculated, if necessary. The value per share of First
National
Bank’s common stock resulting from this analysis was $93.83
million.
30
AFSI
accorded an equal weight to each of the values derived from its analysis
in
order to arrive at an aggregate value of First National Bank. The weightings
were based on AFSI’s review of the financial position, history and recent
performance of First National Bank. The sum of the weighted values, or
$78.4
million, equates to the fair market value of First National Bank as of
March 31,
2007. The sum of the weighted values equates to the fair market value of
First
National Bank as a going concern. Subsequently, AFSI replaced the book
value of
First National Bank as represented in FINA Bancorp’s March 31, 2007 parent
company only balance sheet with the fair market value of First National
Bank.
This substitution results in a fair market value of FINA Bancorp as a going
concern of $81.0 million.
Comparable
Transactions.
AFSI
also analyzed certain other merger/acquisition transactions that have
consummated over the past two years in the Midwest (Iowa, Illinois, Indiana,
Kansas, Michigan, Minnesota, Missouri, North Dakota, Nebraska, Ohio, South
Dakota, and Wisconsin) which involved target financial institutions with assets
between $250 million to $1 billion. AFSI compared the median transaction
multiples of book value and earnings for these comparable transactions to FINA
Bancorp’s book value and last 12 months earnings. These multiples, when applied
to FINA Bancorp’s book value and last 12 months earnings as of and for the
twelve months ending December 31, 2006, suggest the purchase consideration
received by FINA Bancorp would be slightly below comparable transaction values
on a book value basis adjusted for the higher ratio of equity to assets
maintained at FINA Bancorp and well in excess of transaction values on an
earnings basis even after adjusting for “normalized” earnings. The results
produced in this analysis do not purport to be indicative of actual value or
expected value of FINA Bancorp shares of common stock.
Summary
of Proposed Merger.
The
aggregate purchase price to be paid by 1st Source in the merger will be
approximately $135 million, subject to adjustment in accordance with the merger
agreement. The cash portion of the merger consideration will be between 58%
and
60% of the aggregate purchase consideration. After setting aside between $4
million and $5.5 million in escrow for purposes of adjusting the purchase price
and providing indemnity to 1st Source, the balance of the purchase price will
be
allocated among the FINA Bancorp shareholders based on their written elections
whether to take cash or 1st Source common stock as consideration for their
shares. Depending on the elections by all of the FINA Bancorp shareholders,
the
cash and stock consideration may be reallocated among the FINA Bancorp
shareholders to ensure that the total mix of cash and stock consideration is
within the parameters required by the merger agreement. The actual number of
shares to be issued by 1st Source in the merger will depend in part on the
average closing price of 1st Source common stock on the Nasdaq Global Select
Market for the ten full trading days ending on the third full trading day before
the completion of the merger.
Based
on
the results of the various analyses described above, AFSI concluded that the
consideration to be received by FINA Bancorp shareholders under the agreement
and plan of merger is fair, from a financial point of view, to the shareholders
of FINA Bancorp.
The
opinion expressed by AFSI was based upon market, economic and other relevant
considerations as they existed and could be evaluated as of the date of the
opinion. Events occurring after the date of issuance of the opinion, including
but not limited to, changes affecting the securities markets, the results of
operations or material changes in the assets or liabilities of FINA Bancorp
or
1st Source could materially affect the assumptions used in preparing the
opinion.
AFSI
will
receive a fee equal to $50,000.00 plus out-of-pocket expenses incurred for
all
services performed in connection with the rendering of the fairness opinion.
In
addition, FINA Bancorp has agreed to indemnify AFSI and its directors, officers
and employees, from liability in connection with the transaction, and to hold
AFSI harmless from any losses, actions, claims, damages, expenses or liabilities
related to any of AFSI’s acts or decisions made in good faith and in the best
interest of FINA Bancorp.
Certain
of FINA Bancorp’s directors and executive officers may have interests in the
merger that are different from, or in addition to, their interests as
shareholders of FINA Bancorp. FINA Bancorp’s board of directors was aware of
these interests and took them into account at the time they approved the
agreement
31
and
plan
of merger. These interests are the continued director and officer liability
coverage discussed below under “The Merger - Indemnification and
Insurance.”
Indemnification
and Insurance
For
a
period of six years following the merger, 1st Source will be obligated to
indemnify, defend and hold harmless the present and former directors and
officers of FINA Bancorp and its subsidiaries, against expenses, claims,
or
liabilities as incurred, in connection with any claim, action, suit, proceeding
or investigation arising out of actions or omissions occurring at or before
the
merger (including the transactions contemplated in the merger agreement),
to the
same extent as such persons are indemnified or have the right to advancement
of
expenses pursuant to the articles of incorporation or by-laws of FINA Bancorp
and its subsidiaries and any indemnification agreements with FINA Bancorp
or its
subsidiaries in effect on the date of the merger agreement.
Certain
potential claims identified by FINA Bancorp to 1st Source, if a claim for
indemnification is made with respect to such matters, will reduce the indemnity
escrow amount. See the “The Merger - Merger Consideration - Escrow
Arrangements,”
below.
FINA Bancorp has undertaken to obtain tail coverage, prior to the merger,
in
addition to its existing director and officer liability insurance coverage,
to
provide director’s and officer’s liability insurance through the sixth
anniversary of the merger providing for reimbursement of such officers and
directors with respect to such expenses and claims.
Effective
April 10, 2007, the parties amended the merger agreement to stipulate that
the
indemnification provisions are subject to the limitations of federal banking
law.
The
merger will be completed when all of the conditions to the completion of the
merger are satisfied or waived, including adoption of the agreement and plan
of
merger by the shareholders of FINA Bancorp. The merger will become effective
upon the filing of appropriate articles of merger with the Secretary of State
of
the State of Indiana.
We
intend
to complete the merger as quickly as possible after FINA Bancorp’s special
meeting and plan to complete the merger during the second quarter of 2007,
although delays may occur.
The
aggregate purchase price provided for in the merger agreement is approximately
$135 million, subject to adjustment (up or down), on a dollar for dollar basis,
to the extent that the shareholders' equity of FINA Bancorp is greater than
or
less than a targeted figure of $69,051,000. For purposes of the agreement,
shareholders' equity is defined as shareholders' equity as recorded on the
balance sheet of FINA Bancorp in accordance with generally accepted accounting
principles; provided that such figure will be (i) adjusted for unrealized gains
or losses on securities, (ii) reduced by any loss in fair market value of FINA
Bancorp's nonoperating real estate if 1st Source's appraisal of such real estate
is less than 95% of the value of such real estate on FINA Bancorp's books,
and
(iii) reduced by any unrecorded liability for obligations arising upon a change
of control. As of the date of this proxy statement/prospectus, FINA Bancorp
does
not expect the adjustment for shareholders' equity to be material. Therefore
the
aggregate purchase price is expected to be approximately $135 million. There
are
42,101 shares of common stock of FINA Bancorp outstanding on the date hereof,
so
if the aggregate purchase price after adjustment were $135 million, and there
is
no change in the number of outstanding shares before the effective date of
the
merger, FINA Bancorp shareholders would receive $3,206.57 per share in
consideration for their shares in the merger.
Escrow
Arrangements
Of
the
total purchase price, 1st Source will first set aside cash in an escrow account
for two purposes. First, $4 million will be set aside as an indemnity escrow
to
protect 1st Source against certain post-closing contingencies, discussed below.
Second, up to $1.5 million (with the specific amount to be specifically
determined shortly prior to closing depending on FINA Bancorp's estimation
of
its closing date
32
shareholders’
equity) will be set aside for potential remittance to 1st Source in the event
that FINA Bancorp's shareholders equity as of closing is less than an estimated
amount to be determined prior to closing of the merger. Such amount is called
the purchase price adjustment escrow. So if the full $1.5 million is placed
in
escrow for the purchase price adjustment (along with the $4 million indemnity
escrow), a total of $5.5 million in cash will be placed in escrow. The balance
of the purchase price (sometimes called the "initial purchase consideration",
which would amount to $129.5 million, in this example) will become payable
to
shareholders of FINA Bancorp in the form of 1st Source common stock, or cash,
or
both, based on the allocation procedures and provisions of the merger agreement,
summarized below.
You
will
be given the opportunity to elect whether you wish to receive shares of 1st
Source common stock for some or all of your FINA Bancorp shares, or cash for
some or all of your FINA Bancorp shares, as further described below. Each share
of FINA Bancorp stock for which the purchase consideration is paid in cash
will
become entitled to receive an amount equal to the initial purchase consideration
divided by the number of outstanding shares of FINA Bancorp stock as of the
closing. If there continue to be 42,101 shares of FINA Bancorp stock
outstanding, and the initial purchase consideration, as indicated in the
foregoing example, were $129.5 million, then FINA Bancorp shareholders receiving
cash would become entitled to receive $3,075.94 for each share of FINA Bancorp
stock surrendered in the merger.
Each
share of FINA Bancorp stock for which the purchase consideration is paid in
the
form of 1st Source common stock will become entitled to receive the number
of
shares of 1st Source common stock determined by dividing the amount of cash
that
would be paid in respect of FINA Bancorp shares receiving cash (or $3,075.94
in
the foregoing example) by the value per share of 1st Source common stock at
closing, subject to an upper and lower threshold. The value of 1st Source common
stock as of closing will be equal to the average of the closing prices of 1st
Source common stock for a period of 10 full trading days ending three full
trading days before the date of the closing. The lower threshold is $25.663,
so
if the value of 1st Source common stock at closing is in fact less than $25.663,
it will nevertheless be deemed to be $25.663 for purposes of determining the
amount of 1st Source common stock to be issued to holders of FINA Bancorp common
stock receiving 1st Source common stock (subject to 1st Source’s obligation to
provide supplemental consideration as described below). Similarly, the upper
threshold is $32.663, so if the value of 1st Source common stock at closing
is
in fact greater than $32.663, it will nevertheless be deemed to be $32.663
for
purposes of determining the amount of 1st Source common stock to be issued
to
holders of FINA Bancorp common stock receiving 1st Source common stock. The
value of 1st Source common stock, determined based on the foregoing formula,
as
of the date of the merger agreement was $29.163. If the value of 1st Source
common stock at closing were $29.163, then each share of FINA Bancorp common
stock surrendered in exchange for 1st Source common stock would be exchanged
for
105.474 shares of 1st Source common stock. Only a whole number of shares of
1st
Source common stock will be issued to any holder of FINA Bancorp shares and
1st
Source will pay cash in lieu of any fractional shares.
Electing
to Receive Cash or 1st Source Stock in the Merger
A
form of
Letter of Transmittal and Election is included with this proxy
statement/prospectus. If you wish to make an election whether to receive
cash or
1st Source common stock for your shares of FINA Bancorp common stock, you
must:
(i) complete your Letter of Transmittal and Election form in accordance with
the
accompanying instructions, and (ii) return your completed, signed, Letter
of
Transmittal and Election, together with your original certificates for shares
of
FINA Bancorp common stock covered by the Letter of Transmittal and Election,
to
the exchange agent. You must do so no later than May 31, 2007. If you do
not
submit your Letter of Transmittal and Election before such deadline, your
FINA
Bancorp shares will be deemed “no election” shares and cash and stock
consideration will be allocated to your shares based on the allocation
procedures described below.
Allocation
Procedures
The
allocation of cash and 1st Source common stock as consideration for shares
of
FINA Bancorp will be made generally with a view to assuring that no less than
40% and no more than 42% of the aggregate purchase consideration (including
the
amounts set aside in escrow) will be paid in the form of 1st
33
Source
common stock and the balance will be paid in cash. 1st Source Bank, acting
as
the exchange agent, will make allocations of cash and stock consideration
consistent with the following rules.
If
FINA
Bancorp shareholders electing to receive cash for their shares would be entitled
to receive cash exceeding 60% of the total purchase consideration, then all
FINA
Bancorp shareholders electing to receive 1st Source Common Stock, and all FINA
Bancorp shareholders holding shares for which no valid election was made, will
receive shares of 1st Source common stock in exchange for their shares. The
exchange agent will then select a portion of the shares for which holders
elected to receive cash, on a pro rata basis, to instead receive 1st Source
common stock, so that no more than 60% of the total purchase consideration
is
paid in cash.
If
FINA
Bancorp shareholders electing to receive cash for their shares would be entitled
to receive cash amounting to less than 58% of the total purchase consideration,
then all FINA Bancorp shareholders electing to receive cash will receive cash.
Next, the exchange agent will allocate cash to those shares of FINA Bancorp
for
which no valid election was made to the extent necessary to ensure that 58%
of
the total consideration will be paid in cash. If less than all "no election"
shares would need to be allocated cash consideration to ensure the percentage
of
cash purchase consideration is not less than 58%, then the exchange agent will
select among the "no election" shares randomly to determine the "no election"
shares for which cash will be paid. If the exchange agent allocates cash to
all
of the "no election" shares and the percentage of cash purchase consideration
is
still less than 58%, then the exchange agent will select a portion of the shares
for which holders elected to receive 1st Source common stock, on a pro rata
basis, to instead receive cash, so that no less than 58% of the total purchase
consideration is paid in cash.
If
FINA
Bancorp shareholders electing to receive cash for their shares would be entitled
to receive cash amounting to between 58% and 60% of the total purchase
consideration, then all shares of FINA Bancorp common stock the holders of
which
elected to receive 1st Source common stock, and all shares for which no valid
election was made, will receive shares of 1st Source common stock; and all
FINA
Bancorp common stock the holders of which elected to receive cash, will receive
cash.
1st
Source and the FINA Bancorp shareholders who executed the voting agreement
with
1st Source as described herein may agree, in advance of the allocation of cash
or stock consideration described above, that, in lieu of pro rata allocation
by
the exchange agent of consideration to FINA Bancorp shareholders (in cash or
stock) in a form different from what such shareholders elected as contemplated
above, such reallocations will first be made in respect of shares held by
holders who are party to such voting agreement.
Supplemental
Consideration in the Event of a Decline in the Value of 1st Source Common Stock
Notwithstanding
the foregoing allocation rules, if the value of 1st Source common stock at
closing, determined in accordance with the merger agreement, is less than
$25.663, 1st Source will be required to remit additional consideration to FINA
Bancorp shareholders receiving 1st Source common stock, to cover the deficiency
between the value of 1st Source common stock at closing and $25.663. 1st Source
will decide whether to pay such differential in the form of common stock, cash,
or both. If, however, 1st Source's election to allocate this portion of the
consideration under this provision would cause the merger to fail to qualify
as
a tax-free reorganization with respect to the 1st Source common stock being
issued in the merger, then all holders of FINA Bancorp common stock will receive
cash consideration and will not receive any 1st Source common
stock.
Exchange
Process
If
the
exchange agent has not received your Letter of Transmittal and Election prior
to
the effective time of the merger, it will mail an additional letter of
transmittal to you at that time. To become eligible to receive your merger
consideration from 1st Source you will be required to complete and execute
a
Letter of Transmittal and return it to the exchange agent, together with your
original certificates for FINA Bancorp shares you are submitting for
exchange.
34
The
exchange agent will cause the consideration allocated to your FINA Bancorp
shares to be paid or issued to you approximately 10 business days following
the
effective time (if you submitted a properly completed Letter of Transmittal
and
Election, together with your original FINA Bancorp share certificates prior
to
the effective time); or within 10 business days following its receipt, after
the
effective time, of your properly completed Letter of Transmittal together with
your original FINA Bancorp share certificates.
Price
Adjustment
The
merger agreement provides for a mechanism to adjust the purchase price based
on
the amount by which FINA Bancorp's shareholders equity, as described above,
at
the closing, is more or less than $69,051,000. Following closing, 1st Source
will make an initial determination of the total purchase price, based on its
assessment of FINA Bancorp's shareholders' equity at closing. It will provide
this statement to the FINA Bancorp shareholder’s agent for review. If the
shareholder’s agent disagrees with this statement, the agreement provides for a
process to resolve any disagreement through negotiations or, if necessary,
referral to an independent accountant for a neutral, binding determination.
Once
the final purchase price is determined, if a decrease in the price is required,
the escrow agent will release the amount of the deficit to 1st Source from
the
purchase price adjustment escrow amount (described above as an amount up to
$1.5
million set aside for such purpose in connection with the closing) plus 5%
interest from the closing date. If an increase in the purchase price is
required, 1st Source will remit the amount of the increase to the escrow agent,
plus 5% interest from the closing date. The escrow agent will then distribute
any remaining portion of the purchase price adjustment escrow amount (and any
payment made by 1st Source representing a purchase price increase) among the
former holders of FINA Bancorp common stock, ratably according to their
interests.
Indemnity
Escrow
The
escrow agent will retain the escrow indemnity amount of $4 million in the
escrow
account in accordance with the escrow agreement. If 1st Source, its subsidiaries
(including the surviving corporation) or certain affiliates suffer damages
or
costs of litigation or investigation due to any of the following claims, 1st
Source will be entitled to compensation for such claims or damages from the
escrow indemnity amount, so long as it provides notice of its claim for
indemnity on or before September 18, 2012. Claims for which 1st Source will
be
entitled to be indemnified are (i) any claim or action (whether pending or
threatened) disclosed by FINA Bancorp in connection with the merger agreement;
or (ii) any claim or action related to dissenting shares; or (iii) any claim
related to a tax-qualified retirement plan. Indemnity of 1st Source for claims
in respect of dissenting shares will be limited to the amount (if any) the
holder of any dissenting shares recovers pursuant to the exercise of dissenters’
rights in excess of the amount of consideration to which such holder is
otherwise entitled under the merger agreement. 1st Source will also be entitled
to indemnity in respect of any breach of any representation, warranty or
covenant of FINA Bancorp under the merger agreement; provided that 1st Source
gives notice of such claim before the completion of the purchase price
adjustment procedures under the merger agreement. Any portion of the escrow
indemnity amount remaining in the custody of the escrow agent at September
18,
2012, not required to compensate 1st Source in respect of claims or breaches
for
which it has previously provided notice (and as to which it has not been
released) will be distributed to the former holders of FINA Bancorp common
stock, ratably in accordance with their interests, as promptly as practicable
in
accordance with the escrow agreement.
Exchange
of FINA Bancorp Stock Certificates for 1st Source Stock Certificates and Cash
You
received a Letter of Transmittal and Election form and related instructions
for
use with this proxy statement/prospectus. You may use this form to (i) choose
whether you would prefer to receive 1st Source common stock for some or all
of
your shares of FINA Bancorp, along with cash, or only cash for some or all
of
your shares of FINA Bancorp in the merger (subject to the allocation provisions
of the merger agreement described above), and (ii) submit your certificates
representing your shares of FINA Bancorp common stock for exchange in the
merger.
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If
you
wish to make and election whether to receive any 1st Source common stock
in
exchange for your shares or cash, you must return this Letter of Transmittal
and
Election form, properly completed, with your original stock certificates
for
FINA Bancorp common stock being exchanged in the merger to the exchange agent,
and such materials must be received by the exchange agent by May 31, 2007.
The
exchange agent is:
1st
Source Bank
P.O.
Box
1602
South
Bend, Indiana 46634
Attention:
Larry Lentych
If
you
desire to change your election, you may do so by submitting a replacement Letter
of Transmittal and Election form, properly completed, to the exchange agent
in
advance of the deadline. If you wish to revoke an earlier election, and not
to
make a different election, you may do so by providing written notice to the
exchange agent, and your certificates for FINA Bancorp stock submitted with
your
original Letter of Transmittal and Election will be returned to you upon
request.
If
you
submit your Letter of Transmittal and Election form, properly completed,
with
your original stock certificates for FINA Bancorp common stock being exchanged
in the merger, on or before May 31, 2007, when the merger is completed, you
will
need to take no further action and your FINA Bancorp stock certificates will
be
cancelled and you will receive the merger consideration to which you are
entitled under the merger agreement. If, for any reason, the merger is not
completed and the merger agreement is terminated, your certificates for FINA
Bancorp common stock will be promptly returned to you.
You
are
not required to submit your Letter of Transmittal and Election in advance of
the
above date unless you wish to make an election regarding the form of
consideration you wish to receive for your shares of FINA Bancorp common stock
in the merger. If you do not submit your Letter of Transmittal and Election
by
such date, then, after the merger is completed, the exchange agent will mail
to
you a letter of transmittal and instructions for use in surrendering your FINA
Bancorp stock certificates in exchange for the merger consideration. When you
deliver your FINA Bancorp stock certificates to the exchange agent along with
a
properly executed letter of transmittal and any other required documents, your
FINA Bancorp stock certificates will be cancelled and you will receive the
merger consideration to which you are entitled under the agreement and plan
of
merger.
Dividends
and Distributions
FINA
Bancorp shareholders are not entitled to receive any dividends or other
distributions on 1st Source common stock until the merger is completed and
the
FINA Bancorp shareholder has surrendered its FINA Bancorp stock certificates
in
exchange for 1st Source stock certificates. If there is any dividend or other
distribution on 1st Source common stock with a record date after the merger
and
a payment date prior to the date of surrender of the FINA Bancorp stock
certificates in exchange for 1st Source stock certificates, the FINA Bancorp
shareholder will receive it with respect to the whole shares of 1st Source
common stock issued to such shareholder promptly after they are issued. If
there
is any dividend or other distribution on 1st Source common stock with a record
date after the merger and a payment date after the date of surrender of FINA
Bancorp stock certificates in exchange for 1st Source stock certificates, the
FINA Bancorp shareholder will receive it with respect to the whole shares of
1st
Source common stock issued to the shareholder promptly after the payment date.
Withholding
The
exchange agent will be entitled to deduct and withhold from the merger
consideration payable to any FINA Bancorp shareholder the amounts it is required
to deduct and withhold under any federal, state,
36
local
or
foreign tax law. If the exchange agent withholds any amounts, these amounts
will
be treated for all purposes of the merger as having been paid to the
shareholders from whom they were withheld.
No
Fractional Shares Will Be Issued
1st
Source will not issue fractional shares of 1st Source common stock in the
merger. There will be no dividends or voting rights with respect to any
fractional common shares. For each fractional share of common stock that would
otherwise be issued, 1st Source will pay cash in an amount equal to the fraction
of a whole share that would otherwise have been issued, multiplied by the
average closing sale prices of one share of 1st Source common stock for the
ten
consecutive trading days on the Nasdaq Global Select Market immediately
proceeding the third trading day before the completion date of the merger.
No
interest will be paid or accrued on the cash paid for fractional shares.
Lost,
Stolen or Destroyed FINA Bancorp Stock Certificates
If
you
have lost a certificate representing FINA Bancorp common stock, or it has been
stolen or destroyed, 1st Source will issue to you the common stock or cash
payable under the agreement and plan of merger if you submit an affidavit of
that fact and post a bond in such reasonable amount as 1st Source or the
exchange agent may direct to protect against any claim that may be made against
1st Source or the exchange agent about ownership of the lost, stolen or
destroyed certificate.
1st
Source will account for the merger as a purchase. 1st Source will make a
determination of the fair value of FINA Bancorp’s assets and assumed liabilities
in order to allocate the purchase price of the assets acquired and liabilities
assumed. To the extent that the total purchase price exceeds the fair value
of
the assets acquired and liabilities assumed, 1st Source may record goodwill.
After the merger, 1st Source will include the results of FINA Bancorp’s
operations in its consolidated results of operations.
Neither
the board of directors nor the executive officers of 1st Source will change
as a
result of the merger. Information about 1st Source’s directors and executive
officers, including biographical information, executive compensation and
relationships and related transactions between management and the company,
can
be found in Appendix E. See also “Where You Can Find More
Information” on page 68.
The
following is a summary of the material anticipated United States federal income
tax consequences of the merger to a U.S. holder of FINA Bancorp’s common stock
that surrenders shares of FINA Bancorp common stock for shares of 1st Source
common stock or cash in the merger. This summary does not address any tax
consequences arising under the laws of any state, local or foreign jurisdiction.
The summary represents general information only and is based on the Code, its
legislative history, existing and proposed United States Treasury regulations,
administrative rulings and court decisions in effect as of the date of this
proxy statement/prospectus, and all of which are subject to change or differing
interpretations (possibly with retroactive effect) and any change could affect
the continuing validity of this discussion.
For
purposes of this summary, the term “U.S. holder” means:
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a
citizen or resident of the United States;
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a
corporation, or other entity taxable as a corporation for United
States
federal income tax purposes, created or organized under the laws
of the
United States or of any state or the District of Columbia;
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a
trust if it (1) is subject to the primary supervision of a court
within the United States and one or more United States persons have
the
authority to control all substantial decisions of the trust, or
(2) was in existence on August 20, 1996 and has a valid election
in effect under applicable Treasury regulations to continue to be
treated
as a United States person; or
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an
estate that is subject to United States federal income tax on its
income
regardless of its source.
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If
a
partnership (including for this purpose any other entity treated as a
partnership for United States federal income tax purposes) holds FINA Bancorp
common stock, the tax treatment of a partner will generally depend on the status
of the partners and the activities of the partnership. If a U.S. holder is
a
partner in a partnership holding FINA Bancorp common stock, such holder should
consult its tax advisor.
This
discussion only addresses FINA Bancorp’s shareholders that hold their shares of
FINA Bancorp common stock as a capital asset within the meaning of
Section 1221 of the Code. Further, this summary does not address all
aspects of United States federal income taxation that may be relevant to a
FINA
Bancorp shareholder in light of such holder’s particular circumstances or that
may be applicable to holders subject to special treatment under United States
federal income tax laws (including, for example, tax-exempt organizations,
mutual funds, a trader in securities who elects to apply a mark to market method
of accounting, brokers or dealers in securities or foreign currencies, banks,
insurance companies, financial institutions or persons that hold their FINA
Bancorp common stock as part of a hedge, straddle, constructive sale or
conversion transaction, an S corporation, partnership or other pass through
entity (or an investor in an S corporation, partnership or other pass through
entity), holders subject to the alternative minimum tax provisions of the Code,
holders whose functional currency is not the U.S. dollar, holders that exercise
appraisal rights, or holders who acquired their FINA Bancorp common stock
through the exercise of an employee stock option, through a tax qualified
retirement plan or otherwise as compensation). In addition, no information
is
provided in this proxy statement/prospectus with respect to the tax consequences
of the merger under applicable state, local or non-United States laws. No ruling
has been or will be requested by FINA Bancorp or 1st Source from the IRS
regarding the United States federal income tax consequences of the merger.
No
assurance can be given that the IRS would not assert, or that a court would
not
sustain, a position contrary to any of the tax consequences set forth below.
HOLDERS
ARE URGED TO CONSULT WITH THEIR TAX ADVISORS REGARDING THE TAX CONSEQUENCES
OF
THE MERGER TO THEM, INCLUDING THE EFFECTS OF UNITED STATES FEDERAL, STATE AND
LOCAL, FOREIGN AND OTHER TAX LAWS AND OF CHANGES IN THOSE LAWS.
The
merger is intended to qualify as a reorganization under Section 368(a) of
the Code for United States federal income tax purposes, but the merger will
not
qualify as a reorganization if the merger consideration consists solely of
cash
(as described below). It is a condition to FINA Bancorp’s obligation to
consummate the merger as a reorganization that it receive an opinion from tax
counsel, dated as of the closing date of the merger, to the effect that the
merger will be treated as a reorganization within the meaning of
Section 368(a) of the Code. In addition, the opinion must state that FINA
Bancorp and 1st Source are parties to such reorganization within the meaning
of
Section 368(b) of the Code and that no gain or loss shall be recognized by
the shareholders of FINA Bancorp who receive shares of 1st Source in exchange
for shares of FINA Bancorp common stock except to the extent of any cash
received for such shares of FINA Bancorp common stock. These opinions will
be
based on representation letters provided by FINA Bancorp and 1st Source and
on
customary factual assumptions. If any of the representations or assumptions
upon
which the opinions are based are inconsistent with the actual facts existing
at
the effective time of the merger, the tax consequences of the merger as a
reorganization could be adversely affected.
The
determination by tax advisors as to whether the proposed merger will be treated
as a “reorganization” within the meaning of Section 368(a) of the Code will
depend upon the facts and law existing at the effective time of the proposed
merger unless tax counsel determines that such determination may be made as
of
the last business day before the Merger Agreement becomes a binding contract
in
accordance with Treas. Reg. § 1.368-1(e). The opinions are not binding on the
IRS or any court and do not preclude the IRS from asserting, or a court from
sustaining, a contrary conclusion.
The
United States federal income tax consequences of the merger depend upon whether
the merger consideration includes shares of 1st Source common stock. (See the
section of this proxy
38
statement/prospectus
entitled “Merger Consideration - Allocation Procedures” beginning on page 33.)
If the merger consideration consists solely of cash and no 1st Source common
stock (an “all-cash transaction”), the merger will be a taxable transaction for
United States federal income tax purposes as discussed below under the heading
“U.S. Federal Income Tax Consequences - Taxable Transaction.” If the merger
consideration consists of the requisite combination of 1st Source common stock
and cash, the merger will qualify as a reorganization for United States federal
income tax purposes, with the result that the receipt of 1st Source common
stock
in the merger will be tax free to the FINA Bancorp shareholders as discussed
below under the heading “U.S. Federal Income Tax Consequences - Code Section
368(a) Reorganization.”
In
deciding whether to approve and adopt the merger agreement, the merger and
the
related transactions, FINA Bancorp shareholders should consider the possibility
that the merger consideration may consist only of cash, in which case the merger
will be a taxable transaction. FINA Bancorp shareholders will not be entitled
to
change their votes in the event the merger is a taxable
transaction.
U.S.
Federal Income Tax Consequences -Taxable Transaction
If
the
merger is an all-cash transaction and if 1st Source does not exercise its right
in Section 9.09 of the merger agreement to revise the structure or method of
effecting the merger, the merger will be a taxable forward merger rather than
a
reorganization, and FINA Bancorp and its shareholders will recognize taxable
gain or loss for United States federal income tax purposes as a result of the
merger. If the merger is a taxable forward merger, FINA Bancorp will be deemed
for United States federal income tax purposes to have (1) sold all of its assets
and (2) distributed the sale proceeds to its shareholders in exchange for their
shares of FINA Bancorp common stock in complete liquidation of FINA Bancorp.
As
a result, FINA Bancorp will recognize gain or loss on such deemed asset sale
in
an amount equal to the difference between the amount of cash received in the
merger and the FINA Bancorp’s adjusted tax basis in the assets sold. Gain or
loss recognized by FINA Bancorp will be capital gain or ordinary income
depending on the character of the assets sold and FINA Bancorp’s holding period
with respect thereto. Also, each FINA Bancorp shareholder who receives cash
proceeds of the deemed asset sale in exchange for all of its shares of FINA
Bancorp common stock will recognize gain or loss for United States federal
income tax purposes in the manner discussed below under the heading “Exchange of
FINA Bancorp Common Stock Solely for Cash.”
U.S.
Federal Income Tax Consequences - Code Section 368(a)
Reorganization
Assuming
the merger qualifies as a reorganization within the meaning of
Section 368(a) of the Code, FINA Bancorp and 1st Source will not recognize
any gain or loss for United States federal income tax purposes as a result
of
the merger, except as described below. Assuming the merger is treated as a
reorganization within the meaning of Section 368(a) of the Code, the
material United States federal income tax consequences of the merger to U.S.
holders of FINA Bancorp common stock are, in general, as follows:
Exchange
of FINA Bancorp Common Stock Solely for Cash
A
FINA
Bancorp shareholder who exchanges all of its shares of FINA Bancorp common
stock
solely for cash in the merger will recognize gain or loss on the exchange in
an
amount equal to the difference, if any, between the amount of cash received
and
the FINA Bancorp shareholder’s aggregate tax basis in the shares surrendered in
exchange therefor. Gain or loss recognized by such a FINA Bancorp shareholder
will be capital gain or loss (unless treated as a dividend under Section 302(b)
of the Code as discussed below).
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Exchange
of FINA Bancorp Common Stock for a Combination of 1st Source Common
Stock
and Cash
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A
FINA
Bancorp shareholder who receives a combination of 1st Source common stock and
cash in exchange for all of its shares of FINA Bancorp common stock will
recognize gain, if any, (but not loss) in an amount equal to the lesser of
(i)
the amount of cash received in the merger (plus the value of the shareholder’s
right to receive escrowed cash if the installment sale rules, open transaction
doctrine or any other applicable gain recognition deferral technique do not
apply as described below); and (ii) the excess, if any, of (a) the sum of the
amount of cash (plus the value of the shareholder’s right to receive escrowed
39
cash
if
the installment sale rules do not apply as described below) and the fair market
value of the 1st Source common stock received in the merger over (b) the FINA
Bancorp shareholder’s aggregate tax basis in its FINA Bancorp common stock
surrendered in exchange therefor. Such FINA Bancorp shareholder’s aggregate tax
basis in the 1st Source common stock received (including any fractional shares
deemed received and exchanged for cash as described below) will be equal to
the
shareholder’s aggregate tax basis in its FINA Bancorp common stock surrendered,
decreased by the amount of any cash received (other than cash received instead
of fractional shares of 1st Source common stock) and increased by the amount
of
any gain recognized (other than gain recognized with respect to cash received
instead of fractional shares of 1st Source common stock). Such FINA Bancorp
shareholder’s holding period for 1st Source common stock received (including any
fractional shares deemed received and exchanged for cash) will include the
holding period of the FINA Bancorp common stock surrendered in the merger.
Possible
Treatment of Exchange of FINA Bancorp Common Stock for Cash as a Dividend
Any
gain
recognized by a FINA Bancorp shareholder will be capital gain unless the FINA
Bancorp shareholder’s receipt of cash has the effect of a distribution of a
dividend, in which case the gain will be treated as dividends to the extent
of
the shareholder’s ratable share of accumulated earnings and profits, as
calculated for United States federal income tax purposes. For purposes of
determining whether a FINA Bancorp shareholder’s receipt of cash has the effect
of a distribution of a dividend, the FINA Bancorp shareholder will be treated
as
if it first exchanged all of its FINA Bancorp common stock solely in exchange
for 1st Source common stock and then 1st Source immediately redeemed a portion
or all of that stock for the cash that the holder actually received in the
merger (referred to herein as the “deemed redemption”). Receipt of cash will
generally not have the effect of a distribution of a dividend of the FINA
Bancorp shareholder if such receipt is, with respect to the FINA Bancorp
shareholder, “not essentially equivalent to a dividend,” “substantially
disproportionate” or a “complete redemption,” each within the meaning of
Section 302(b) of the Code.
The
deemed redemption will not be “essentially equivalent to a dividend” and,
therefore, will not have the effect of a distribution of a dividend with respect
to a FINA Bancorp shareholder if it results in a “meaningful reduction” in the
holder’s proportionate interest in 1st Source. If a holder that has a relatively
minimal stock interest in 1st Source and no right to exercise control over
corporate affairs suffers a reduction in the holder’s proportionate interest in
1st Source, the holder should be regarded as having suffered a meaningful
reduction in the holder’s proportionate interest in 1st Source. For example, the
IRS has held in a published ruling that, in the case of a less than 1%
stockholder who does not have management control over the corporation, any
reduction in the stockholder’s proportionate interest will constitute a
“meaningful reduction.” The IRS has also indicated in rulings that any reduction
in the interest of a minority shareholder that owns a small number of shares
in
a publicly and widely held corporation and that exercises no control over
corporate affairs would result in capital gain (as opposed to dividend)
treatment.
The
deemed redemption will be “substantially disproportionate,” and, therefore, will
not have the effect of a distribution of a dividend with respect to a FINA
Bancorp shareholder who
owns less than 50% of the voting power of the outstanding 1st
Source
common stock
if the
percentage of the outstanding 1st Source common stock that is actually and
constructively owned by the holder immediately after the deemed redemption
is
less than 80% of the percentage of the outstanding 1st Source common stock
that
is considered to be actually and constructively owned by the holder immediately
before the deemed redemption.
The
deemed redemption will be a “complete redemption,” and, therefore, will not have
the effect of a distribution of a dividend with respect to a FINA Bancorp
shareholder, if it results in a complete termination of a shareholder’s interest
in the outstanding 1st Source common stock that is considered to be actually
and
constructively owned by the holder immediately before the deemed
redemption.
For
purposes of applying the foregoing tests, a shareholder will be deemed to own
the stock it actually owns and the stock it constructively owns under the
attribution rules of Section 318 of the Code. Under Section 318 of the Code,
a
shareholder will be deemed to own the shares of stock owned by certain family
members, by certain estates and trusts of which the shareholder is a beneficiary
and by certain affiliated entities, as well as shares of stock subject to an
option actually or constructively owned by the
40
shareholder
or such other persons. In the event of a “complete redemption” within the
meaning of Section 302(b) of the Code, a shareholder is may elect to waive
the
attribution rules of Section 318 of the Code pursuant to Section 302(c) of
the
Code.
If,
after
applying these tests, the deemed redemption results in a capital gain, the
capital gain will be long-term if the FINA Bancorp shareholder’s holding period
for its FINA Bancorp common stock is more than one year as of the date of the
merger. Long-term capital gains recognized by an individual are generally
subject to tax at reduced rates.
If,
after
applying these tests, the deemed redemption results in the gain recognized
by a
FINA Bancorp shareholder being classified as a dividend, such dividend will
be
treated as either ordinary income or qualified dividend income. Any gain treated
as qualified dividend income will be taxable to individual FINA Bancorp
shareholders at the long-term capital gains rate, provided that the shareholder
held the shares giving rise to such income for more than 61 days during the
121
day period beginning 60 days before the closing date. Any gain treated as
ordinary income will be taxable at ordinary income rates.
The
determination as to whether a FINA Bancorp shareholder will recognize a capital
gain or dividend income as a result of its exchange of FINA Bancorp common
stock
for cash in the merger is complex and is determined on a
shareholder-by-shareholder basis. Accordingly,
each FINA Bancorp shareholder is urged to consult its own tax advisor with
respect to this determination.
Cash
Received Due to Exercise of Dissenters’ Rights
A
holder
of FINA Bancorp common stock who receives cash for its FINA Bancorp common
stock
because such shareholder exercised dissenters’ rights pursuant to Chapter 44 of
the Indiana Business Corporation Law will be treated for United States federal
income tax purposes as if the 1st Source common stock had been received and
then
redeemed for cash by 1st Source. Such FINA Bancorp shareholder will recognize
a
capital gain or loss in an amount equal to the difference between the cash
received and the tax basis in the 1st Source common stock, unless such payment,
under each such holder’s particular facts and circumstances, is deemed to have
the effect of a dividend distribution and not a redemption treated as an
exchange under the principles of Section 302 of the Code, as discussed
above.
Cash
in Lieu of Fractional Shares
A
holder
of FINA Bancorp common stock who receives cash in lieu of a fractional share
of
1st Source common stock generally will be treated as having received such
fractional share in the merger and then as having received cash in exchange
for
such fractional share. As a result, assuming that the redemption of a fractional
share of FINA Bancorp common stock is treated as a sale or exchange and not
as a
dividend, gain or loss generally will be recognized based on the difference
between the amount of cash received in lieu of the fractional share and the
tax
basis allocated to such fractional share of 1st Source common stock and such
gain or loss generally will be long-term capital gain or loss if, as of the
effective date of the merger, the holding period for such shares is greater
than
one year.
Treatment
of Escrowed Cash
Although
the law is uncertain with respect to the United States federal income tax
treatment of cash placed in escrow, unless a U.S. holder of FINA Bancorp common
stock elects out of or is otherwise ineligible for the installment method of
reporting gain, a shareholder may take the position that cash placed in escrow
is not taxable to a FINA Bancorp shareholder at the time of the merger. Instead,
the recognition of any gain is deferred until the cash is actually received.
Under the installment method, the amount of the gain recognized will be the
lesser of the cash received (minus the portion of the cash treated as interest,
as discussed below) and the proportionate amount of the total gain realized
in
the merger that was not previously recognized as a result of the cash received
at the effective time of the merger. For this purpose, the total gain realized
in the merger will be the excess of (i) the sum of the fair market value of
1st
Source common stock and the amount of cash that is received or expected to
be
received in the merger (including the holder’s portion of the full amount of
cash placed in escrow) over (ii) the shareholder’s tax basis in the FINA Bancorp
common stock surrendered in the merger. The proportion of the total gain
realized and not previously recognized allocable to any cash received from
the
escrow in a particular tax year will be equal to the proportion of the escrowed
cash received in that year. If less than the full amount of a FINA
41
Bancorp
shareholder’s portion of the escrowed cash is ultimately received by such
holder, the holder will have to make subsequent adjustments to its income tax
returns to reflect such fact. Gain recognized will be capital gain (unless
treated as a dividend under Section 302(b) of the Code as discussed above),
which will be long-term capital gain if the holding period for the shares of
FINA Bancorp common stock exchanged in the merger was more than one year as
of
the effective time of the merger. As discussed above, long-term capital gains
recognized by an individual are generally subject to tax at reduced rates.
The
installment method does not apply to FINA Bancorp shareholders who affirmatively
elect out of the installment method. FINA Bancorp shareholders are urged to
consult their own tax advisors with respect to whether they should elect out
of
the installment method and the impact of the installment method or such election
out of the installment method on their particular tax posture. Certain other
rules, including special interest and pledge rules applicable to an installment
obligation arising from the disposition of property with a sales price in excess
of $150,000, may also apply.
If
the
installment method does not apply or in the alternative, a U.S. holder of FINA
Bancorp common stock may take the position that cash placed in escrow is not
taxable to a FINA Bancorp shareholder at the time of the merger based upon
application of the so-called “open transaction” doctrine. Temporary United
States Treasury regulations, however, are intended to limit the use of the
open
transaction doctrine and open-transaction treatment to “rare and extraordinary
cases.”
It
is
possible that the IRS could take the position that the installment method,
open-transaction doctrine or any other applicable gain recognition deferral
technique are unavailable to FINA Bancorp shareholders with respect to the
escrowed cash and, therefore, seek to require the FINA Bancorp shareholders
to
recognize gain immediately on the escrowed cash at the time of the merger.
Such
a position, if sustained, would result in a FINA Bancorp shareholder being
taxed
on its share of the escrowed cash at the time of the merger without actually
receiving such share of cash until the potential distribution of the escrowed
cash at a later date.
The
FINA
Bancorp shareholders should be considered the owners of the escrowed funds
and
should be taxed on their pro rata share of the periodic earnings (including,
but
not limited to, interest income) on the escrowed funds on an annual basis.
A
portion of any escrowed cash and/or earnings thereon may be characterized as
ordinary interest income for United States federal income tax purposes under
the
imputed interest rules of the Code. As a result, a portion of any payments
made
to the FINA Bancorp shareholders from the escrow at a date later than the merger
may be recharacterized as interest income; applicable tax law may allocate
payments between interest and sales proceeds, whether or not the parties have
done so, and, in some cases, in derogation of the parties’ negotiated
allocation. Generally, the amount of imputed interest income, if any, on the
escrowed cash should be determined by a comparison of the actual interest earned
by the FINA Bancorp shareholders with respect to the escrowed cash compared
to
the applicable federal rate in effect for the month in which the effective
time
of the merger occurs.
Backup
Withholding and Information Reporting
In
general, a non-corporate FINA Bancorp shareholder receiving cash in the merger
may be subject to information reporting to the IRS. In addition, backup
withholding at the applicable rate (currently 28%) may apply to cash payments
received unless the exchanging FINA Bancorp shareholder either provides an
accurate taxpayer identification number and certifies that it is not subject
to
backup withholding (generally on a substitute IRS Form W-9) or otherwise
establishes an exemption to the satisfaction of 1st Source and the exchange
agent. Any amount withheld as backup withholding from payments to an exchanging
FINA Bancorp shareholder will be allowed by the IRS as a refund or credit
against the FINA Bancorp shareholder’s federal income tax liability if the
shareholder timely furnishes the required information to the IRS. FINA Bancorp
shareholders should consult their tax advisors as to their qualifications for
exemption from backup withholding and the procedure for establishing an
exemption.
Reporting
Requirements
A
FINA
Bancorp shareholder who receives 1st Source common stock as a result of the
merger will generally be required to retain records pertaining to the merger
and
will be required to file with such shareholder’s United States federal income
tax return for the year in which the merger takes place a statement setting
forth certain facts relating to the merger.
42
The
preceding summary does not address tax consequences that may vary with, or
are
contingent on, individual circumstances. Holders are urged to consult their
own
tax advisers as to the specific tax consequences to them of the merger,
including tax return reporting requirements, the applicability and effect of
federal, state, local, foreign and other applicable tax laws and the effect
of
any proposed changes in the tax laws.
Governmental
and Regulatory Approvals
Completion
of the merger is subject to prior receipt of all required approvals and consents
by all applicable federal and state regulatory authorities. 1st Source and
FINA
Bancorp have agreed to use all reasonable best efforts to obtain consents of
governmental and regulatory authorities necessary for consummation of the
transactions contemplated by the agreement and plan of merger.
Section
3(a)(3) of the Bank Holding Company Act (“BHC Act”) requires the prior approval
of the Board of Governors of the Federal Reserve Board (“FRB”) before a bank
holding company may acquire direct or indirect ownership or control of more
than
5 percent of the voting shares of any bank. The BHC Act requires the FRB to
take
into consideration the financial and managerial resources and future prospects
of the bank holding companies and the banks involved in the transaction, their
compliance with laws intended to detect and combat money laundering, and the
convenience and needs of the communities to be served. In considering financial
resources and future prospects, the FRB will, among other things, evaluate
the
adequacy of the capital levels of 1st Source Bank and First National
Bank. In
determining whether the transaction meets the convenience and needs of the
communities to be served, the FRB must take into account 1st Source Bank’s
record of performance under the Community Reinvestment Act in meeting the credit
needs of the communities it serves, including low- and moderate-income
neighborhoods.
The
BHC
Act prohibits the FRB from approving any proposed merger transaction that would
result in a monopoly, or which would be in furtherance of any combination or
conspiracy to monopolize or to attempt to monopolize the business of banking
in
any part of the United States, or whose effect in any section of the country
may
be substantially to lessen competition, or to tend to create a monopoly, or
which in any other manner would be in restraint of trade, unless the FRB finds
that the anticompetitive effects of the proposed merger transaction are clearly
outweighed in the public interest by the probable effect of the transaction
in
meeting the convenience and needs of the communities to be served.
The
merger may not be consummated before the 30th calendar day, or, with the consent
of the relevant agencies, the 15th calendar day, after the date of FRB approval,
during which period the United States Department of Justice may comment
adversely on the merger or challenge the merger on antitrust grounds. The
commencement of an antitrust action would stay the effectiveness of the FRB’s
approval unless a court specifically orders otherwise.
1st
Source must also obtain the prior written approval of the Indiana Department
of
Financial Institutions with regard to the proposed merger pursuant to Indiana
Code section 28-2-14-12. In considering an application for approval of the
transaction, the Department of Financial Institutions will consider factors
similar to those considered by the FRB in its review of the
transaction.
Status
of Applications and Notices
1st
Source has completed the filing of all required applications and notices
with
the applicable regulatory authorities in connection with the merger. There
can
be no assurance that all required approvals will be obtained, that such
approvals will be received on a timely basis or that such approvals will
not
impose conditions or restrictions on the operations of 1st Source, 1st Source
Bank or First National Bank. 1st Source shall not be required to consummate
the
merger if, any such regulatory approval contains any condition which, in
the
reasonable good faith judgment of 1st Source, adversely impacts the ability
of
1st Source to conclude the merger or operate any business of 1st Source or
FINA
Bancorp as currently operated. See “The Agreement and Plan of Merger-Conditions
to the Completion of the Merger” beginning on page 53.
The
Federal Reserve staff has advised 1st Source that due to the concentration
of
deposits in Starke County that would likely exist following completion of
the
merger, the Federal Reserve will condition its approval of the merger upon
the
agreement of 1st Source to divest itself of one of the current Starke County
branch offices of FINA Bancorp (located in Hamlet, Indiana and North Judson,
Indiana (see pages 57 and 58 of this proxy statement/prospectus for information
on FINA Bancorp’s current offices). 1st Source does
43
not
view
this condition as material or adversely impacting its ability to conclude the
merger or to operate the business of 1st Source and FINA Bancorp in Starke
County following the merger, and so is prepared to accept this condition of
the
Federal Reserve’s approval. However, before the merger may be consummated, 1st
Source will be required to have executed a definitive agreement with a qualified
third party to dispose of one of FINA Bancorp’s Starke County branches and there
is no assurance as to when, or the terms upon which, 1st Source will be able
to
enter into such an agreement. Alternatively, 1st Source will be required to
place one of the Starke County branches in trust with an independent trustee
prior to the Closing on terms acceptable to the Federal Reserve. Such trustee
will be directed to arrange for the sale of such branch.
Restrictions
on Resales by Affiliates
All
shares of 1st Source common stock received by FINA Bancorp’s shareholders in the
merger will be registered under the Securities Act of 1933, as amended, or
Securities Act, and will be freely transferable, except for shares issued to
any
FINA Bancorp shareholder who, is deemed to be an “affiliate” of FINA Bancorp for
purposes of Rule 145 under the Securities Act, or may be deemed to be an
“affiliate” of 1st Source for purposes of Rule 144 under the Securities Act.
Affiliates will include persons (generally executive officers, directors and
10%
shareholders) who control, are controlled by or are under common control with
(1) 1st Source or FINA Bancorp at the time of the special meeting or
(2) 1st Source at or after the completion of the merger. The agreement and
plan of merger requires that FINA Bancorp cause its affiliates to sign a written
agreement to the effect that they will not sell, assign, transfer or otherwise
dispose of any of the shares of 1st Source common stock issued to them in the
merger in violation of the Securities Act.
Rule
145
will restrict the sale of 1st Source common stock received in the merger by
affiliates of FINA Bancorp and certain of their family members and related
interests. Generally speaking, during the one-year period after the effective
time of the merger, those persons who are affiliates of FINA Bancorp at the
time
of the special meeting, provided they do not become affiliates of 1st Source
at
or after the completion of the merger, may publicly resell any 1st Source common
stock received by them in the merger, subject to certain limitations as to,
among other things, the amount of 1st Source common stock sold by them in any
three-month period and as to the manner of sale. After the one-year period,
such
affiliates generally may resell their shares without such restrictions. Persons
who are affiliates of 1st Source after the completion of the merger may publicly
resell the 1st Source common stock received by them in the merger subject to
similar limitations (except that the restrictions do not lapse after the
one-year period) and subject to certain filing requirements specified in Rule
144.
The
ability of affiliates to resell shares of 1st Source common stock received
in
the merger under Rules 144 or 145 as summarized in this proxy
statement/prospectus generally will be subject to 1st Source’ having satisfied
its reporting requirements under the Securities Exchange Act of 1934, as
amended, for specified periods before the time of sale. Pursuant to the
agreement and plan of merger, 1st Source has agreed to use its best efforts
to
satisfy its reporting requirements under the Exchange Act in order to satisfy
the public information provisions required to be met in order for affiliates
to
resell shares of 1st Source common stock under Rules 145 and 144 for a period
of
not less than three years. Affiliates also would be permitted to resell 1st
Source common stock received in the merger in accordance with an effective
registration statement under the Securities Act or another available exemption
from the Securities Act registration requirements.
This
proxy statement/prospectus does not cover resales of 1st Source common stock
received by any person who may be deemed to be an affiliate of FINA Bancorp
and/or 1st Source.
1st
Source has agreed to use all reasonable best efforts to have the shares of
1st
Source common stock issuable in the merger included for quotation on the Nasdaq
Global Select Market, subject to official notice of issuance before the
completion of the merger.
44
RIGHTS
OF DISSENTING SHAREHOLDERS
The
Indiana Business Corporation Law grants dissenters’ rights in the merger to the
holders of FINA Bancorp common stock. Under the Indiana Business Corporation
Law, FINA Bancorp shareholders may dissent from the merger and demand in writing
that FINA Bancorp pay the fair value of their shares. Fair value excludes any
appreciation or depreciation in anticipation of the merger unless exclusion
would be inequitable.
Chapter
44 of the Indiana Business Corporation Law sets forth the required procedures
a
shareholder requesting dissenters’ rights must follow. Shareholders who elect to
exercise dissenters’ rights must strictly comply with all of the procedures to
preserve those rights. Failure to strictly comply with the procedures may cause
a termination of your dissenter’s rights. A copy of Chapter 44 of the Indiana
Business Corporation Law is attached as Appendix
D
this
proxy statement/prospectus. The following information is qualified in its
entirety by the provisions of Chapter 44. Please review Chapter 44 for the
complete procedures.
Dissenters’
Rights Procedures
If
you
are a FINA Bancorp shareholder and you wish to exercise your dissenters’ rights,
you must satisfy the provisions of Chapter 44 of the Indiana Business
Corporation Law. The following describes some of the requirements of Chapter
44.
|
1.
|
You
must deliver a written notice to FINA Bancorp.
|
Before
the shareholder vote is taken, you must deliver to FINA Bancorp a written notice
of your intent to demand payment for your shares pursuant to Chapter 44 if
the
merger is completed. Dissenters’ rights are not available to you unless you
fulfill this notice requirement. The written notice must:
|
·
|
be
sent before the vote on the merger agreement is taken at the special
meeting of FINA Bancorp shareholders;
and
|
|
·
|
be
sent to:
|
FINA
Bancorp, Inc.
Attention:
Wayne B. Welter
President
14
Indiana Avenue
Valparaiso,
Indiana
46383
|
2.
|
Record
owners may assert dissenters’ rights on behalf of beneficial owners.
|
If
you
are a record owner, such as a broker, who holds FINA Bancorp common stock as
a
nominee for others, you may assert dissenters’ rights with respect to the shares
held for one or more beneficial owners, while not exercising such right for
other beneficial owners. You may assert dissenters’ rights as to fewer than all
shares registered in your name only if you dissent (in accordance with the
provisions of Chapter 44) with respect to all of the shares beneficially owned
by any one person, and you notify FINA Bancorp in writing of the name and
address of each person on whose behalf you, as record owner, are asserting
dissenters’ rights.
|
3.
|
Beneficial
owners may assert dissenters’ rights only with the record owner’s consent.
|
If
you
are the beneficial owner of FINA Bancorp shares but you are not the record
owner
of those shares, you may assert dissenters’ rights as to the shares held on your
behalf only if:
45
|
·
|
you
submit to FINA Bancorp the record owner’s written consent to the dissent
no later than the time you assert dissenters’ rights;
and
|
|
·
|
you
assert dissenters’ rights with respect to all of your shares or all of
those shares over which you have the power to direct the
vote.
|
|
4.
|
You
must refrain from voting “FOR” approval of the merger agreement.
|
You
must
not vote “FOR” approval of the merger agreement. If you vote in favor of the
merger agreement, your dissenters’ rights will terminate, even if you previously
filed a written notice of your intent to demand payment for your
shares.
|
5.
|
FINA
Bancorp must notify dissenting shareholders if the merger is approved.
|
If
the
merger is approved, FINA Bancorp must send a written notice to each dissenting
shareholder within ten days of the approval. The dissenters’ notice
must:
|
·
|
supply
a form that includes the date of the first announcement to news media
or
to shareholders of the terms of the merger and require that you certify
whether you were the beneficial owner of your shares before that
date;
|
|
·
|
state
where you must send the payment demand and certificates for your
shares;
|
|
·
|
set
a date by which FINA Bancorp must receive your payment demand and
certificates representing your shares (the date may not be fewer
than 30
nor more than 60 days after the date FINA Bancorp delivers the dissenters’
notice to you); and
|
|
·
|
include
a copy of Chapter 44.
|
|
6.
|
FINA
Bancorp must return your shares if the merger is not completed by
a
certain date.
|
If
FINA
Bancorp and 1st Source do not complete the merger within 60 days after the
date
set forth in the dissenters’ notice for demanding payment and depositing shares,
FINA Bancorp must return your shares to you. If FINA Bancorp and 1st Source
complete the merger after returning your shares to you, FINA Bancorp must send
you a new dissenters’ notice and repeat the payment demand
procedure.
|
7.
|
You
must demand payment for your shares.
|
To
preserve statutory dissenters’ rights, you must send FINA Bancorp a payment
demand, certify whether you were the beneficial owner of your shares prior
to
the date set forth in the dissenters’ notice and deposit the certificates
formerly representing your shares, all in accordance with the terms of the
dissenters’ notice. If you demand payment and deposit stock certificates in
accordance with the terms of the dissenters’ notice, you will retain all other
rights as a shareholder until the rights are cancelled or modified by the
completion of the merger. If you fail to demand payment or deposit stock
certificates as required by the dissenters’ notice by the date set forth in the
notice, you will not be entitled to payment for your shares and will be
considered to have voted in favor of the merger.
|
8.
|
1st
Source, on behalf of FINA Bancorp, will pay you the estimated fair
value
of your shares.
|
Upon
the
completion of the merger, if you have met all statutory conditions for
dissenting shareholders, 1st Source, on behalf of FINA Bancorp, will send you
a
payment of the amount FINA Bancorp estimates to be the fair value of your
shares, accompanied by certain information specified in Chapter 44. However,
FINA Bancorp may elect to withhold payment if you acquired beneficial ownership
of your shares after the date set forth in the dissenters’ notice as the date of
the first announcement to news media or shareholders of the terms of the merger.
If FINA Bancorp elects to withhold payment from you and other post-announcement
shareholders, 1st Source, on behalf of FINA Bancorp, will offer to pay you
FINA
Bancorp’s estimate of the
46
fair
value of your shares upon your agreement to accept the payment offered in full
satisfaction of your dissenters’ demands.
|
9.
|
You
may make an optional second payment demand.
|
Within
30
days after 1st Source, on behalf of FINA Bancorp, pays FINA Bancorp’s estimate
of the fair value of your shares (or, if you are a post-announcement
shareholder, after 1st Source, on behalf of FINA Bancorp, offers to pay you
FINA
Bancorp’s estimate of the fair value of your shares), you may notify FINA
Bancorp of your estimate of the value of your shares and demand payment of
your
estimate of the fair value of the shares less any payment received on behalf
of
FINA Bancorp (or, if you are a post-announcement shareholder, reject the offer
and demand payment of your estimate of the fair value of the shares). You may
exercise this right if:
|
·
|
you
believe the amount paid or offered on behalf of FINA Bancorp is less
than
the fair value of your shares;
|
|
·
|
1st
Source and FINA Bancorp fail to make payment within 60 days after
the date
set for demanding payment; or
|
|
·
|
1st
Source and FINA Bancorp have failed to complete the merger and has
not
returned your deposited certificates within 60 days after the date
set for
demanding payment.
|
|
10.
|
FINA
Bancorp will commence an appraisal proceeding.
|
If
a
demand for payment by any dissenting shareholder remains unsettled, FINA Bancorp
or, if the merger has occurred, Hickory Acquisition, Inc., as the surviving
corporation, will commence a proceeding in the Circuit Court or the Superior
Court of Porter County, Indiana to appraise the value of the dissenting shares.
This appraisal proceeding must be commenced within 60 days after the receipt
by
FINA Bancorp of the unsettled demand. All dissenting shareholders whose claims
remain unsettled at that time will be made parties to those proceedings. If
FINA
Bancorp does not commence the proceeding within the 60-day period, FINA Bancorp
(or 1st Source, on behalf of FINA Bancorp) must pay each dissenter whose demand
for payment is unsettled the amount demanded by the dissenter.
|
11.
|
The
court will determine the fair value of your shares.
|
If
you
have an unsettled claim, you will be entitled to judgment for the amount, if
any, by which the court finds the fair value of your shares, plus interest,
exceeds any amount paid to you on behalf of FINA Bancorp. In determining the
fair value, in accordance with Chapter 44, the court will not consider any
appreciation or depreciation due to the anticipation or accomplishment of the
merger, unless such exclusion is inequitable. The court could determine that
the
fair value of your shares of FINA Bancorp common stock is more than, the same
as, or less than the consideration paid in the merger. In other words, if you
demand appraisal rights, you could receive less consideration for your shares
than you would have received under the merger agreement.
|
12.
|
The
court may assess the costs of the appraisal proceeding against you,
other
dissenting shareholders and/or FINA Bancorp.
|
The
court
in an appraisal proceeding will determine and assess costs against all parties
in such amounts as the court finds equitable. The court may assess fees and
expenses of counsel and experts against FINA Bancorp if the court finds that
FINA Bancorp did not substantially comply with the requirements of Chapter
44 or
against either FINA Bancorp or a dissenting shareholder if the court finds
that
the party against whom the fees and expenses are assessed acted arbitrarily,
vexatiously, or not in good faith. In addition, if the court finds that the
services of counsel for any dissenter were of substantial benefit to other
dissenting shareholders similarly situated and that the fees for those services
should not be assessed against FINA Bancorp, the court may award to such counsel
reasonable fees to be paid out of the amounts awarded the dissenting
shareholders who were benefited.
47
|
13.
|
You
will retain your rights as a shareholder until the merger is completed.
|
You
will
retain the rights, if any, to vote and receive dividends until the merger is
completed. Upon the completion of the merger, if you have given proper notice
and made a valid demand, you will cease to be a shareholder and will have no
rights with respect to your shares except the right to receive payment of the
fair value.
If
you fail to comply with these procedures, you will lose your dissenters’ rights.
Consequently, if you wish to exercise your dissenters’ rights, you should
consult a legal advisor before attempting to exercise your dissenters’
rights.
48
THE
AGREEMENT AND PLAN OF MERGER
The
following describes the material provisions of the Agreement and Plan of Merger.
We urge you to read the Agreement and Plan of Merger which is attached as
Appendix
A
and
incorporated by reference in this document, carefully and in its entirety.
The
description of the Agreement and Plan of Merger in this proxy
statement/prospectus has been included to provide you with information regarding
its terms. The Agreement and Plan of Merger contains representations and
warranties made by and to the parties thereto as of specific dates. The
statements embodied in those representations and warranties were made for
purposes of that contract between the parties and are subject to qualifications
and limitations agreed by the parties in connection with negotiating the terms
of that contract. In addition, certain representations and warranties were
made
as of a specified date, may be subject to a contractual standard of materiality
different from those generally applicable to shareholders, or may have been
used
for the purpose of allocating risk between the parties rather than establishing
matters as facts.
FINA
Bancorp and 1st Source each made a number of representations and warranties
in
the Agreement and Plan of Merger regarding aspects of their respective
businesses, financial condition, structure and other facts pertinent to the
merger. Theses
representations cover the following topics, among others:
|
|
•
|
|
organization,
standing and authority;
|
|
|
•
|
|
capitalization;
|
|
|
•
|
|
subsidiaries;
|
|
|
•
|
|
corporate
power ;
|
|
|
•
|
|
authorization
of the Agreement and Plan of Merger and related transactions;
|
|
|
•
|
|
regulatory
approvals required for the Agreement and Plan of Merger and related
transactions;
|
|
|
•
|
|
financial
statements and SEC filings;
|
|
|
•
|
|
absence
of certain changes or events;
|
|
|
•
|
|
legal
proceedings;
|
|
|
•
|
|
regulatory
matters;
|
|
|
•
|
|
compliance
with laws;
|
|
|
•
|
|
material
contract contracts and the absence of defaults;
|
|
|
•
|
|
employee
benefit plans;
|
|
|
•
|
|
tax
matters;
|
|
|
•
|
|
accuracy
of books and records;
|
|
|
•
|
|
the
inapplicability to the merger of state anti-takeover laws;
|
|
|
•
|
|
required
payments related to the merger to financial advisers;
|
|
|
•
|
|
labor
and employment matters;
|
|
|
•
|
|
environmental
matters;
|
|
|
•
|
|
intellectual
property; and
|
|
|
•
|
|
tax
treatment of the merger.
|
In
addition, 1st Source makes representations as to its organization and ownership
of the merger subsidiary and the availability of cash sufficient to fund the
cash portion of the merger consideration.
The
representations and warranties contained in the agreement and plan of merger
are
not easily summarized. You are urged to carefully read the respective articles
of the agreement and plan of merger
49
setting
forth the representations and warranties of 1st Source and FINA Bancorp. A
copy
of the agreement and plan of merger is attached hereto as Appendix
A.
FINA
Bancorp has agreed that until the completion of the merger it will, and will
cause each of its subsidiaries to operate and conduct their business in the
usual and ordinary course and use its reasonable best efforts to preserve intact
its business organization, assets, licenses, franchises, authorizations, and
existing relationships with customers, suppliers and employees.
FINA
Bancorp has also agreed that until the completion of the merger, FINA Bancorp
will, unless it otherwise receives the written consent of 1st Source, conduct
its business in compliance with specific restrictions relating to the following:
|
|
•
|
|
material
changes to or materially deviations from its lending or investment
policies and practices , provided that on or before May 1, 2007 FINA
Bancorp will transition its current investment portfolio to an agreed
investment portfolio;
|
|
|
•
|
|
issuance,
sale and redemption of securities;
|
|
|
•
|
|
adjustments,
splits, combinations or reclassifications of its capital stock and
the
payment of dividends (other than regular quarterly dividends at current
levels) or other distributions;
|
|
|
•
|
|
transfers
of and liens on FINA Bancorp’s assets;
|
|
|
•
|
|
acquisition
of property or assets;
|
|
|
•
|
|
amendment
to FINA Bancorp’s articles of incorporation and bylaws;
|
|
|
•
|
|
accounting
policies and procedures and tax elections, except as required by
generally
accepted accounting principles in the United States or applicable
regulatory accounting;
|
|
|
•
|
|
actions
that would adversely affect the tax treatment of the merger or result
in
conditions to the merger failing to be satisfied;
|
|
|
•
|
|
compensation
and employment agreements, with specified exceptions;
|
|
|
•
|
|
employee
benefit plans, with specified exceptions;
|
|
|
•
|
|
maintenance
of regulatory agreements and other regulatory authorizations;
|
|
|
•
|
|
actions
affecting the tax-free reorganization status of the merger;
|
|
|
•
|
|
incurring
or guarantying debt;
|
|
|
•
|
|
settlement
of litigation or claims; or
|
|
|
•
|
|
any
commitment to take any action described above.
|
1st
Source has also agreed that until the completion of the merger 1st Source will,
unless it otherwise receives the written consent of FINA Bancorp, conduct its
business in compliance with specific restrictions relating to the following:
|
|
•
|
|
actions
that would adversely affect the tax treatment of the merger or result
in
conditions to the merger failing to be satisfied;
|
|
|
•
|
|
amendment
to FINA Bancorp’s articles of incorporation and bylaws; or
|
|
|
•
|
|
any
commitment to take any action described above.
|
The
agreements related to the conduct of FINA Bancorp’s business and 1st Source’s
business in the agreement and plan of merger are not easily summarized. You
are
urged to carefully read the pertinent provisions of the agreement and plan
of
merger, a copy of which is attached hereto as Appendix
A.
50
Additional
Covenants and Agreements
Each
of
FINA Bancorp and 1st Source has agreed to cooperate with each other and to
use
its reasonable best efforts to take all actions and do all things necessary
under the agreement and plan of merger to complete the merger. Until the
completion of the merger, FINA Bancorp and 1st Source have, as applicable,
agreed as follows:
|
|
•
|
|
FINA
Bancorp has agreed to hold a special meeting of its shareholders
as soon
as practicable after the registration statement of which this proxy
statement/prospectus is a part is declared effective for purposes
of
adopting the agreement and plan of merger and approving the merger
and to
cooperate with 1st Source in preparing and causing its registration
statement to be declared effective;
|
|
|
•
|
|
1st
Source has agreed to prepare and file the registration statement
of which
this proxy statement/prospectus is a part and to use its reasonable
best
efforts to have the registration statement declared effective as
promptly
as practicable after filing;
|
|
|
•
|
|
FINA
Bancorp has agreed to prepare and provide to 1st Source its 2006
audited
annual financial statements; and subsequent quarterly interim financial
statements;
|
|
|
•
|
|
Each
of 1st Source and FINA Bancorp have agreed to consult with each other
as
to press releases, communications to employees and shareholder
communications;
|
|
|
•
|
|
Each
of 1st Source and FINA Bancorp has agreed to provide the other with
access
information reasonably related to its operations or financial performance
and to keep confidential any nonpublic information it receives;
|
|
|
•
|
|
FINA
Bancorp has agreed to provide 1st Source Corporation a list of persons
who
are “affiliates” of FINA Bancorp for purposes of Rule 145 under the
Securities Act and has agreed to cause each affiliate to execute
and
deliver to 1st Source an affiliates letter, in substantially the
form
attached to the agreement and plan of merger;
|
|
|
•
|
|
Each
of 1st Source and FINA Bancorp have agreed to refrain from taking
any
action that would subject the merger to Indiana’s anti-takeover statutes
(Indiana Code 23-1-42 and 23-1-43)
;
|
|
|
•
|
|
1st
Source has agreed to use reasonable efforts to have the shares of
1st
Source common stock to be issued in the merger to be listed, as of
the
effective time of the merger, on the Nasdaq Global Select Market;
|
|
|
•
|
|
Each
of 1st Source and FINA Bancorp have agreed to use all reasonable
best
efforts to prepare and file all documents needed to obtain necessary
regulatory approvals as soon as practicable;
|
|
|
•
|
Each
of 1st Source and FINA Bancorp have agreed to maintain their current
employee stock ownership, profit sharing and 401(k) plans and to
fund
contributions through the
merger;
|
|
|
•
|
FINA
Bancorp agreed that prior to the completion of the merger it will
terminate its 401(k) plan, pay any excise taxes and correct any
deficiencies in its plans and 1st Source has agreed to either terminate
FINA Bancorp’s ESOP plan or merge it into its current
plans. (Notwithstanding the foregoing provsion of the Merger
Agreement related to FINA Bancorp's retirement plans, 1st Source
and FINA
Bancorp have subsequently agreed that FINA Bancorp's 401(k) Plan
will
continue for some period of time after the completion of the merger,
and
that FINA Bancorp's ESOP will be terminated effective on the Closing
of
the merger with an appropriate filing with the Internal Revenue
Service
for approval of such ESOP plan termination.);
|
|
|
•
|
|
Each
of 1st Source and FINA Bancorp have agreed to give prompt notice
to the
other party of any events or facts which either maker any representation
or warranty materially untrue or inaccurate, could result in a failure
of
any condition to the merger, would constitute a material adverse
effect
relating to it, or could result in a change to its investment or
other
policies and procedures;
|
|
•
|
Each
of 1st Source and FINA Bancorp have agreed to consult with the other
concerning policies and procedures and restructuring charges in connection
with the merger and FINA Bancorp has agreed not to change its policies
or
practices or take such charges without the consent of 1st
Source;
|
|
•
|
FINA
Bancorp has agreed to terminate a series of specified agreements
and use
reasonable commercial efforts to sell specified real estate;
|
|
•
|
Each
of 1st Source and FINA Bancorp have agreed not to take actions
which are
intended to manipulate the price of 1st Source common
stock.
|
51
|
|
•
|
|
1st
Source has agreed to provide indemnification to the directors,
officers,
employees and agents of FINA Bancorp and its subsidiaries for six
years
after the merger and FINA Bancorp has agreed to obtain “tail” coverage
under it’s existing directors’ and officers’ insurance policy for that
six-year period, see “The Merger—Indemnification and Insurance” on page
32;
|
|
|
•
|
|
FINA
Bancorp has agreed to indemnify 1st Source (and its affiliates)
up to the
amount of the Indemnity Escrow ($4.0 million) against disclosed
claims, dissenters claims and claims related to tax-qualified
retirement plans made prior to September 12, 2012 and against breaches
of
the merger agreement if claims are made before the release of the
Purchase
Price Adjustment Escrow;
|
|
|
•
|
1st
Source has agreed, following the merger, to provide compensation
and
employee benefits to the officers and employees of FINA Bancorp on
terms
and conditions which are substantially similar to those provided
by 1st
Source and its subsidiaries to their similarly situated officers
and
employees; and
|
|
•
|
1st
Source has agreed, following the merger, to use its best efforts
to meet
the current public information requirements of SEC Rule 144 and cooperate
with former FINA Bancorp shareholders who become “affiliates” of 1st
Source in sale of 1st Source common stock in compliance with SEC
rules 144
and 145.
|
No
Solicitation of Other Acquisition Proposals
In
addition to the restrictions on FINA Bancorp outlined above, until the merger
is
completed or the agreement and plan of merger is terminated, FINA Bancorp has
agreed not to take, or allow its subsidiaries to take, any of the following
actions:
|
|
•
|
|
Initiate,
solicit, encourage, or knowingly facilitate any acquisition inquiries
or
proposals; or
|
|
|
•
|
|
Have
discussions with, engage in negotiation with or furnish nonpublic
information to any person in furtherance of any acquisition proposal.
|
However,
FINA Bancorp may furnish information to third parties after execution of a
confidentiality agreement, engage in discussions or negotiations with third
parties and following receipt of an acquisition proposal, present such
acquisition proposal to its shareholders and withdraw or modify its
recommendation of the merger if:
|
|
•
|
|
FINA
Bancorp’s board of directors concludes in good faith, on the basis of
written advice from outside counsel, that failure to take such actions
would be breach of fiduciary duties by the board of directors under
applicable law;
|
|
|
•
|
|
FINA
Bancorp promptly informs 1st Source of any acquisition proposal or
request
and the substance thereof; and
|
|
|
•
|
|
FINA
Bancorp shall continue to keep 1st Source apprised of developments
on a
current basis.
|
An
“acquisition proposal” includes any proposal, inquiry or offer relating to, any
agreement to engage in, or any public announcement or written notice to FINA
Bancorp of any plan or proposal to do, any of the following:
|
|
•
|
|
a
tender offer, exchange offer, merger, consolidation, business combination
or other similar transaction involving 51% or more of the voting
power of
the common stock of FINA Bancorp, other than as contemplated by the
agreement and plan of merger; or
|
|
|
•
|
|
any
sale of over 51% of the business, assets or deposits FINA Bancorp
or any
of its subsidiaries; other than as contemplated by the agreement
and plan
of merger.
|
52
Conditions
to Completion of the Merger
The
obligations of 1st Source and FINA Bancorp to complete the merger and the other
transactions contemplated by the agreement and plan of merger are dependent
on
the satisfaction or waiver of the following conditions:
|
|
•
|
|
FINA
Bancorp’s shareholders must approve and adopt the agreement and plan of
merger;
|
|
|
•
|
|
the
merger must be approved, as applicable, by the Federal Reserve, the
FDIC,
the Indiana Department of Financial Institutions, or other regulatory
authorities whose approval is required for the merger and all applicable
waiting periods shall have expired, and no required approval or consent
shall contain any conditions which, in the reasonable good faith
judgment
of 1st Source, adversely impacts the ability of 1st Source to conclude
the
merger or operate any business of 1st Source or FINA Bancorp;
|
|
|
•
|
|
the
absence of any order or injunction prohibiting the consummation of
the
merger or the transactions contemplated by the agreement and plan
of
merger;
|
|
•
|
the
registration statement of which this proxy disclosure is a part shall
have
become effective under the Securities Act and no SEC proceeding to
suspend
its effectiveness shall be pending;
|
|
•
|
the
1st Source common stock to be issued in the merger to the shareholders
of
FINA Bancorp must be approved for trading on the Nasdaq Global Select
Market;
|
|
•
|
FINA
Bancorp must receive an opinion from Krieg DeVault LLP, its counsel,
(or
other counsel acceptable to FINA Bancorp) that the merger will constitute
a “tax-free reorganization” under the Code unless all cash is paid for the
purchase price; and
|
|
•
|
Each
of 1st Source and the Shareholders’ Agent must have entered into an escrow
agreement relating to the Purchase Price Adjustment Escrow and the
Indemnity Escrow with an escrow agent designated by 1st Source and
reasonably acceptable to FINA
Bancorp.
|
1st
Source’s obligations to complete the merger and other transactions contemplated
by the agreement and plan of merger are further subject to the satisfaction
or
waiver of each of the following additional conditions:
|
|
•
|
|
FINA
Bancorp’s representations and warranties must be true and correct in all
material respects as of the date of the agreement and plan of merger
and
the date of the merger is completed except to the extent any such
representations or warranties are made as of a specified date; and
|
|
|
•
|
|
FINA
Bancorp must perform or comply in all material respects with all
of its
obligations required to be performed by it under the agreement and
plan of
merger.
|
FINA
Bancorp’s obligations to complete the merger and the other transactions
contemplated by the agreement and plan of merger are further subject to the
satisfaction or waiver of each of the following additional conditions:
|
|
•
|
|
1st
Source’s representations and warranties must be true and correct in all
material respects as of the date of the agreement and plan of merger
and
the date of the merger is completed except to the extent any such
representations or warranties are made as of a specified date;
and
|
|
|
•
|
|
1st
Source must perform or comply in all material respects with all of
its
obligations required to be performed by it under the agreement and
plan of
merger.
|
53
consummated,
1st Source will be required to have executed a definitive agreement with a
qualified third party to dispose of one of FINA Bancorp’s Starke County branches
and there is no assurance as to when, or the terms upon which, 1st Source will
be able to enter into such an agreement. Alternatively, 1st Source will be
required to place one of the Starke County branches in trust with an independent
trustee prior to the Closing on terms acceptable to the Federal Reserve. Such
trustee will be directed to arrange for the sale of such branch.
Termination
of the Agreement and Plan of Merger
The
agreement and plan of merger may be terminated at any time prior to the
completion of the merger, whether before or after approval of the agreement
and
plan of merger by FINA Bancorp shareholders:
|
|
•
|
|
by
mutual consent of FINA Bancorp and 1st Source;
|
|
|
•
|
|
by
either FINA Bancorp or 1st Source, if the merger has not become effective
by August 31, 2007; provided, that the date will be extended for
any
period during which the merger is enjoined:
|
|
|
•
|
|
by
either FINA Bancorp or 1st Source, if the Federal Reserve or the
Indiana
Department of Financial Institutions has denied approval of the merger
and
such denial has become final and
nonappealable;
|
|
•
|
by
either FINA Bancorp or 1st Source, upon 60 days notice to the other
upon a
breach or failure of a representation, warranty or covenant by the
other
that causes a failure of the conditions to the closing of the merger,
which breach or failure has not been cured within the 60-day period
after
written notice of such breach is given, so long as the terminating
party
is not in material breach of any of its obligations under the agreement
and plan of merger; or
|
|
|
•
|
|
by
the board of directors of FINA Bancorp:
|
|
|
•
|
|
if
1st Source accepts a proposal from a third party to acquire 51% or
more of
its common stock; or
|
|
|
•
|
|
if
prior to the effective time of the merger, FINA Bancorp shall have
received an acquisition proposal and the board of directors of FINA
Bancorp determines, in good faith judgment based on the written opinion
of
its independent legal counsel and after consultation with its investment
banking firm, that failure to terminate the agreement and plan of
merger
and accept such alternative acquisition proposal would violate the
fiduciary duties of FINA Bancorp’s board of directors. FINA Bancorp may
only terminate the Agreement and Plan of Merger under these conditions
if
it pays a termination fee of $4.5 million to 1st Source.
|
The
following describes the material provisions of the voting agreement. We urge
you
to read carefully the Shareholder Voting Agreement, the form of which is
attached as Appendix
C
and
is incorporated by reference into this proxy statement/prospectus, in its
entirety.
In
connection with the execution of the agreement and plan of merger, and as a
condition to 1st Source’s willingness to enter into the agreement and plan of
merger, Donna D. Welter, Wendy N. Meyers, Wayne B. Welter and Cyril J. Welter
who are the beneficial owners of, or have power to direct the voting of, an
aggregate of approximately 72.3% of FINA Bancorp’s outstanding common stock,
entered into a Shareholder Voting Agreement with 1st Source. Included in these
shares are 9,396 shares, or approximately 22.3% of the common stock of FINA
Bancorp, held by the William J. Welter Irrevocable Trust. The provisions of
this
trust are currently the subject of a pending lawsuit which may impact the method
of voting of these shares. Neither FINA Bancorp nor 1st Source is a party to
this lawsuit and we offer no assurance as to how or when such lawsuit may be
resolved.
Under
the
voting agreement, each such shareholder has agreed, with respect to the shares
of FINA Bancorp common stock beneficially owned by that shareholder (and any
shares held of record by a fiduciary in respect of which such shareholder has
power to direct the vote), that at any meeting of the
54
FINA
Bancorp shareholders or in connection with any written consent of the
shareholders of FINA Bancorp with respect to the merger, the agreement and
plan
of merger or any other acquisition proposal, such shareholder will:
|
|
•
|
|
vote
(or direct the voting of) his or her shares in favor of the agreement
and
plan of merger, the merger and any transactions contemplated thereby;
and
|
|
|
•
|
|
vote
(or direct the voting of) his or her shares against approval of any
other
acquisition proposal.
|
The
voting agreement also contains restrictions on
|
|
•
|
|
the
sale, transfer, assignment or other disposition of the shareholder’s
shares;
|
|
|
•
|
|
the
grant of any proxy, power-of-attorney or other authorization relating
to
the agreement and plan of merger; and
|
|
|
•
|
|
depositing
of the shareholder’s shares into a voting trust or entrance into a voting
agreement.
|
In
the
voting agreement, each signing shareholder agrees not to solicit or respond
to
any other acquisition proposal, and to promptly inform 1st Source of any other
acquisition proposal. The voting agreement will terminate upon the earlier
to
occur of (i) the completion date of the merger, (ii) the termination
of the agreement and plan of merger, or (iii) notification by 1st Source to
the Shareholders’ Agent.
Shareholders’
Agent
Prior
to
the effective time of the merger, the Board of Directors and the officers of
FINA Bancorp will continue to take action on behalf of FINA Bancorp under the
agreement and plan of merger. However, after the effective time of the merger,
since FINA Bancorp would become a wholly-owned subsidiary of 1st Source, Wayne
B. Welter has been designated under the agreement and plan of merger to act
as
the “Shareholders’ Agent” from and after the effective time of the merger for
the then former shareholders of FINA Bancorp.
Your
vote to Approve the Merger will be a vote authorizing the Shareholders’ Agent to
act as the attorney-in-fact for matters related to the agreement and plan of
merger. The
Shareholders’ Agent would act as attorney-in-fact for all former shareholders of
FINA Bancorp in such matters as executing the Escrow Agreement, receiving notice
of and resolving claims regarding the escrowed funds, the final purchase price
adjustment and all other matters related to the merger and payment of the merger
consideration.
Under
the
agreement and plan of merger, the Shareholder’s Agent may seek direction on any
matter from a committee composed of Donna D. Welter, Wendy N. Meyers, and Cyril
J. Welter. This Committee would also select a successor to the Shareholders’
Agent in the event of his death, disability or resignation. Successors to
members of the Committee would be selected by a vote of a majority of the voting
power of the FINA Bancorp shares that were held by the shareholders of FINA
Bancorp at the effective time of the merger. Any expenses of the Shareholders’
Agent or the Committee will be reimbursed from the escrowed funds.
The
parties may amend the Agreement and Plan of Merger before completion of the
merger. However, after the Agreement and Plan of Merger has been adopted by
the
FINA Bancorp shareholders, the provisions of the Agreement and Plan of Merger
relating to the amount of the merger consideration may not be amended without
approval of the Shareholders’ Agent.
55
FINA
Bancorp, headquartered in Valparaiso, Indiana wholly owns First National Bank,
Valparaiso, a full service bank operating 26 banking facilities located in
Porter, LaPorte and Starke County, Indiana, and offering a broad complement
of
personal and business banking services, as well as trust and asset management
services.
At
December 31, 2006, FINA Bancorp and its subsidiaries had total assets of $607.5
million, deposits of $509.4 million, and shareholders equity of $69.9 million.
The authorized capital stock of the FINA Bancorp consists of 325,000 shares
of
common stock, no value. As of the date hereof, (i) 42,101 shares of FINA
Bancorp common stock were issued and outstanding.
Founded
in 1889 as an Indiana state bank to support local farmers and the developing
community of Valparaiso, First National Bank converted to a national bank
charter in 1959. Its principal offices have been located at 14 Indiana Avenue
in
Valparaiso for 118 years. FINA Bancorp was incorporated in Indiana and became
the holding company for First National Bank in 1973.
56
Facilities
In
addition to its main office, which also serves as the principal office of FINA
Bancorp, First National operates 26 branch bank locations, of which 23 are
owned
and 3 are leased as indicated below. The following table sets forth the address,
ownership status and deposit balances for each of First National Bank’s banking
centers:
FINA
Bancorp, Inc. and First National Bank, Valparaiso
Facilities
|
Facility
Location
|
Branch
Type
|
Owned
or Leased
|
Deposits
at December 31, 2006
|
|
Valparaiso,
Indiana
|
|||
|
Main
Branch, 14 Indiana Avenue
|
Corporate
|
Owned
|
$173,102,936
|
|
East
Branch, 1806 East Lincolnway
|
Full
Service
|
Owned
|
$
11,813,549
|
|
West
Branch, 2356 West Morthland Drive
|
Full
Service
|
Owned
|
$
22,701,355
|
|
North
Calumet Branch, 2700 North Calumet Avenue
|
Full
Service
|
Owned
|
$
50,545,491
|
|
Napoleon
Branch, 175 West Lincolnway
|
Full
Service
|
Leased
|
$
14,242,223
|
|
FrosTop
Branch, 2904 John Howell Drive
|
Full
Service
|
Owned
|
$
3,060,567
|
|
Valparaiso
Street Branch, 2600 Valparaiso Street
|
Express
|
Owned
|
$
4,063,760
|
|
Hwy
130 & 149 Branch, 401 North Hwy 149
|
Express
|
Owned
|
$
579,874
|
|
ATM,
Valparaiso University (Student Union Building)
|
N/A
|
Leased
|
N/A
|
|
ATM,
Porter County Building
|
N/A
|
Leased
|
N/A
|
|
ATM,
3201 Evans Avenue (Inside Inman’s Recreation)
|
N/A
|
Leased
|
N/A
|
|
Chesterton,
Indiana
|
|||
|
Chesterton
Branch, 1500 South Calumet
|
Full
Service
|
Owned
|
$
41,119,838
|
|
1100
North Branch, 104 West County Road 1100 North
|
Express
|
Owned
|
$
89,219
|
|
ATM,
8th
and Broadway (at Poco’s)
|
N/A
|
Leased
|
N/A
|
|
ATM,
US 6 and Meridian Road (Clark’s Mart)
|
N/A
|
Leased
|
N/A
|
|
ATM,
US 49 and Indian Boundary Road (Wendy’s)
|
N/A
|
Leased
|
N/A
|
|
Hamlet,
Indiana
|
|||
|
Hamlet
Branch, 100 East Short Street, Hamlet, IN 46532
|
Full
Service
|
Leased
|
$
7,051,647
|
57
|
Hebron,
Indiana
|
|||
|
Hebron
Branch, 111 West Sigler Street
|
Full
Service
|
Owned
|
$
49,136,099
|
|
Patz
Branch, 800 County Square Plaza
|
Express
|
Leased
|
$
2,482,591
|
|
ATM,
698 West County Road 900 South
|
N/A
|
Owned
|
N/A
|
|
Kouts,
Indiana
|
|||
|
Kouts
Branch, 221 South Main Street, Kouts, IN 46347
|
Full
Service
|
Owned
|
$
25,474,369
|
|
LaCrosse,
Indiana
|
|||
|
LaCrosse
Branch, 218 North Washington Street, LaCrosse, IN 46348
|
Full
Service
|
Owned
|
$
8,057,659
|
|
LaPorte
Branch, 2044 West State Road 2
|
Full
Service
|
Owned
|
$
7,279,772
|
|
Pine
Lake Branch, 1340 Pine Lake Avenue
|
Full
Service
|
Owned
|
$
565,529
|
|
Boyd
Branch, 1101 Boyd Boulevard
|
Full
Service
|
Owned
|
$
1,106,517
|
|
Michigan
City, Indiana
|
|||
|
Michigan
City Branch, 9856 West County Road 400 North
|
Full
Service
|
Owned
|
$
3,451,969
|
|
35
& 20 Branch, 5844 N. US Hwy 35
|
Full
Service
|
Owned
|
$
273,580
|
|
Waterford
Branch, 7007 W Johnson Rd.
|
Express
|
Owned
|
$
150,066
|
|
North
Judson, Indiana
|
|||
|
North
Judson Branch, 302 Keller Avenue, North Judson, IN 46366
|
Full
Service
|
Owned
|
$
7,166,752
|
|
Portage,
Indiana
|
|||
|
Portage
Branch, 6043 Central Avenue
|
Full
Service
|
Owned
|
$
52,248,119
|
|
Swanson
Branch, 5615 US Highway 6
|
Full
Service
|
Owned
|
$
1,850,561
|
|
ATM,
6045 Robbins Road
|
N/A
|
Owned
|
N/A
|
|
Wanatah,
Indiana
|
|||
|
Wanatah
Branch, 10301 West US 30, Wanatah, IN 46391
|
Full
Service
|
Owned
|
$
5,822,163
|
|
Westville,
Indiana
|
|||
|
Westville
Branch, 501 North Flynn Road, Valparaiso, IN 46383
|
Full
Service
|
Owned
|
$
15,963,795
|
At
December 31, 2006, First National Bank had 242 employees, including 48
officers. Management of First National Bank considers its relations with its
employees to be good. FINA Bancorp and First National Bank are not party to
any
collective bargaining agreement.
58
Legal
Proceedings
FINA
Bancorp and First National Bank, Valparaiso are from time to time involved
in
legal proceedings arising in the normal course of business. Although the
amount
of any ultimate liability with respect to such matters cannot be determined,
in
the opinion of FINA Bancorp’s management, any such liability will not have a
material adverse effect upon FINA Bancorp’s financial condition, results of
operations or cash flows. If the merger is effected and subsequent to the
effective time of the merger 1st Source is sued for certain matters as a
result
of action taken or not taken by FINA Bancorp or its subsidiaries prior to
the
merger, 1st Source is entitled to indemnification out of the escrow account.
See
the discussion of “The
Merger - Merger Consideration - Escrow Arrangements”
on
page
32.
59
Security
Ownership by Certain Beneficial Owners and Management of FINA Bancorp
The
following table sets forth, as of April 16, 2007, information with respect
to
the shares of FINA Bancorp common stock beneficially owned by (i) each person
known to be a beneficial owner of 5% or more of the common stock of FINA
Bancorp, and (ii) each director and executive officer of FINA Bancorp, and
all
directors and executive officers of FINA Bancorp as a group:
|
Name,
Title & Address
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class(1)
|
|||||
|
Donna
D. Welter, Chairperson of the Board of Directors (2)
14
Indiana Avenue
Valparaiso,
IN 46383
|
15,289
|
36.3
|
%
|
||||
|
Wendy
W. Meyers, as Trustee of the
William
J. Welter Irrevocable Trust (3)
14
Indiana Avenue
Valparaiso,
IN 46383
|
9,396
|
22.3
|
%
|
||||
|
Wendy
W. Meyers, Wayne B. Welter and Cyril Welter as Co-Trustees of the
William
J. Welter Family Trust (4)
14
Indiana Avenue
Valparaiso,
IN 46383
|
3,124
|
7.4
|
%
|
||||
|
Wendy
W. Meyers, Director and Secretary (5)
14
Indiana Avenue
Valparaiso,
IN 46383
|
2,009
|
4.8
|
%
|
||||
|
Wayne
B. Welter, Director and President (6)
14
Indiana Avenue
Valparaiso,
IN 46383
|
2,315
|
5.5
|
%
|
||||
|
Cyril
J. Welter, Director and Treasurer (7)
14
Indiana Avenue
Valparaiso,
IN 46383
|
1,447
|
3.4
|
%
|
||||
|
Charles
P. Welter, Director and Vice President (8)
153
S. Washington Street
Valparaiso,
IN 46383
|
1,332
|
3.2
|
%
|
||||
|
First
Bankers Trust Services, Inc.,
as
Trustee of the First National Bank, Valparaiso
Employee
Stock Ownership Plan
2321
Kochs Lane
Quincy,
IL 62305
|
3,599
|
8.5
|
%
|
||||
|
All
Directors and Officers as a group (5 persons)
(9)
|
34,912
|
82.9
|
%
|
||||
__________________________
(1)
Calculated based on 42,101 shares of common stock issued and
outstanding.
60
(2)
Donna
D. Welter is party to the Shareholder Voting Agreement with 1st Source. Includes
5,607 shares held of record by Welter Estates, Inc. as to which Ms. Welter
votes
in her capacity as the chairperson of the board of directors of Welter Estates,
Inc., and 47 shares held for the benefit of Mrs. Welter in the First National
Bank, Valparaiso Employee Stock Ownership Plan. Excludes the 9,396 shares
in the
Wayne J. Welter Irrevocable Trust as to which Ms. Welter may be deemed to
share
power to direct the vote as a grantor of the trust.
(3)
These
shares are voted by Wendy W. Meyers in her capacity as trustee of this trust.
The provisions of the trust provide that the shares are voted in accordance
with
the directions provided to the trustee by a majority of the grantors of the
trust who contributed a majority of the shares of FINA Bancorp to the trust.
The
voting procedures set forth in the trust and other matters are currently the
subject of a pending lawsuit. Neither FINA Bancorp nor 1st Source is a party
to
this lawsuit and they offer no assurance as to how such lawsuit may be
resolved.
(4)
These
shares are voted by Wendy W. Meyers, Wayne B. Welter and Cyril Welter in their
capacity as co-trustees of this trust. This trust is the subject of a pending
lawsuit, which could result in different voting procedures or the appointment
of
different trustees. Neither FINA Bancorp nor 1st Source is a party to this
lawsuit and they offer no assurance as to how such lawsuit may be
resolved.
(5)
Wendy
W. Meyers is party to the Shareholder Voting Agreement with 1st Source. Includes
2,009 shares which may be deemed beneficially owned by Ms. Meyers as a fiduciary
in various capacities for family members or by virtue of being held in IRA’s for
the benefit of Ms. Meyers or her spouse. Excludes (i) the 9,396 shares held
by
Ms. Meyers of record, as Trustee of the William J. Welter Irrevocable Trust,
as
to which Ms. Meyers might be deemed to share power to direct the vote, and
(ii)
3,124 shares held by Ms. Meyers of record, jointly as Co-Trustee of the William
J. Welter Family Trust, as to which Ms. Meyers shares voting power.
(6)
Wayne
B. Welter is party to the Shareholder Voting Agreement with 1st Source. Includes
396 shares which may be deemed beneficially owned by Mr. Welter as a fiduciary
in various capacities for family members, 470 shares held jointly with Mr.
Welter’s spouse, and 373 shares held for the benefit of Mr. Welter in the First
National Bank, Valparaiso Employee Stock Ownership Plan. Excludes (i) the
9,396
shares held by the William J. Welter Irrevocable Trust as to which Mr. Welter
might be deemed to share power to direct the vote, and (ii) 3,124 shares
held by
Mr. Welter of record, jointly as Co-Trustee of the William J. Welter Family
Trust, as to which Mr. Welter shares voting power.
(7)
Cyril
Welter is party to the Shareholder Voting Agreement with 1st Source. Includes
428 shares which may be deemed beneficially owned by Mr. Welter as a fiduciary
in various capacities for family members, 35 shares held jointly with Mr.
Welter’s spouse, 8 shares held by Mr. Welter’s spouse and 90 shares held in an
IRA for the benefit of Mr. Welter’s spouse. Excludes (i) the 9,396 shares held
by the William J. Welter Irrevocable Trust as to which Mr. Welter might be
deemed to share power to direct the vote, and (ii) 3,124 shares held by Mr.
Welter of record, jointly as Co-Trustee of the William J. Welter Family Trust,
as to which Mr. Welter shares voting power.
(8)
Includes 243 shares held in an IRA for the benefit of Mr. Welter and 556
shares
held for the benefit of Mr. Welter in the First National Bank, Valparaiso
Employee Stock Ownership Plan. Excludes the 9,396 shares in the Wayne J.
Welter
Irrevocable Trust as to which Mr. Welter may be deemed to share power to
direct
the vote.
(9)
Includes the shares held in the William J. Welter Irrevocable Trust and the
William J. Welter Family Trust. See footnote 3 and 4 above.
61
The
following summary of the current terms of the capital stock of 1st Source
and
the terms of capital stock of 1st Source to be in effect after completion
of the
merger is not meant to be complete and is qualified by reference to 1st Source’s
charter documents and amended by-laws. See “Where You Can Find More
Information” on page 68.
1st
Source is authorized to issue up to 40,000,000 shares of common stock and
up to
10,000,000 shares of preferred stock. As of April 30, 2007, 1st Source has
22,782,952 shares of common stock and no shares of preferred stock issued
and
outstanding.
The
holders of 1st Source common stock are entitled to one vote for each share
held
of record on all matters submitted to a vote of shareholders. Holders of shares
of common stock are not entitled to cumulative voting rights in the election
of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratable
dividends which are declared by 1st Source’s board of directors out of funds
legally available for such a purpose. In the event of 1st Source’s liquidation,
dissolution or winding up, holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities and liquidation
preferences, if any, on any outstanding shares of preferred stock. Holders
of
common stock have no preemptive rights and have no rights to convert their
common stock into any other securities. The common stock is not redeemable.
All
of the outstanding shares of 1st Source common stock are fully paid and
non-assessable.
The
transfer agent and registrar for 1st Source common stock is 1st Source
Bank.
1st
Source’s board of directors, without any further action by 1st Source’s
shareholders but subject to limits contained in its charter, is authorized
to
issue up to 10,000,000 shares of preferred stock, in one or more series. The
board may fix by resolution the terms of a series of preferred stock, such
as:
|
|
•
|
|
dividend
rates and preference of dividends, if any,
|
|
|
•
|
|
conversion
rights,
|
|
|
•
|
|
voting
rights,
|
|
|
•
|
|
terms
of redemption and liquidation preferences, and
|
|
|
•
|
|
the
number of shares constituting each such series.
|
Holders
of preferred stock have no right or power to vote on any matter except as
otherwise as required by law in which case they are entitled to one vote for
each share of preferred stock held. Holders of preferred stock are also not
currently entitled to liquidation preferences in the event of 1st Source’s
liquidation, dissolution, or winding up. However, the board of directors of
1st
Source is authorized to determine the liquidation preferences and other rights
of the preferred stock by resolution without shareholder approval. The issuance
of additional shares of 1st Source preferred stock or the issuance of 1st Source
common stock may adversely affect the interests of 1st Source shareholders
by
diluting their voting and ownership interests.
Provisions
with Potential Anti-takeover Effect
Several
provisions of the Indiana Business Corporation Law, could affect the acquisition
of shares of 1st Source Common Stock, or otherwise affect the control of 1st
Source. The IBCL contains provisions
62
designed
to assure that minority shareholders have some say in their future relationship
with Indiana corporations in the event that a person makes a tender offer for,
or otherwise acquires, shares giving that person more than 20%, 33 1/3%, and
50%
of the outstanding voting securities of corporations having 100 or more
shareholders (the “Control Share Acquisition Statute”). Under the Control Share
Acquisition Statute, if an acquirer purchases those shares at a time when the
corporation is subject to the Control Share Acquisition Statute, then until
each
class or series of shares entitled to vote separately on the proposal, by a
majority of all votes entitled to be cast by that group (excluding shares held
by officers of the corporation, by employees of the corporation who are
directors thereof, and by the acquirer), approves in a special or annual meeting
the rights of the acquirer to vote the shares that take the acquirer over each
level of ownership as stated in the statute, the acquirer has no right to vote
those shares.
In
addition, Chapter 43 of the IBCL prohibits certain business combinations,
including mergers, sales of assets, recapitalizations, and reverse stock splits,
between corporations such as 1st Source (assuming it has over 100 shareholders)
and an interested shareholder (defined as the beneficial owner of 10% or more
of
the voting power of the outstanding voting shares) for five (5) years following
the date on which the shareholder obtained 10% ownership, unless the acquisition
was approved in advance of that date by the Board of Directors of the respective
companies. If prior approval is not obtained, several price and procedural
requirements must be met before the business combination can be
completed.
1st
Source’s articles of incorporation also contain a provision requiring the
affirmative vote of not less than 80% of the outstanding shares of the Common
Stock of 1st Source to approve a business combination with a “Related Person"
unless 2/3 of the entire Board of Directors not associated with the Related
Person has first approved the transaction. A “Related Person” is generally
defined as a beneficial owner of 5% or more of 1st Source common stock. This
provision may only be amended by an 80% vote of 1st Source’s
shareholders.
COMPARISON
OF RIGHTS OF HOLDERS OF
FINA
BANCORP COMMON STOCK AND 1ST SOURCE COMMON STOCK
Both
1st
Source and FINA Bancorp are incorporated in the State of Indiana. If the merger
is completed, holders of FINA Bancorp common stock receiving stock as
consideration in the merger will become holders of 1st Source common stock
and
the rights of former FINA Bancorp shareholders will be governed by Indiana
law
and 1st Source’s restated articles of incorporation and amended by-laws. The
rights of FINA Bancorp shareholders under FINA Bancorp’s amended articles of
incorporation and by-laws differ in limited respects from the rights of 1st
Source shareholders under 1st Source’s restated articles of incorporation and
amended by-laws. The material differences are summarized in the table below.
To
review all provisions and differences of such documents in full detail, please
read these documents and the Indiana Business Corporation Law, as amended (the
“IBCL”). Copies of 1st Source’s restated articles of incorporation and amended
by-laws are on file with the SEC. Copies of FINA Bancorp’s amended articles of
incorporation and by-laws may be obtained from FINA Bancorp’s corporate
secretary upon written request.
|
FINA
BANCORP SHAREHOLDER RIGHTS
|
1ST
SOURCE SHAREHOLDER RIGHTS
|
||
|
Corporate
Governance
|
The
rights of FINA Bancorp shareholders are currently governed by Indiana
law
and the amended articles of incorporation and by-laws of FINA
Bancorp.
|
The
rights of 1st Source shareholders are currently governed by Indiana
law
and the restated articles of incorporation and amended by-laws of
1st
Source.
|
|
|
|
|||
|
Upon
consummation of the merger, the rights of FINA Bancorp shareholders
will
be governed by Indiana law and the restated articles of incorporation
and
amended by-laws of 1st Source.
|
Upon
consummation of the merger, the rights of 1st Source shareholders
will
remain governed by Indiana law and the restated articles of incorporation
and amended by-laws of 1st Source.
|
||
63
|
FINA
BANCORP SHAREHOLDER RIGHTS
|
1ST
SOURCE SHAREHOLDER RIGHTS
|
||
|
Authorized
Capital Stock
|
The
authorized capital stock of FINA Bancorp consists of 325,000 shares
of
common stock.
|
The
authorized capital stock of 1st Source consists of 40 million shares
of
common stock and 10 million shares of preferred stock.
|
|
|
Number of Directors
|
FINA
Bancorp’s Board currently
consists of five directors.
|
1st
Source’s amended by-laws state that number of directors comprising the
initial board of directors shall be not fewer than three, nor more
than
twenty-five members, subject to being increased or decreased by resolution
of the board of directors. 1st Source’s board of directors currently
consists of 14 directors.
|
|
|
Election of Directors
|
FINA
Bancorp’s by-laws provide that directors shall be elected by a majority of
votes cast at the annual meeting of shareholders. Cumulative voting
is not
authorized. Holders of its common stock currently elect FINA Bancorp’s
board of directors.
|
1st
Source’s amended by-laws provide that the election of directors shall be
by a plurality of votes cast by the shareholders entitled to elect
directors. Cumulative voting is not authorized. Holders of its common
stock currently elect 1st Source’s board of directors.
|
|
|
Classification
of
Board
of Directors
|
FINA
Bancorp’s by-laws do not provide for a classified board of directors. Each
director serves until the annual meeting of the shareholders next
succeeding his election and until his successor shall have been duly
elected and qualified.
|
1st
Source’s amended by-laws provide that the board of directors shall be
divided into three classes as nearly equal in number as possible,
with
each class serving a staggered three-year term. This means that only
one-third of the board of directors is elected at each annual meeting
of
shareholders. The classification of the board of directors makes
it more
difficult to change the composition of 1st Source’s board of directors
because at least two annual meetings of shareholders are required
to
change control of the board of directors.
|
|
|
Removal of Directors
|
FINA
Bancorp’s amended articles of incorporation and by-laws are silent with
respect to removal of directors. Under the IBCL, the shareholders
or
directors of FINA Bancorp may remove a director with or without
cause.
|
According
to 1st Source’s amended by-laws, any director may be removed, with or
without cause, at any meeting of shareholders or directors called
for that
purpose and if the number of votes to remove the director exceeds
the
number of votes cast not to remove the
director.
|
64
|
FINA
BANCORP SHAREHOLDER RIGHTS
|
1ST
SOURCE SHAREHOLDER RIGHTS
|
||
|
Shareholder
Action Without a Meeting
|
FINA
Bancorp’s amended articles of incorporation and by-laws are silent with
respect to shareholder action without a meeting. Under a provision
of the
IBCL that does not apply to 1st Source, any action required or permitted
to be taken at any meeting of FINA Bancorp shareholders may be taken
without a meeting if a consent in writing, setting forth the action
to be
taken, is signed by shareholders having the minimum number of votes
that
would be required to take the action at a meeting at which all
shareholders entitled to vote on the matter were present.
|
According
to1st Source’s amended by-laws, any action required or permitted to be
taken at any meeting of the shareholders may be taken without a meeting
if
a consent in writing, setting forth the action to be taken, is signed
by
all shareholders entitled to vote with respect to the subject matter
thereof.
|
|
|
Special
Meetings of
Shareholders
|
According
to FINA Bancorp’s by-laws, FINA Bancorp may call a special shareholders’
meeting at the request of the president, forty percent of the directors,
or by FINA Bancorp shareholders owning not less than one-fourth of
the
shares that would be entitled to vote at such a meeting.
|
According
to 1st Source’s amended by-laws, a special meeting of the shareholders may
be called by the president, the chairman of the board of directors
or the
board of directors, and shall be called by the president if one-fourth
of
the shareholders entitled to vote sign a written demand for the
meeting.
|
|
|
Amendment
of
Articles
of
Incorporation
and
By-laws
|
FINA
Bancorp’s amended articles of incorporation provide that FINA Bancorp may
amend the articles in the manner provided under Indiana law. Under
the
IBCL, FINA Bancorp may amend its articles of incorporation at any
time.
Such amendments, with few exceptions, require shareholder
approval.
The
power to amend FINA Bancorp’s by-laws is vested exclusively in its board
of directors.
|
Under
the IBCL, 1st Source may amend its articles of incorporation at any
time.
Such amendments, with few exceptions, require shareholder approval.
Approval by 2/3 of the 1st Source board, and the favorable vote of
80% of
1st Source shareholders is required to amend the provisions of the
articles of incorporation restricting certain business combinations
with
interested persons.
The
power to amend 1st Source’s by-laws is vested exclusively in its board of
directors.
|
|
|
Voting
Stock
|
Generally,
the outstanding voting securities of FINA Bancorp are the shares
of FINA
Bancorp common stock. Holders of FINA Bancorp common stock have one
vote
per share held by them.
|
Generally,
the outstanding voting securities of 1st Source are the shares of
1st
Source common stock. Holders of 1st Source common stock have one
vote per
share held by them.
|
|
|
Authorization
and
Issuance
of
Additional
Classes of Capital Stock
|
FINA
Bancorp is not authorized to issue any preferred stock.
|
1st
Source’s board of directors is authorized to issue ten million shares of
preferred stock, and can determine the class, series and rights attached
to any share of preferred stock. At this time, the board of directors
of
1st Source has not issued any shares of preferred
stock.
|
65
|
FINA
BANCORP SHAREHOLDER RIGHTS
|
1ST
SOURCE SHAREHOLDER RIGHTS
|
||
|
Liquidation
Rights
|
Under
the IBCL, FINA Bancorp shareholders would share ratably in net assets
in
the event of liquidation, after satisfaction of all liabilities of
the
corporation.
|
According
to 1st Source’s restated articles of incorporation, holders of common
stock are entitled to share ratably in 1st Source’s assets after the
payment of liabilities and liquidation preferences of preferred stock,
if
any.
|
|
|
Dividend
Rights
|
Under
the IBCL, holders of FINA Bancorp common stock are treated equally
for the
purpose of dividend rights.
|
According
to 1st Source’s restated articles of incorporation, holders of common
stock are treated equally for the purpose of dividend
rights.
|
|
|
Appraisal
Rights
|
FINA
Bancorp shareholders have dissenters’ rights under Chapter 44 of the IBCL.
Under these provisions, shareholders of FINA Bancorp who follow the
procedures set forth in the IBCL may dissent from certain corporate
actions proposed by FINA Bancorp’s management and may receive the fair
value of their shares of FINA Bancorp common stock immediately prior
to
the effective time of the proposed corporate action. Please read
“Rights
of Dissenting Shareholders” on page 45 for a more complete description of
dissenters’ rights.
|
Because
the approval of the 1st Source shareholders is not required to complete
the merger, they are not entitled to exercise their dissenters’ rights
under the IBCL in connection with the merger. Generally, so long
as 1st
Source common stock is listed for trading on the Nasdaq Global Select
Market (or a similar stock exchange) holders of 1st Source common
stock
will not be afforded dissenters’ rights if the provisions of the IBCL
would otherwise provide dissenters rights in respect of a transaction
being undertaken by 1st Source.
|
|
|
Preemptive
Rights
|
FINA Bancorp’s amended articles of incorporation do not provide FINA Bancorp shareholders with preemptive rights. |
1st
Source’s restated articles of incorporation do not provide 1st Source
shareholders with preemptive rights.
|
|
|
Indemnification
|
FINA Bancorp’s amended articles of incorporation and by-laws provide for the indemnification of FINA Bancorp’s directors and officers, if such director or officer acted in good faith and in a manner reasonably believed to be in the best interest of FINA Bancorp, and had no reason to believe his action was unlawful. |
1st
Source’s restated articles of incorporation provide for the
indemnification of 1st Source’s directors and officers and of any person
serving at the request of 1st Source as a director, officer, partner,
trustee, employee, or agent of another employee, to the fullest extent
permitted by Indiana law.
|
66
COMPARATIVE
MARKET PRICE AND DIVIDEND INFORMATION WITH RESPECT TO
1ST
SOURCE COMMON STOCK AND FINA BANCORP COMMON STOCK
1st
Source
1st
Source’s stock trades through the Nasdaq Global Select Market under the symbol
“SRCE.” The following table sets forth the high and low sales prices and
end-of-quarter closing prices of 1st Source’s common stock and the dividends
paid thereon for the quarters indicated.
|
2006
Sales Price
|
Cash
Dividends
|
2005
Sales Price
|
Cash
Dividends
|
|||||||||
|
Common
Stock Prices* (quarter
ended)
|
High
|
|
Low
|
|
Paid
|
|
High
|
|
Low
|
|
Paid
|
|
|
March
31
|
$
|
27.26
|
$
|
22.64
|
$
|
.127
|
$
|
23.49
|
$
|
18.54
|
$
|
.109
|
|
June
30
|
30.81
|
24.68
|
.127
|
21.64
|
17.65
|
.109
|
||||||
|
September
30
|
31.33
|
28.46
|
.140
|
23.54
|
20.06
|
.109
|
||||||
|
December
31
|
|
33.46
|
|
29.08
|
|
.140
|
|
23.72
|
|
19.02
|
|
.118
|
|
As
of December 31, 2006, there were 1,037 holders of record of 1st Source
common stock
|
||||||||||||
|
*
The
computation of per common share data gives retroactive effect to
a 10%
stock dividend declared July 27, 2006.
|
||||||||||||
The
last
reported sales price per share of 1st Source common stock, as reported on
the
Nasdaq Global Select Market on February 16, 2007, the last business day before
public announcement of the signing of the agreement and plan of merger was
$28.27. The last reported sales price per share of 1st Source common stock,
as
reported on the Nasdaq Global Select Market on May 3, 2007, the latest
practicable trading day before the mailing of this document was $26.82.
Past
price performance is not necessarily indicative of likely future performance.
Because the market price of 1st Source common stock will continue to fluctuate
between the date of this document and the date on which the merger is completed
and afterwards, you should obtain current market quotations for 1st Source
common stock.
FINA
Bancorp
There
is
no established public trading market for FINA Bancorp common stock, and no
market for FINA Bancorp common stock is expected to develop if the merger does
not occur. No registered broker/dealer makes a market in FINA Bancorp’s common
stock, and FINA Bancorp’s common stock is not listed or quoted on any stock
exchange or automated quotation system. FINA Bancorp acts as the transfer agent
and registrar for its own stock. As of the record date, there were 80 holders
of
the FINA Bancorp common stock.
FINA
Bancorp is not obligated to register its common stock or, upon any registration,
to create a market for its shares. Thus, a holder of FINA Bancorp common stock
may be unable to liquidate his or her investment and must be able to bear the
economic risk of such investment indefinitely.
1st
Source has paid regular quarterly dividends on its common stock during the
last
two years. The payment of dividends is within the discretion of the 1st Source
board of directors. Dividends that may be paid by a subsidiary bank to 1st
Source Corporation are subject to certain legal and regulatory limitations
and
also may be affected by capital needs, as well as other factors. Without
regulatory approval, 1st Source Bank could authorize and pay dividends during
2007 of up to $67.14 million, plus an additional amount equal to its net profits
for 2007, as defined by statute, up to the date of declaration of any such
dividend.
67
OTHER
MATTERS
FINA
Bancorp’s management is not aware of any other matters to be brought before the
special meeting of the shareholders. However, if other matters are properly
brought before the meeting, the persons named in the enclosed forms of proxy
will have discretionary authority to vote all proxies with respect to such
matters in accordance with their judgment.
The
validity of the shares of 1st Source common stock offered by this proxy
statement/prospectus has been passed upon for 1st Source by John B. Griffith,
General Counsel of 1st Source. Certain legal matters relating to the merger
will
be passed upon for FINA Bancorp by Krieg DeVault LLP. It is a condition to
the
merger that Krieg DeVault LLP (or other counsel acceptable to FINA Bancorp)
will
provide an opinion to FINA Bancorp that the merger will qualify as a tax-free
reorganization under the Internal Revenue Code.
The
consolidated financial statements of 1st Source Corporation appearing in
Appendix E of this proxy statement/prospectus and 1st Source Corporation
management’s assessment of the effectiveness of internal control over financial
reporting as of December 31, 2006 included therein, have been audited by
Ernst
& Young LLP, independent registered public accounting firm, as set forth
in
their reports thereon, included therein. Such consolidated financial statements
and management’s assessments are included in reliance upon such reports given on
the authority of such firm as experts in accounting and
auditing.
1st
Source is a publicly traded company and is required to file certain reports,
proxy statements and other information with the SEC. The SEC maintains a
web
site on the Internet that contains reports, proxy statements and other
information about public companies, including 1st Source. The address of
that
site is http://www.sec.gov. You may also read and copy any materials filed
with
the SEC by 1st Source at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. 1st
Source’s periodic filings with the SEC may also be accessed on 1st Source’s
website: www.1stsource.com.
1st
Source has filed a registration statement on Form S-4 with the SEC that
registers the 1st Source common stock to be issued in the merger. This proxy
statement/prospectus is a part of that registration statement and constitutes
a
prospectus of 1st Source and a proxy statement of FINA Bancorp for the special
meeting. 1st Source has supplied all of the information contained in this proxy
statement/prospectus relating to 1st Source. FINA Bancorp has supplied all
of
the information relating to FINA Bancorp.
This
proxy statement/prospectus does not contain all of the information in the
registration statement. Please refer to the registration statement for further
information about 1st Source and the 1st Source common stock to be issued in
the
merger. Statements contained in this proxy statement/prospectus concerning
the
provisions of certain documents included in the registration statement are
not
necessarily complete. A complete copy of each document is filed as an exhibit
to
the registration statement. You may obtain copies of all or any part of the
registration statement, including exhibits thereto, upon payment of the
prescribed fees, at the offices of the SEC listed above.
This
proxy statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this proxy
statement/prospectus, or the solicitation of a proxy, in any jurisdiction to
or
from any person to whom or from it is unlawful to make such offer, solicitation
of an offer or proxy solicitation in such jurisdiction.
68
APPENDIX
A
AGREEMENT
AND PLAN OF MERGER
AGREEMENT
AND PLAN OF MERGER
dated
as
of February 19, 2007
by
and
among
1st
SOURCE CORPORATION,
FINA
BANCORP, INC.,
SHAREHOLDERS’
AGENT,
(as
named
herein)
and
HICKORY
ACQUISITION, INC.
A-1
TABLE
OF
CONTENTS
|
Page
|
||
|
ARTICLE
I DEFINITIONS; INTERPRETATION
|
1
|
|
|
1.01
|
DEFINITIONS.
|
1
|
|
1.02
|
INTERPRETATION
|
9
|
|
ARTICLE
II THE MERGER
|
9
|
|
|
2.01
|
THE
MERGER
|
9
|
|
2.02
|
CLOSING
|
10
|
|
2.03
|
EFFECTIVE
TIME
|
10
|
|
2.04
|
EFFECTS
OF THE MERGER.
|
10
|
|
2.05
|
ARTICLES
OF INCORPORATION AND BY-LAWS
|
10
|
|
ARTICLE
III CONSIDERATION; EXCHANGE PROCEDURE
|
10
|
|
|
3.01
|
CONVERSION
OR CANCELLATION OF SHARES
|
10
|
|
3.02
|
EXCHANGE
OF OLD CERTIFICATES; PAYMENT OF THE CONSIDERATION
|
14
|
|
3.03
|
ADJUSTMENTS
TO PARENT COMMON STOCK
|
15
|
|
3.04
|
DISSENTING
SHAREHOLDERS
|
16
|
|
3.05
|
EFFECT
ON PARENT AND MERGER SUB STOCK
|
16
|
|
3.06
|
ESCROW
|
16
|
|
3.07
|
DETERMINATION
OF FINAL PURCHASE PRICE ADJUSTMENT
|
16
|
|
3.08
|
PAYMENT
OPTIONS
|
18
|
|
ARTICLE
IV CONDUCT OF BUSINESS PENDING THE MERGER
|
19
|
|
|
4.01
|
FORBEARANCES
OF COMPANY
|
19
|
|
4.02
|
FORBEARANCES
OF PARENT
|
21
|
|
4.03
|
COORDINATION
OF DIVIDENDS
|
21
|
|
ARTICLE
V REPRESENTATIONS AND WARRANTIES
|
21
|
|
|
5.01
|
DISCLOSURE
SCHEDULES
|
21
|
|
5.02
|
STANDARD
|
22
|
|
5.03
|
REPRESENTATIONS
AND WARRANTIES
|
22
|
|
ARTICLE
VI COVENANTS
|
32
|
|
|
6.01
|
REASONABLE
BEST EFFORTS
|
32
|
|
6.02
|
SHAREHOLDER
APPROVALS
|
32
|
|
6.03
|
SEC
FILINGS
|
33
|
|
6.04
|
COMPANY
FINANCIAL STATEMENTS
|
34
|
|
6.05
|
PRESS
RELEASES
|
34
|
|
6.06
|
ACCESS;
INFORMATION
|
34
|
|
6.07
|
ACQUISITION
PROPOSALS
|
35
|
A-2
|
Page
|
||
|
6.08
|
AFFILIATE
AGREEMENTS
|
35
|
|
6.09
|
TAKEOVER
LAWS AND PROVISIONS
|
35
|
|
6.10
|
EXCHANGE
LISTING
|
35
|
|
6.11
|
REGULATORY
APPLICATIONS
|
36
|
|
6.12
|
INDEMNIFICATION
|
36
|
|
6.13
|
EMPLOYEE
MATTERS
|
38
|
|
6.14
|
NOTIFICATION
OF CERTAIN MATTERS
|
40
|
|
6.15
|
CERTAIN
MODIFICATIONS; RESTRUCTURING CHARGES
|
40
|
|
6.16
|
TERMINATION
OF AGREEMENTS
|
40
|
|
6.17
|
SALE
OF CERTAIN REAL PROPERTY
|
40
|
|
6.18
|
SHAREHOLDERS’
AGENT
|
40
|
|
6.19
|
CURRENT
PUBLIC INFORMATION
|
42
|
|
6.20
|
PARENT
STOCK
|
42
|
|
ARTICLE
VII CONDITIONS TO THE MERGER
|
42
|
|
|
7.01
|
CONDITIONS
TO EACH PARTY’S OBLIGATION TO EFFECT THE MERGER
|
42
|
|
7.02
|
CONDITIONS
TO COMPANY’S OBLIGATION
|
43
|
|
7.03
|
CONDITIONS
TO PARENT’S OBLIGATION
|
43
|
|
ARTICLE
VIII TERMINATION
|
44
|
|
|
8.01
|
TERMINATION
|
44
|
|
8.02
|
EFFECT
OF TERMINATION AND ABANDONMENT
|
45
|
|
ARTICLE
IX MISCELLANEOUS
|
45
|
|
|
9.01
|
SURVIVAL
|
45
|
|
9.02
|
WAIVER;
AMENDMENT
|
45
|
|
9.03
|
COUNTERPARTS
|
46
|
|
9.04
|
GOVERNING
LAW
|
46
|
|
9.05
|
EXPENSES
|
46
|
|
9.06
|
NOTICES
|
46
|
|
9.07
|
ENTIRE
UNDERSTANDING; NO THIRD PARTY BENEFICIARIES
|
47
|
|
9.08
|
SEVERABILITY
|
47
|
|
9.09
|
ALTERNATIVE
STRUCTURE
|
47
|
|
EXHIBIT
A FORM OF VOTING AGREEMENT
|
||
|
EXHIBIT
B FORM OF AFFILIATE LETTER
|
||
|
SCHEDULE
A TERMS OF SEVERANCE
|
||
A-3
AGREEMENT
AND PLAN OF MERGER,
dated as
of February 19, 2007 (this “Agreement”),
among
1st
Source
Corporation, an Indiana corporation (“Parent”),
FINA
Bancorp, Inc., an Indiana corporation (“Company”),
Hickory Acquisition, Inc., an Indiana corporation and a wholly owned subsidiary
of Parent (“Merger
Sub”),
and
Wayne B. Welter, in his capacity as Shareholders’ Agent (as defined
herein).
PREAMBLE
The
Agreement provides for the acquisition of Company by Parent pursuant to
the
merger of Company with and into Merger Sub (the “Merger”),
with
Merger Sub the surviving corporation (the “Surviving
Corporation”).
The
respective boards of directors of Parent, Merger Sub and Company have each
determined that the Merger and the other transactions contemplated hereby
are
consistent with, and will further, their respective business strategies
and
goals, and are in the best interests of their respective shareholders and,
therefore, have approved the Merger, this Agreement and the plan of merger
contained in this Agreement.
The
parties intend the Merger to be treated as a reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended, and
the rules and regulations thereunder (the “Code”)
and
intend for this Agreement to constitute a “plan of reorganization” within the
meaning of the Code, subject to Section 3.08(b).
Concurrently
with the execution and delivery of this Agreement, as
a condition and inducement to Parent’s and Merger Sub’s willingness to enter
into this Agreement, certain of the holders of the outstanding shares of
Company
Common Stock have executed and delivered to Parent an agreement in substantially
the form of Exhibit
A
(the “Voting
Agreement”),
pursuant to which they have agreed, among other things, subject to the
terms of
such Voting Agreement, to vote the shares of Company Common Stock held
of record
by such persons to approve and adopt this Agreement.
Now,
Therefore,
in
consideration of the premises, and of the mutual representations, warranties,
covenants and agreements contained in this Agreement, Parent, Company,
Shareholders’ Agent and Merger Sub agree as follows:
ARTICLE
I
Definitions;
Interpretation
1.01 Definitions.
This
Agreement uses the following definitions:
“Acquisition
Proposal”
means
a
tender or exchange offer to acquire more than 51% of the voting power in
Company
or any of its Subsidiaries, a proposal for a merger, consolidation or other
business combination involving Company or any of its Subsidiaries or any
other
proposal or offer to acquire in any manner more than 51% of the voting
power in,
or more than 51% of the business, assets or deposits of, Company or any
of its
Subsidiaries, other than the transactions contemplated hereby.
“Actual
Equity”
means
Stockholders’ Equity as set forth on the Final Purchase Price Adjustment
Statement.
“Actual
Excess Equity Amount”
means
the difference (positive or negative) between (i) Actual Equity, and (ii)
$69,051,000.
A-4
“Agreement”
has
the
meaning assigned in the Preamble.
“All
Cash Payment Option”
has
the
meaning assigned in Section 3.08(b).
“Articles
of Merger”
has
the
meaning assigned to it in Section 2.03.
“Assumed
Closing Parent Share Price”
has
the
meaning assigned to it in Section 3.08(a).
“Benefit
Arrangement” means,
with respect to each of Parent and Company, each of the following (a) under
which any of its employees or current or former directors has any present
or
future right to benefits, (b) that is sponsored or maintained by it or its
Subsidiaries, or (c) under which it or its Subsidiaries has had or has any
present or future liability: each “employee benefit plan” (within the meaning of
Section 3(3) of ERISA) and each stock purchase, stock option, severance,
employment, change-in-control, fringe benefit, bonus, incentive, deferred
compensation, paid time off benefits and other employee benefit plan, agreement,
program, policy or other arrangement (with respect to any of preceding,
whether
or not subject to ERISA).
“BHC
Act”
means
the Bank Holding Company Act of 1956, as amended, and the rules and
regulations thereunder.
“Burdensome
Condition”
has
the
meaning assigned in Section 6.11.
“Cash
Designated Shares”
has
the
meaning assigned in Section 3.01(c).
“Cash
Election Shares”
has
the
meaning assigned in Section 3.01(c).
“Closing”
has
the
meaning assigned in Section 2.02.
“Closing
Date”
has
the
meaning assigned in Section 2.02.
“Closing
Parent Share Price”
means
the average of the closing sale price of one share of Parent Common Stock,
as
quoted on the NASDAQ Global Select Market, for the ten full trading days
ending
on the third full trading day immediately preceding the Closing Date;
provided, however,
that in the event that such average is less than or equal to $25.663 (the
“Lower
Threshold”),
the “Closing Parent Share Price” will be deemed to be $25.663, and provided,
further,
that in the event that such average is greater than or equal to $32.663
(the
“Upper
Threshold”),
the “Closing Parent Share Price” will be deemed to be $32.663.
“COBRA”
has
the
meaning assigned in Section 5.03(m)(9).
“Code”
has
the
meaning assigned in the Preamble.
“Company”
has
the
meaning assigned in the Preamble.
“Company
Affiliate”
has
the
meaning assigned in Section 6.08.
“Company
Board”
means
the Board of Directors of Company.
“Company
Common Stock”
means
the common stock, no par value, of Company.
“Company
Financial Statements”
means
(x) the following items contained in Section 5.03(g)
of
Company’s Disclosure Schedule: (i) audited consolidated balance sheets of
Company
A-5
and
its
Subsidiaries as of December 31, 2004 and 2005, and the related audited
consolidated statements of income, changes in stockholders’ equity and cash
flows for the years then ended, including the notes thereto, together with
the
report thereon of BKD, LLP, independent certified public accountants, and
(ii)
an unaudited consolidated balance sheet of Company and its Subsidiaries
and the
related unaudited consolidated statements of income, changes in stockholders’
equity and cash flows for the nine months ended September 30, 2006, including
the notes thereto; (y) the audited consolidated balance sheet of Company
and its Subsidiaries as of December 31, 2006 and the related audited
consolidated statements of income, changes in stockholders’ equity and cash
flows for the year then ended, including the notes thereto, together with
the
report thereon of BKD, LLP, independent certified public accountants (the
“2006
Financial Statements”);
and
(z) unaudited consolidated balance sheets of Company and its Subsidiaries
and related unaudited consolidated statements of income, changes in
stockholders’ equity and cash flows for each fiscal quarter ended after December
31, 2006, including, in each case, the notes thereto (the “Subsequent
Interim Financial Statements”).
“Company
Meeting”
has
the
meaning assigned in Section 6.02(b).
“Company
Stock”
means
Company Common Stock.
“Confidentiality
Agreement”
has
the
meaning assigned in Section 6.06(b).
“Constituent
Documents”
means
the charter or articles or certificate of incorporation and by-laws of
a
corporation or banking organization, the certificate of partnership and
partnership agreement of a general or limited partnership, the certificate
of
formation and limited liability company agreement of a limited liability
company, the trust agreement of a trust and the comparable documents of
other
entities.
“Contract”
has
the
meaning assigned in Section 5.03(l).
“Covered
Employees”
has
the
meaning assigned in Section 6.13(a).
“D&O
Claims”
has the
meaning assigned in Section 6.12(f).
“Damages”
has
the
meaning assigned in Section 6.12(f).
“Disclosure
Schedule”
has
the
meaning assigned in Section 5.01.
“Dissenting
Shares”
means
shares of Company Common Stock the holders of which have perfected and
not
withdrawn or lost their right to dissent with respect to such shares under
Section 23-1-44-8 of the IBCL.
“Dissenting
Shareholder”
has
the
meaning assigned in Section 3.04.
“Effective
Time”
has
the
meaning assigned in Section 2.03.
“Election
Deadline”
has
the
meaning assigned in Section 3.01(c).
“Election
Form”
has
the
meaning assigned in Section 3.01(c).
“Election
Form Record Date”
has
the
meaning assigned in Section 3.01(c).
A-6
“Environmental
Laws”
means
the statutes, rules, regulations, ordinances, codes, orders, decrees, and
any
other laws (including common law) of any foreign, federal, state, local,
and any
other governmental authority, regulating, relating to or imposing liability
or
standards of conduct on the Parent or Company concerning pollution, or
protection of human health and safety or of the environment.
“ERISA
Affiliate”
has
the
meaning assigned in Section 5.03(m).
“ERISA”
means
the Employee Retirement Income Security Act of 1974, as amended, and the
rules and regulations thereunder.
“Escrow
Agent”
means
the escrow agent to be designated by Parent, subject to the approval of
Company
pursuant to Section 7.01(g).
“Escrow
Agreement”
means
that certain Escrow Agreement to be entered into dated as of the Closing
Date,
by and among Parent, the Shareholders’ Agent and the Escrow Agent, as
contemplated by this Agreement and agreed to by the parties.
“Escrow
Amount”
means
the sum of (i) the Indemnity Escrow Amount and (ii) the Purchase Price
Adjustment Escrow Amount.
“Escrow
Fund”
has
the
meaning assigned in Section 3.06.
“Estimated
Balance Sheet”
has
the
meaning assigned in Section 3.01(b).
“Estimated
Equity”
has
the
meaning assigned in Section 3.01(b).
“Estimated
Excess Equity Amount”
means
the difference (positive or negative) between (i) Estimated Equity and,
(ii)
$69,051,000.
“Estimated
Purchase Price”
means
$135,000,000 (i) plus the Estimated Excess Equity Amount if the Estimated
Excess
Equity Amount is a positive number, or (ii) less the Estimated Excess Equity
Amount if the Estimated Excess Equity Amount is a negative number.
“Estimated
Purchase Price Statement”
has the
meaning assigned in Section 3.01(b).
“Exception
Shares”
means,
collectively, shares of Company Common Stock that are (i) owned or held,
other than in a bona fide fiduciary or agency capacity or in satisfaction
of a
debt previously contracted in good faith, by Company or by Parent and
(ii) Dissenting Shares.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder.
“Exchange
Agent”
has
the
meaning assigned in Section 3.02(a).
“Final
Purchase Price Adjustment”
shall
mean a Purchase Price Increase or a Purchase Price Decrease.
“Final
Purchase Price Adjustment Statement”
has
the
meaning assigned in Section 3.07(c).
“GAAP”
means
United States generally accepted accounting principles.
A-7
“Governmental
Authority”
means
any court, administrative agency or commission or other governmental authority
or instrumentality, domestic or foreign, or any industry self-regulatory
authority.
“IBCL”
means
the Indiana Business Corporation Law, as amended.
“Indemnified
Party”
has
the
meaning assigned in Section 6.12(a).
“Indemnity Escrow
Amount”
means
$4,000,000.
“Independent Accountant”
shall
mean an independent accounting firm designated and retained by Parent,
subject
to the approval in writing by Company pursuant to Section 3.07(c).
“Initial
Parent Share Price”
means
$29.163, which is the average of the closing sale price of one share of
Parent
Common Stock, as quoted on the NASDAQ Global Select Market, for the ten
full
trading days ending on the third full trading day immediately prior to
the date
of this Agreement.
“Initial Per
Share Cash Consideration”
has
the
meaning assigned in Section 3.01(a).
“Initial Per
Share Purchase Consideration”
means
the Initial Purchase Consideration divided by the number of shares of Company
Common Stock outstanding immediately prior to the Effective Time.
“Initial Per
Share Stock Consideration”
has
the
meaning assigned in Section 3.01(a).
“Initial
Purchase Consideration”
has
the
meaning assigned in Section 3.01(b).
“Intellectual
Property”
shall
mean all patents, trademarks, trade names, service marks, domain names,
database
rights, copyrights, and any applications therefor, mask works, technology,
know-how, trade secrets, inventory, ideas, algorithms, processes, computer
software programs or applications (in both source code and object code
form),
and tangible or intangible proprietary information or material and all
other
intellectual property or proprietary rights.
“Lien”
means
any charge, mortgage, pledge, security interest, restriction, claim, lien,
or
encumbrance.
“Lower
Threshold”
has
the
meaning assigned in the definition of “Closing
Parent Share Price”.
“Mailing
Date”
has
the
meaning assigned in Section 3.01(c).
“Majority
Holders”
has
the
meaning assigned in Section 6.18(b).
“Material
Adverse Effect”
means,
with respect to any person, any effect, change, event or circumstance
that
(a) is
material and adverse to the financial condition, results of operations,
management, business or prospects of such person and its Subsidiaries,
taken as
a whole, excluding the impact of (1) changes in banking and other laws of
general applicability or changes in the inter-pre-tation thereof by Governmental
Authorities, (2) changes in GAAP or regulatory accounting requirements
applicable to U.S. banking or financial services
A-8
organizations
generally, (3) changes in prevailing interest rates or other general
economic conditions affecting the U.S. banking industry generally, unless
such
changes have a dis-propor-tion-ate impact on such person as compared to
other
companies in the banking industry, and (4) actions or omissions of a party
to this Agreement required by this Agreement or taken with the prior written
consent of the other party to this Agreement in contemplation of the
transactions contemplated hereby; or
(b) would
materially impair the ability of such person to perform its obligations
under
this Agreement or to consummate the transactions contemplated hereby on
a timely
basis.
“Materials
of Environmental Concern”
means
any hazardous or toxic substances, materials, wastes, pollutants, or
contaminants, including without limitation those defined or regulated as
such
under any Environmental Law, and any other substance the presence of which
may
give rise to liability under any Environmental Law.
“Maximum
Cash Consideration”
means
the product of (x) 60% and (y) the sum of the Initial Purchase Consideration
and
the Escrow Amount.
“Merger”
has
the
meaning assigned in the Preamble.
“Merger
Sub”
has
the
meaning assigned in the Preamble.
“Minimum
Cash Consideration”
means
the product of (x) 58% and (y) the sum of the Initial Purchase Consideration
and
the Escrow Amount.
“NASDAQ”
means
The NASDAQ Stock Market, Inc.
“New
Certificates”
has
the
meaning assigned in Section 3.02(a).
“No
Election Shares”
has
the
meaning assigned in Section 3.01(c).
“Non-Operating
Real Estate”
means
the real property identified in Section 6.17 of the Company’s Disclosure
Schedule.
“Old
Certificate”
has
the
meaning assigned in Section 3.01(a).
“Old
Share”
has
the
meaning assigned in Section 3.01(a).
“Parent”
has
the
meaning assigned in the Preamble.
“Parent
Common Stock”
means
the common stock, no par value, of Parent.
“Parent
Preferred Stock”
means
the Preferred Stock, no par value, of Parent.
“Parent
Stock”
means,
collectively, the Parent Common Stock and the Parent Preferred
Stock.
“party”
means
Parent, Merger Sub, Company or Shareholder’s Agent.
“Pension
Plan”
has
the
meaning assigned in Section 5.03(m).
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“Person”
is
to
be interpreted broadly to include any individual, savings association,
bank,
trust company, corporation, limited liability company, partnership, association,
joint-stock company, business trust or unincorporated organization.
“Previously
Disclosed”
means
information set forth by a party in the paragraph of its Disclosure Schedule
corresponding to the applicable section of this Agreement, or any other
paragraph of its Disclosure Schedule so long as it is reasonably clear
from the
context that the disclosure in such other paragraph of its Disclosure Schedule
(i) applies to the section of this Agreement in question and (ii) contains
sufficient detail to enable a reasonable person to recognize the relevance
of
such disclosure to the section of this Agreement in question.
“Proposed
Purchase Price Adjustment Statement”
has
the
meaning assigned in Section 3.07(a).
“Proxy
Statement”
has
the
meaning assigned in Section 6.02(c).
“Purchase
Price”
means
$135,000,000 (i) plus the Actual Excess Equity Amount if the Actual Excess
Equity Amount is a positive number, or (ii) less the Actual Excess Equity
Amount
if the Actual Excess Equity Amount is a negative number.
“Purchase
Price Adjustment Escrow Amount”
means
an amount to be mutually agreed upon in writing by Parent and Company;
provided,
however,
that in
no event shall such amount exceed $1,500,000.
“Purchase
Price Decrease”
has
the
meaning assigned in Section 3.07(d).
“Purchase
Price Dispute Notice”
has
the
meaning assigned in Section 3.07(b).
“Purchase
Price Increase”
has
the
meaning assigned in Section 3.07(d).
“Registration
Statement”
has
the
meaning assigned in Section 6.03(a).
“Representatives”
means,
with respect to any person, such person’s directors, officers, employees, legal
or financial advisors or any representatives of such legal or financial
advisors.
“Requisite
Regulatory Approvals”
has
the
meaning assigned in Section 6.11.
“Resolution
Period”
has
the
meaning assigned in Section 3.07(b).
“Rights”
means,
with respect to any person, securities or obligations convertible into
or
exercisable or exchangeable for, or giving any other person any right to
subscribe for or acquire, or any options, calls or commitments relating
to, or
any stock appreciation right or other instrument the value of which is
determined in whole or in part by reference to the market price or value
of,
shares of capital stock of such first person.
“SEC”
means
the United States Securities and Exchange Commission.
“SEC
Filings”
has
the
meaning assigned in Section 5.03(g).
“Secretary
of State”
means
the Secretary of State of the State of Indiana.
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“Securities
Act”
means
the Securities Act of 1933, as amended, and the rules and regulations
thereunder.
“Shareholders’
Agent”
has
the
meaning assigned in Section 6.18(a).
“Shareholders’
Committee”
has
the
meaning assigned in Section 6.18(b).
“Stock
Designated Shares”
has
the
meaning assigned in Section 3.01(c).
“Stock
Election Shares”
has
the
meaning assigned in Section 3.01(c).
“Stockholders’
Equity”
shall
mean the consolidated common stockholders’ equity of Company, after adjusting to
market value all unrealized securities gains and losses (whether or not
such
adjustment is required by, or is consistent with, GAAP); provided,
that
Stockholders’ Equity shall (i) not be adjusted with respect to a decrease in the
fair market value of the Non-Operating Real Estate, unless Parent’s appraised
value of the Non-Operating Real Estate is less than 95% of the value of
such
Non-Operating Real Estate set forth on the Estimated Balance Sheet and
(ii) be
adjusted to reflect the unrecorded portion of any payments that may become
due
and owing as of or after the Closing pursuant to any change-in-control
or
similar type agreements between Company and any of its directors, officers
or
employees.
“Subsidiary”
and
“Significant
Subsidiary”
have
the meanings assigned to those terms in Rule 1-02 of Regulation S-X
promulgated by the SEC.
“Surviving
Corporation”
has
the
meaning assigned in the Preamble.
“Takeover
Laws”
has
the
meaning assigned in Section 5.03(p).
“Takeover
Provisions”
has
the
meaning assigned in Section 5.03(p).
“Tax
Returns”
means
any return, amended return or other report (including elections, declarations,
disclosures, schedules, estimates and information returns) required to
be filed
with respect to any Tax.
“Tax”
and
“Taxes”
means
all federal, state, local or foreign taxes, charges, fees, levies or other
assessments, however denominated, including all net income, gross income,
gains,
gross receipts, sales, use, ad valorem, goods and services, capital, production,
transfer, franchise, windfall profits, license, withholding, payroll,
employment, disability, employer health, excise, estimated, severance,
stamp,
occupation, property, environmental, unemployment or other taxes, custom
duties,
fees, assessments or charges of any kind whatsoever, together with any
interest
and any penalties, additions to tax or additional amounts imposed by any
taxing
authority whether arising before, on or after the Effective Time.
“Technology
Systems”
means
the electronic data processing, information, record keeping, communications,
telecommunications, hardware, third party software, networks, peripherals,
portfolio trading and computer systems, including any outsourced systems
and
processes, and Intellectual Property which are used by a party or its
Subsidiaries.
“Termination
Date”
has
the
meaning assigned in Section 8.01(c).
“Upper
Threshold”
has
the
meaning assigned in “Closing
Parent Share Price.”
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“Voting
Agreement”
has
the
meaning assigned in the Preamble.
1.02 Interpretation.
(a) In
this
Agreement, except as context may otherwise require, references:
(1) to
the
Preamble, Sections, Exhibits or Schedules are to the Preamble to, or Section
of,
or Exhibits or Schedule to, this Agreement;
(2) to
this
Agreement are to this Agreement, and the Exhibits and Schedules to it,
taken as
a whole;
(3) to
any
agreement (including this Agreement), contract, statute or regulation are
to the
agreement, contract, statute or regulation as amended, modified, supplemented,
restated or replaced from time to time (in the case of an agreement or
contract,
to the extent permitted by the terms thereof); and to any section of any
statute
or regulation include any successor to the section;
(4) to
the “transactions contemplated hereby” includes the transactions provided
for in this Agreement and the Exhibits to it;
(5) to
any
Governmental Authority include any successor to that Governmental Authority;
and
(6) to
the
date of this Agreement are to February 19, 2007.
(b) The
table
of contents and article and section headings are for reference purposes
only and
do not limit or otherwise affect any of the substance of this
Agreement.
(c) The
words
“include,” “includes” or “including” are to be deemed followed by the words
“without limitation” and shall not be construed to limit any general statement
that it follows to the specific or similar items or maters immediately
following
it.
(d) The
words
“herein”, “hereof” or “hereunder”, and similar terms are to be deemed to refer
to this Agreement as a whole and not to any specific Section.
(e) This
Agreement is the product of negotiation by the parties, having the assistance
of
counsel and other advisers. The parties intend that this Agreement not
be
construed more strictly with regard to one party than with regard to the
other.
(f) No
provision of this Agreement is to be construed to require, directly or
indirectly, any person to take any action, or omit to take any action,
to the
extent such action or omission would violate applicable law (including
statutory
and common law), rule or regulation.
ARTICLE
II
The
Merger
2.01 The
Merger. Upon
the
terms and subject to the conditions set forth in this Agreement, Company
will
merge with and into Merger
Sub at
the
Effective Time. At the Effective Time, the separate corporate
existence of Company will terminate. Merger
Sub will
be
the Surviving Corporation, and will
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continue
its corporate existence under the laws of the State of Indiana and shall
be a
wholly owned subsidiary of Parent.
2.02 Closing. The
closing of the Merger (the “Closing”) will take place in the offices of
Parent located at 100 N. Michigan Street, South Bend, Indiana 46601, at
10:00 a.m. on the date (unless the parties agree to another time or date)
that is, subject to Section 3.08, the last day of the month in which each
of the
conditions set forth in Article VII have been satisfied or waived, other
than those conditions that by their nature are to be satisfied at the Closing,
but subject to the fulfillment or waiver of those conditions (the “Closing
Date”).
2.03 Effective
Time.
Subject
to the provisions of this Agreement, in connection with the Closing,
Merger
Sub will
duly
execute and deliver articles of merger (the “Articles of Merger”) to the
Secretary of State for filing under Section 23-1-40-5 of the IBCL. The
parties
will make all other filings or recordings required under the IBCL, and
the
Merger will become effective when the Articles of Merger are filed in the
office
of the Secretary of State, or at such later date or time as Parent
and
Company mutually agree (the time the Merger becomes effective being
the “Effective Time”).
2.04 Effects
of the Merger.
The
Merger will have the effects prescribed by the IBCL and other applicable
law.
2.05 Articles
of Incorporation and By-laws.
(a) The
Merger Sub certificate of incorporation, as in effect immediately before
the
Effective Time, will be the certificate of incorporation of the Surviving
Corporation as of the Effective Time.
(b) The
Merger Sub by-laws, as in effect immediately before the Effective Time,
will be
the by-laws of the Surviving Corporation as of the Effective Time.
ARTICLE
III
Consideration;
Exchange Procedure
3.01 Conversion
or Cancellation of Shares.
(a) Company
Common Stock.
At the
Effective Time, by virtue of the Merger and without any action on the part
of
any shareholder, each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time, other than Exception Shares, shall
be
converted into and constitute the right to receive:
(1) at
the
election of the holder thereof as provided in, and subject to the provisions
of
Section 3.01(c)
and
Section 3.08, either:
(A) a
number
of shares of Parent Common Stock equal to the quotient, rounded to the
nearest
thousandth, obtained by dividing the Initial Per Share Purchase Consideration
by
the Closing Parent Share Price (the “Initial Per
Share Stock Consideration”);
or
(B) cash
in
an amount equal to the Initial Per Share Purchase Consideration (the
“Initial
Per Share Cash Consideration”),
and
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(2) the
contingent right to receive additional amounts from the Escrow Fund as
provided
in the Escrow Agreement.
Each
share of Company Common Stock issued and outstanding immediately prior
to the
Effective Time, other than Exception Shares, is hereinafter defined as
an
“Old
Share.”
Old
Shares shall cease to be outstanding, shall be canceled and retired and
shall
cease to exist, and each holder of a certificate (an “Old
Certificate”)
formerly representing Old Shares shall thereafter cease to have any rights
with
respect to such shares, except the right to receive, as applicable, without
interest, upon exchange of such Old Certificate in accordance with this
Article III (i) any dividends with respect to Company Common Stock
with a record date prior to the Effective Time but unpaid as of the Effective
Time and (ii) the consideration to which he or she may be entitled pursuant
to this Article III.
(b) Determination
of Initial Purchase Consideration.
(1) The
Initial Purchase Consideration shall equal (i) the Estimated Purchase Price
minus (ii) the Escrow Amount (the “Initial Purchase Consideration”). Not later
than five business days prior to the Closing Date, Company will deliver
to
Parent an estimated balance sheet of Company as of the close of business
on the
Closing Date (the “Estimated Balance Sheet”), including a statement setting
forth its best estimate of Stockholders’ Equity (“Estimated Equity”) as of the
Closing Date and a detailed calculation of the Estimated Purchase Price
(taken
together, the “Estimated Purchase Price Statement”). The Company shall deliver
to Parent on the day prior to the Closing Date its updated Estimated Equity
determined as of the close of business two days prior to the Closing Date.
The
Estimated Purchase Price Statement will be prepared using the updated Estimated
Equity and applying GAAP, as modified by the definition of Stockholders’ Equity
contained herein, and, to the extent consistent with GAAP, on the basis
of the
same accounting principles and practices used by Company in the preparation
of
Company Financial Statements delivered prior to the date of this
Agreement.
(2) On
the
day prior to the Closing Date the Company and Parent shall in good faith
agree
in writing to the amount of the Purchase Price Adjustment Escrow Amount.
(c) Election
Procedures.
(1) An
election form and other appropriate and customary transmittal materials
in such
form as Parent and Company shall mutually agree (the “Election
Form”)
shall
be mailed on the date on which proxy materials relating to the Merger are
mailed
to holders of shares of Company Common Stock or such other date as Parent
and
Company shall mutually agree (the “Mailing
Date”)
to
each holder of record of Company Common Stock as of the close of business
on the
same date as the record date for eligibility to vote on the Merger (the
“Election
Form Record Date”).
(2) Each
Election Form shall permit the holder (or the beneficial owner through
appropriate and customary documentation and instructions) to specify
(A) the number of shares of such holder’s Company Common Stock with respect
to which such holder elects to receive the Initial Per Share Stock Consideration
(“Stock
Election Shares”),
(B) the number of shares of such holder’s Company Common Stock with respect
to which such holder elects to receive the Initial Per Share Cash Consideration
(“Cash
Election Shares”)
or
(C) that such holder makes no election with respect to such holder’s
Company Common
Stock (“No
Election Shares”).
Any
Company Common Stock with respect to
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which
the
Exchange Agent has not received an effective, properly completed Election
Form
on or before 5:00 p.m. Eastern Standard time, on the first business day
subsequent to the Company Meeting (or such other time and date as Parent
and
Company may mutually agree) (the “Election
Deadline”)
shall
also be deemed to be No Election Shares.
(3) Parent
shall make available one or more Election Forms as may reasonably be requested
from time to time by any person who becomes a holder (or beneficial owner)
of
Company Common Stock between the Election Form Record Date and the close
of
business on the business day prior to the Election Deadline, and Company
shall
provide to the Exchange Agent all information reasonably necessary for
it to
perform as specified herein.
(4) Any
such
election shall have been properly made only if the Exchange Agent shall
have
actually received a properly completed Election Form by the Election Deadline.
An Election Form shall be deemed properly completed only if accompanied
by one
or more Old Certificates (or customary affidavits and indemnification regarding
the loss or destruction of such certificates or the guaranteed delivery
of such
certificates) representing all shares of Company Common Stock covered by
such
Election Form, together with duly executed transmittal materials included
in the
Election Form. Any Election Form may be revoked or changed by the person
submitting such Election Form only by written notice received by the Exchange
Agent prior to the Election Deadline accompanied by a properly completed
and
signed revised Election Form. In the event an Election Form is revoked
prior to
the Election Deadline, unless a subsequent properly completed Election
Form is
submitted and actually received by the Exchange Agent by the Election Deadline,
the shares of Company Common Stock represented by such Election Form shall
become No Election Shares and Parent shall cause the Old Certificates to
be
promptly returned without charge to the person submitting the Election
Form upon
written request to that effect from the holder who submitted the Election
Form.
Subject to the terms of this Agreement and of the Election Form, the Exchange
Agent shall have reasonable discretion to determine whether any election,
revocation or change has been properly or timely made and to disregard
immaterial defects in the Election Forms, and any good faith decisions
of Parent
regarding such matters shall be binding and conclusive. Neither Parent
nor the
Exchange Agent shall be under any obligation to notify any person of any
defect
in an Election Form.
(5) Within
five business days after the later to occur of the Election Deadline or
the
Effective Time, Parent shall cause the Exchange Agent to effect the allocation
among the holders of Company Common Stock of rights to receive Parent Common
Stock or cash in the Merger in accordance with the Election Forms as
follows:
(A) Cash
Oversubscribed.
If the
aggregate cash amount that would otherwise be paid upon the conversion
in the
Merger of the Cash Election Shares is greater than the Maximum Cash
Consideration, then:
(I) all
Stock
Election Shares and No Election Shares shall be converted into the right
to
receive the Initial Per Share Stock Consideration,
(II) the
Exchange Agent shall then select from among the Cash Election Shares, by
a pro
rata selection process, a sufficient number of shares to receive the Initial
Per
Share Stock Consideration (“Stock
Designated Shares”)
such
that the aggregate of cash that will be paid in the
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Merger
equals an amount as close as practicable but in no event greater than the
Maximum Cash Consideration, and all Stock Designated Shares shall be converted
into the right to receive the Initial Per Share Stock Consideration,
and
(III) the
Cash
Election Shares that are not Stock Designated Shares will be converted
into the
right to receive the Initial Per Share Cash Consideration.
(B) Cash
Undersubscribed.
If the
aggregate cash amount that would be paid upon conversion in the Merger
of the
Cash Election Shares is less than the Minimum Cash Consideration,
then:
(I) all
Cash
Election Shares shall be converted into the right to receive the Initial
Per
Share Cash Consideration,
(II) the
Exchange Agent shall then select first from among the No Election Shares,
by a
random selection process, and then (if necessary) from among the Stock
Election
Shares, by a pro rata selection process, a sufficient number of shares
to
receive the Initial Per Share Cash Consideration (“Cash
Designated Shares”)
such
that the aggregate cash amount that will be paid in the Merger equals as
closely
as practicable but in no event less than the Minimum Cash Consideration,
and all
Cash Designated Shares shall be converted into the right to receive the
Initial
Per Share Cash Consideration, and
(III) the
Stock
Election Shares and the No Election shares that are not Cash Designated
Shares
shall be converted into the right to receive the Initial Per Share Stock
Consideration.
(C) Cash
Subscriptions Sufficient.
If the
aggregate cash amount that would be paid upon conversion in the Merger
of the
Cash Election Shares is equal to or exceeds the Minimum Cash Consideration
and
does not exceed the Maximum Cash Consideration (as determined by the Exchange
Agent), then subparagraphs (A) and (B) above shall not apply and all Cash
Election Shares shall be converted into the right to receive the Initial
Per
Share Cash Consideration and all Stock Election Shares and No Election
Shares
shall be converted into the right to receive the Initial Per Share Stock
Consideration.
The
pro
rata selection process to be used by the Exchange Agent shall consist of
such
equitable pro ration processes as shall be mutually determined by Parent
and
Company. In addition, the Parent and the shareholders of the Company who
have
executed the Voting Agreements may agree that a specified number of Stock
Designated Shares or Cash Designated Shares, as applicable, may be selected
from
among the shares subject to the Voting Agreements prior to the pro rata
selection process, after which the pro rata selection process will occur,
if
necessary.
For
purposes of the calculations in this Section 3.01(c), but not for any pro
rata
selection process, Dissenting Shares shall be deemed to be Cash Election
Shares.
(d) Exception
Shares.
At the
Effective Time, by virtue of the Merger and without any action on the part
of
any shareholder, each Exception Share shall cease to be
outstanding,
A-16
shall
be
canceled and retired and shall cease to exist, and no consideration shall
be
delivered in exchange therefor.
(e) No
Fractional Shares.
Notwithstanding any other provision of this Agreement, neither certificates
nor
scrip for fractional shares of Parent Common Stock shall be issued in the
Merger. Each holder who otherwise would have been entitled to a fraction
of a
share of Parent Common Stock shall receive in lieu thereof cash (without
interest) in an amount determined by multiplying the fractional share interest
to which such holder would otherwise be entitled (after taking into account
all
shares of Company Common Stock owned by such holder at the Effective Time)
by
the Closing Parent Share Price. No such holder shall be entitled to dividends,
voting rights or any other rights in respect of any fractional
share.
3.02 Exchange
of Old Certificates; Payment of the Consideration.
(a) Appointment
of Exchange Agent.
Until
the first anniversary of the Effective Time, Parent shall make available
on a
timely basis or cause to be made available to an exchange agent agreed
upon by
Parent and Company (the “Exchange
Agent”)
(1) cash in an amount sufficient to allow the Exchange Agent to make all
payments that may be required pursuant to this Article III and
(2) certificates representing the shares of Parent Common Stock
(“New
Certificates”),
each
to be given to the holders of Company Common Stock in exchange for Old
Certificates pursuant to this Article III. Upon such anniversary, any such
cash or New Certificates remaining in the possession of the Exchange Agent
(together with any earnings in respect thereof) shall be delivered to Parent.
Any holder of Old Certificates who has not theretofore exchanged his or
her Old
Certificates pursuant to this Article III shall thereafter be entitled to
look exclusively to Parent, and only as a general creditor thereof, for
the
consideration to which he or she may be entitled upon exchange of such
Old
Certificates pursuant to this Article III. Notwithstanding the foregoing,
neither the Exchange Agent nor any party hereto shall be liable to any
holder of
Old Certificates for any amount properly delivered to a public official
pursuant
to applicable abandoned property, escheat or similar laws.
(b) Exchange
Procedures.
Promptly after the Effective Time, but in no event later than five business
days
thereafter, Parent shall cause the Exchange Agent to mail or deliver to
each
person who was, immediately prior to the Effective Time, a holder of record
of
Company Common Stock and who theretofore has not submitted such holder’s Old
Certificates with an Election Form, a form of letter of transmittal (which
shall
specify that delivery shall be effected, and risk of loss and title to
Old
Certificates shall pass, only upon proper delivery of such certificates
to the
Exchange Agent) containing instructions for use in effecting the surrender
of
Old Certificates in exchange for the consideration to which such person
may be
entitled pursuant to this Article III. After completion of the allocation
procedure set forth in Section 3.01(c)
and upon
surrender to the Exchange Agent of an Old Certificate for cancellation
together
with such letter of transmittal or Election Form, as the case may be, duly
executed and completed in accordance with the instructions thereto, the
holder
of such Old Certificate shall promptly be provided in exchange therefor,
but in
no event later than ten business days after due surrender, a New
Certificate and/or a check in the amount to which such holder is entitled
pursuant to this Article III, and the Old Certificate so surrendered shall
forthwith be canceled. Parent shall be entitled to deduct and withhold
from the
Merger consideration such amounts as it is required to deduct and withhold
under
the Code and the rules and regulations promulgated thereunder, or any provision
of state, local or foreign Tax law. To the extent that amounts are so withheld
by Parent, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to Company shareholders in respect to which
such
deduction and withholding
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was
made
by Parent. No interest will accrue or be paid with respect to any property
to be
delivered upon surrender of Old Certificates.
(c) Transfer
to Holder other than Existing Holder.
If any
cash payment is to be made in a name other than that in which the Old
Certificate surrendered in exchange therefor is registered, it shall be
a
condition of such exchange that the person requesting such exchange shall
pay
any transfer or other taxes required by reason of the making of such payment
of
the Initial Per Share Cash Consideration in a name other than that of the
registered holder of the Old Certificate surrendered, or required for any
other
reason relating to such holder or requesting person, or shall establish
to the
reasonable satisfaction of the Exchange Agent that such tax has been paid
or is
not payable. If any New Certificate representing shares of Parent Common
Stock
is to be issued in the name of other than the registered holder of the
Old
Certificate surrendered in exchange therefor, it shall be a condition of
the
issuance thereof that the Old Certificate so surrendered shall be properly
endorsed (or accompanied by an appropriate instrument of transfer) and
otherwise
in proper form for transfer, and that the person requesting such exchange
shall
pay to the Exchange Agent in advance any transfer or other taxes required
by
reason of the issuance of a certificate representing shares of Parent Common
Stock in a name other than that of the registered holder of the Old Certificate
surrendered, or required for any other reason relating to such holder or
requesting person, or shall establish to the reasonable satisfaction of
the
Exchange Agent that such tax has been paid or is not payable.
(d) Dividends.
No
dividends or other distributions with a record date after the Effective
Time
with respect to Parent Common Stock shall be paid to the holder of any
unsurrendered Old Certificate until the holder thereof shall surrender
such Old
Certificate in accordance with this Article III. After the surrender of an
Old Certificate in accordance with this Article III, the record holder
thereof shall be entitled to receive any such dividends or other distributions,
without any interest thereon, which theretofore had become payable with
respect
to shares of Parent Common Stock represented by the New
Certificate.
(e) Transfers.
At or
after the Effective Time, there shall be no transfers on the stock transfer
books of Parent of Old Shares.
(f) Lost,
Stolen or Destroyed Certificates.
If any
Old Certificate shall have been lost, stolen or destroyed, upon the making
of an
affidavit of that fact by the person claiming such Old Certificate to be
lost,
stolen or destroyed and, if required by Parent or the Exchange Agent, the
posting by such person of a bond in such reasonable amount as Parent or
the
Exchange Agent may direct as indemnity against any claim that may be made
against it with respect to such Old Certificate, Parent or the Exchange
Agent
shall, in exchange for such lost, stolen or destroyed Old Certificate,
pay or
cause to be paid the consideration deliverable in respect of the Old Shares
formerly represented by such Old Certificate pursuant to this
Article III.
3.03 Adjustments
to Parent Common Stock.
If
Parent changes (or Parent’s Board of Directors sets a related record date that
will occur before the Effective Time for a change in) the number of shares
of
Parent
Common
Stock issued and outstanding prior to the Effective Time as a result of
a stock
split, stock dividend, or similar recapitalization with respect to such
stock,
the Initial Per Share Stock Consideration (and if appropriate the Upper
Threshold and the Lower Threshold) shall be adjusted appropriately to provide
the holders of the Company Common Stock the same economic effect as contemplated
by this Agreement prior to such event.
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3.04 Dissenting
Shareholders.
(a) Except
as
otherwise provided herein, each Dissenting Share shall not
be
converted into or represent a right to receive the Initial Per Share Purchase
Consideration hereunder, and the holder thereof shall be entitled only
to such
rights as are granted by Section 23-1-44-8 of the IBCL. Company shall give
Parent prompt notice upon receipt by Company of any demand for payment
pursuant
to Sections 23-1-44-8 and 23-1-44-9 of the IBCL and of withdrawals of such
notice and any other instruments provided pursuant to applicable law (any
shareholder duly making such demand being hereinafter called a “Dissenting
Shareholder”),
and
Parent shall have the right to participate in all negotiations and proceedings
with respect to any such demands. Company shall not, without the prior
written
consent of Parent, make any payment with respect to, settle, offer to settle
or
otherwise negotiate any such demands. Any payments made in respect of Dissenting
Shares shall be made by Parent.
(b) If
any
Dissenting Shareholder shall effectively withdraw or lose (through failure
to
perfect or otherwise) his or her right to dissent under Section
23-1-44-8 of
the
IBCL at or prior to the Effective Time, each of such holder’s shares of Company
Common Stock shall be converted into a right to receive the Initial Per
Share
Purchase Consideration in accordance with the applicable provisions of
this
Agreement.
3.05 Effect
on Parent and Merger Sub Stock.
(a) Each
share of Parent
Stock
issued and outstanding immediately prior to the Effective Time will remain
outstanding.
(b) Each
share of Merger
Sub common stock
issued and outstanding immediately prior to the Effective Time will remain
outstanding.
3.06 Escrow.
On the
Closing Date, Parent, the Escrow Agent and the Shareholders’ Agent shall execute
the Escrow Agreement. By 9:00 a.m. Eastern Standard time on the day immediately
following the Closing Date, Parent shall deposit, or shall cause to be
deposited, with the Escrow Agent, for the benefit and on behalf of the
shareholders of Company an amount of cash equal to the Escrow Amount (the
“Escrow Fund”) for disbursement in accordance with the terms of the Escrow
Agreement. The Escrow Fund constitutes part of the consideration to be
paid to
the holders of Company Common Stock, receipt of which is subject to the
terms
and conditions of the Escrow Agreement
3.07 Determination
of Final Purchase Price Adjustment.
The
Initial Purchase Consideration shall be subject to adjustment following
the
Closing Date as follows:
(a) As
soon
as practicable after the Closing, but in no event later than 60 days after
the
Closing Date, Parent will prepare (or cause to be prepared) and deliver
to the
Shareholders’ Agent a balance sheet of Company as of the close of business on
the Closing Date, a statement setting forth the actual Stockholders’ Equity as
of such date and a statement setting forth a detailed calculation of the
Purchase Price and Final Purchase Price Adjustment (taken together the
“Proposed
Purchase Price Adjustment Statement”).
The
Proposed Purchase Price Adjustment Statement will be prepared applying
GAAP, as
modified by the definition of Stockholders’ Equity contained herein, and, to the
extent consistent with GAAP, on the basis of the same accounting principles
and
practices used by Company in the preparation of Company Financial Statements
delivered prior to the date of this Agreement.
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(b) The
Shareholders’ Agent shall have 15 days from receipt of the Proposed Purchase
Price Adjustment Statement to give Parent written notice of his or her
objection
to any item or calculation contained in the Proposed Purchase Price Adjustment
Statement, specifying in reasonable detail all disputed items and the basis
therefore (a “Purchase
Price Dispute Notice”).
If
the Shareholders’ Agent concurs with the Proposed Purchase Price Adjustment
Statement or otherwise does not give Parent a Purchase Price Dispute Notice
within such 15-day period, such Proposed Purchase Price Adjustment Statement
shall be deemed final and conclusive with respect to the determination
of the
Final Purchase Price Adjustment and shall be binding on the parties for
all
purposes under this Agreement. If, however, the Shareholders’ Agent delivers a
Purchase Price Dispute Notice objecting to any items or calculations contained
in the Proposed Purchase Price Adjustment Statement within such 15-day
period,
Parent and the Shareholders’ Agent shall meet within 15 days following the date
of the Purchase Price Dispute Notice (the “Resolution
Period”)
and
shall attempt in good faith to resolve such objections and any written
resolution by them as to any disputed amount shall be deemed final and
conclusive with respect to the determination of the Final Purchase Price
Adjustment and shall be binding on the parties for all purposes under this
Agreement. Any amounts that were not timely disputed pursuant to a Purchase
Price Dispute Notice (or if so disputed, subsequently resolved) may not
be
disputed. In all events the Proposed Purchase Price Adjustment Statement
shall
be final and binding, except to the extent of those amounts timely identified
in
a Purchase Price Dispute Notice in accordance with this paragraph.
(c) If
Parent
and the Shareholders’ Agent are unable to resolve the Shareholders’ Agent’s
objections within the Resolution Period, then Parent shall designate and
retain
the Independent Accountant, subject to the written approval of Company,
which
approval shall not be unreasonably withheld or delayed. Following such
approval
by Company, Parent and the Shareholders’ Agent shall submit for review by the
Independent Accountant all amounts and issues remaining in dispute and
Parent’s
and the Shareholders’ Agent responses thereto. All parties agree to execute, if
requested by the Independent Accountant, a reasonable engagement letter
with
respect to the determination to be made by the Independent Accountant.
The
Independent Accountant will determine only those issues still in dispute
at the
end of the Resolution Period and the Independent Accountant’s determination will
be based upon and consistent with the terms and conditions of this Agreement.
The determination by the Independent Accountant will be based solely on
the
information contained in the presentations with respect to such disputed
items
by Parent and the Shareholders’ Agent to the Independent Accountant and not on
the Independent Accountant’s independent review. Each of Parent and the
Shareholders’ Agent will use its reasonable best efforts to provide its
presentations and related information as promptly as practicable following
submission to the Independent Accountant of the disputed items, and each
such
party will be entitled, as part of its presentation, to respond to the
presentation of the other party and any questions and requests of the
Independent Accountant. Discovery shall be limited to documents designated
by
the Independent Accountant as necessary for it to assess the proper calculation
of the Final Purchase Price Adjustment consistent with this Agreement.
The
Independent Accountant’s determination will be made within 30 days after its
engagement (which engagement will be made no later than five business days
after
the end of the Resolution Period), or as soon thereafter as possible, and
will
be set forth in a written statement delivered to the Shareholders’ Agent and
Parent. The Final Purchase Price Adjustment Statement as finalized by the
Independent Accountant shall be deemed final and conclusive with respect
to the
Final Purchase Price Adjustment and shall be binding on Parent and the
shareholders of Company for all purposes under this Agreement. In deciding
any
matter, the Independent Accountant (A) will be bound by the provisions
of this
Agreement and (B) may not assign a value to any item greater than the greatest
value for such item claimed by either Parent or the Shareholders’ Agent or less
than the smallest value for such
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item
claimed by Parent or the Shareholders’ Agent. The fees and expenses of the
Independent Accountant in resolving all such objections shall be borne
by
(1) Parent in an amount equal to the proportion of the total disputed
amount that the Independent Accountant finds in favor of the Shareholders’ Agent
and (2) the Shareholders’ Agent in an amount equal to the proportion of the
total disputed amount that the Independent Accountant finds in favor of
Parent.
The amount of the fees and expenses of the Independent Accountant to be
paid by
the Shareholders’ Agent will be assessed first against the Escrow Fund. Except
as provided in the preceding sentence, all other costs and expenses incurred
by
the parties in connection with resolving any dispute hereunder before the
Independent Accountant will be borne by the party incurring such cost and
expense. The term “Final
Purchase Price Adjustment Statement”
will
mean the definitive Proposed Purchase Price Adjustment Statement agreed
to by
the Shareholders’ Agent and Parent or resulting from the determination made by
the Independent Accountant in accordance with this Section 3.07(c).
(d) In
the
event that the Purchase Price set forth on the Final Purchase Price Adjustment
Statement exceeds the Estimated Purchase Price set forth on the Estimated
Purchase Price Statement (such excess, together with interest thereon at
an
annual rate of five percent (5.00%) from the Closing Date to the date of
payment, the “Purchase
Price Increase”),
then
Parent shall promptly deliver to the Escrow Agent an amount in cash so
that the
sum of such cash and the Purchase Price Adjustment Escrow Amount shall
be equal
to the Purchase Price Increase. The Escrow Agent will promptly distribute
an
amount equal to the Purchase Price Increase from the Escrow Account to
the
former holders of Company Common Stock in accordance with the provisions
of the
Escrow Agreement. In the event that the Estimated Purchase Price set forth
on
the Estimated Purchase Price Statement exceeds the Purchase Price set forth
on
the Final Purchase Price Adjustment Statement (such excess, together with
interest thereon at an annual rate of five percent (5.00%) from the Closing
Date
to the date of payment, the “Purchase
Price Decrease”),
then
the Escrow Agent shall promptly disburse to Parent from the Escrow Account
an
amount equal to such Purchase Price Decrease, but in no event an amount
greater
than the Purchase Price Adjustment Escrow Amount. Any remaining Escrow
Funds in
excess of the Indemnity Escrow Amount shall be distributed to the former
holders
of Company Common Stock in accordance with the provisions of the Escrow
Agreement.
3.08 Payment
Options
(a) In
the
event that the Closing Parent Share Price without regard to the Lower Threshold
is less than $25.663, Parent shall elect to pay to the holders of Stock
Election
Shares and Stock Designated Shares (if applicable), for each Stock Election
Share and Stock Designated Share (if applicable), either (i) in addition
to the
Initial Per Share Stock Consideration cash in an amount equal to the difference
between $25.663 and the Closing Parent Share Price without regard to the
Lower
Threshold, (ii) a number of shares of Parent Common Stock equal to a quotient,
rounded to the nearest thousandth, obtained by dividing the Initial Per
Share
Purchase Consideration by the Closing Parent Share Price without regard
to the
Lower Threshold, or (iii) a number of shares of Parent Common Stock equal
to a
quotient, rounded to the nearest thousandth, obtained by dividing the Initial
Per Share Purchase Consideration by a figure between the Closing Parent
Share
Price without regard to the Lower Threshold and $25.663 (the “Assumed
Closing Parent Share Price”),
plus
cash equal to the difference between $25.663 and the Assumed Closing Parent
Share Price; provided,
that if
any such election by Parent other than pursuant to 3.08(a)(ii) would cause
the
condition of Section 7.01(f) to not be satisfied, then Parent shall offer
the
consideration set forth in Section 3.08(b).
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(b) Notwithstanding
anything else to the contrary contained herein, in the event that the Closing
Parent Share Price is less than the Lower Threshold and Parent pursuant
to
Section 3.08(a) must offer the consideration set forth in this Section
3.08(b),
then Parent shall pay to all holders of Old Certificates in cash in an
amount
for each Old Certificate equal to the Initial Per Share Cash consideration,
regardless of any elections made pursuant to Article III (“All Cash Payment
Option”).
(c) If
the
All Cash Payment Option is utilized, then Parent shall cause payment to
be made
to all holders of Old Certificates within the later to occur of (i) thirty
(30)
days following the Closing Date, which payment shall include interest thereon
at
an annual rate of five percent (5.00%) from the Closing Date to the date
of
payment, or (ii) within ten business days after satisfaction of the conditions
of Section 3.02(b) with respect to the surrender by the holder of the Old
Certificate to the Exchange Agent the Old Certificate for cancellation
together
with such letter of transmittal or Election Form, as the case may be, duly
executed and completed in accordance with the instructions thereto, which
payment shall include interest thereon at an annual rate of five percent
(5.00%)
from the Closing Date to the date thirty (30) days subsequent to the Closing
Date.
ARTICLE
IV
Conduct
of Business Pending the Merger
4.01 Forbearances
of Company.
Company
agrees that from the date of this Agreement until the Effective Time, except
as
expressly contemplated by this Agreement or as Previously Disclosed, without
the
prior written consent of Parent
(which
consent will not be unreasonably withheld or delayed), it will not, and
will
cause each of its Subsidiaries not to:
(a) Ordinary
Course.
Conduct
its business and the business of its Subsidiaries other than in the ordinary
and
usual course or fail to use reasonable best efforts to preserve intact
their
business organizations and assets and maintain their rights, franchises
and
authorizations and their existing relations with customers, suppliers,
employees
and business associates, or take any action reasonably likely to have a
Material
Adverse Effect with respect to Company.
(b) Operations.
Enter
into any new line of business or change its lending, investment, underwriting,
risk, asset liability management or other material banking and operating
policies or practices, except as required by applicable law, regulation
or
policies imposed by any Governmental Authority; provided,
however,
that on
or before May 1, 2007, Company will structure its investment portfolio
as set
forth on Schedule 4.01(b)(ii).
(c) Capital
Stock.
Issue,
sell or otherwise permit to become outstanding, or dispose of or encumber
or
pledge, or authorize or propose the creation of, any additional shares
of its
stock, or permit any additional shares of its stock to become subject to
new
grants.
(d) Dividends,
Distributions, Repurchases.
(1) Make, declare, pay or set aside for payment any dividend on or in
respect of, or declare or make any distribution on any shares of its stock,
other
than
(A) dividends from its wholly owned Subsidiaries to it or another of its
wholly owned Subsidiaries and (B) regular quarterly dividends on its common
stock in amounts Previously Disclosed or (2) directly or indirectly adjust,
split, combine, redeem, reclassify, purchase or otherwise acquire, any
shares of
its stock.
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(e) Dispositions.
Sell,
transfer, mortgage, encumber or otherwise dispose of any of its assets,
deposits, business or properties, except for sales, transfers, mortgages,
encumbrances or other dispositions in the ordinary course of business consistent
with past practice and in a transaction that, together with other such
transactions, is not material to it and its Subsidiaries, taken as a
whole.
(f) Acquisitions.
Acquire
(other than by way of foreclosures or acquisitions of control in a fiduciary
or
similar capacity or in satisfaction of debts previously contracted in good
faith, in each case in the ordinary and usual course of business consistent
with
past practice) all or any portion of the assets, business, deposits, securities
or properties of any other entity.
(g) Constituent
Documents.
Amend
its Constituent Documents or the Constituent Documents (or similar governing
documents) of any of its Subsidiaries.
(h) Accounting
Methods.
Implement or adopt any change in its accounting principles, practices or
methods, other than as may be required by GAAP or applicable regulatory
accounting requirements, or make, change or revoke any material Tax election
or
change any method of Tax accounting.
(i) Adverse
Actions.
Subject
to Section 3.08(b), but otherwise notwithstanding anything herein to the
contrary, (1) knowingly take, or knowingly omit to take, any action that
would, or is reasonably likely to, prevent or impede the Merger from qualifying
as a reorganization within the meaning of Section 368(a) of the Code or
(2) knowingly take, or knowingly omit to take, any action that is
reasonably likely to result in any of the conditions to the Merger set
forth in
Article VII not being satisfied in a timely manner, except as may be
required by applicable law or regulation.
(j) Compensation;
Employment Agreements; Etc.
Enter
into, amend, modify, or renew or terminate any employment, consulting,
change-in-control or similar contract, agreement or arrangement with any
director, or employee or consultant, or increase or decrease the cash or
equity
compensation or fringe benefits of, or pay any bonus to, any director,
employee
or consultant or grant any salary or wage increase, equity awards or incentive
or bonus payments, except (1) to make changes that are required by applicable
law, (2) with respect to employees who are not executive officers, to grant
merit based or annual salary increases in the ordinary and usual course
of
business and in accordance with past practice, or (3) for employment
arrangements for newly hired employees who are not executive officers in
the
ordinary and usual course of business consistent with past
practice.
(k) Benefit
Plans.
Enter
into, establish, adopt, amend, modify, or renew or terminate any pension,
retirement, stock option, stock purchase, savings, profit sharing, deferred
compensation bonus, group insurance or other employee benefit, incentive
or
welfare contract, plan or arrangement or any trust agreement in respect
of any
director, officer or employee or take any action to accelerate the vesting
or
exercisability of stock options, restricted stock or other compensation
or
benefits payable thereunder, or take any action to fund the payment of
compensation or benefits under any Benefit Arrangement (other than in the
ordinary and usual course), or materially change any actuarial of other
assumptions used to calculate the funding obligations with respect to any
Benefit Arrangement that is not a qualified plan under Section 401(a) of
the
Code or change the manner in which contributions to any Benefit Arrangement
are
made or the basis on which such contributions are determined, except (1)
as may
be required by applicable law or (2) amendments that do not increase benefits
or
result in increased administrative costs.
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(l) Debt.
Other
than in the ordinary course of business, incur any indebtedness for borrowed
money, assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any person, or make any loan or advance.
(m) Litigation.
Settle
any suit, action, investigation or proceeding, except for any suit, action,
investigation or proceeding involving solely money damages in an amount,
individually or in the aggregate for all such settlements, that is not
material
to Company and its Subsidiaries, taken as a whole, and that does not involve
or
create precedent for any suit, action, investigation or proceeding that
is
reasonably likely to be material to Company or its Subsidiaries taken as
a
whole.
(n) Commitments.
Enter
into any contract with respect to, or otherwise agree or commit to do,
any of
the foregoing.
4.02 Forbearances
of Parent.
Parent
agrees
that from the date of this Agreement until the Effective Time, except as
expressly contemplated by this Agreement or as Previously Disclosed, without
the
prior written consent of Company (which consent will not be unreasonably
withheld or delayed), it will not, and will cause each of its Subsidiaries
not
to:
(a) Adverse
Actions.
Subject
to Section 3.08(b), but otherwise notwithstanding anything herein to the
contrary, (1) knowingly take, or knowingly omit to take, any action that
would, or is reasonably likely to, prevent or impede the Merger from qualifying
as a reorganization within the meaning of Section 368(a) of the Code or
(2) knowingly take, or knowingly omit to take, any action that is
reasonably likely to result in any of the conditions to the Merger set
forth in
Article VII not being satisfied in a timely manner, except as may be
required by applicable law or regulation.
(b) Constituent
Documents.
Amend
its Constituent Documents or the Constituent Documents of Merger Sub in
a way
that is adverse to the holders of Company Stock.
(c) Commitments.
Enter
into any contract with respect to, or otherwise agree or commit to do,
any of
the foregoing.
4.03 Coordination
of Dividends.
Until
the
Effective Time, Parent
and
Company will coordinate on the declaration of any dividends or other
distributions with respect to Parent
Common
Stock and Company Common Stock and the related record dates and payment
dates,
it being intended that Company shareholders will not receive more than
one
dividend, or fail to receive one dividend, for any single calendar quarter
on
their shares of Company Common Stock (including any shares of Parent
Common
Stock received in exchange therefor in the Merger).
ARTICLE
V
Representations
and Warranties
5.01 Disclosure
Schedules.
Before
entry into this Agreement, Parent
delivered
to Company a schedule and Company delivered to Parent
a
schedule (respectively, each schedule a “Disclosure
Schedule”),
setting forth, among other things, items the disclosure of which is necessary
or
appropriate either in response to an express disclosure requirement contained
in
a provision hereof or as an exception to one or more representations or
warranties contained in Section 5.03
or to
one or more of its covenants contained in Article IV; provided
that the
inclusion of an item in a Disclosure Schedule as an exception to
A-24
a
representation or warranty will not by itself be deemed an admission by
a party
that such item is material or was required to be disclosed therein.
5.02 Standard.
For
all
purposes of this Agreement, no representation or warranty of a party contained
in Section 5.03
(other
than the representations and warranties contained in Section 5.03(b)
and
5.03(c),
which
shall be true in all material respects) will be deemed untrue, and no party
will
be deemed to have breached a representation or warranty, as a consequence
of the
existence of any fact, event or circumstance unless such fact, circumstance
or
event, individually or taken together with all other facts, events or
circumstances inconsistent with any representation or warranty contained
in
Section 5.03,
has had
or is reasonably likely to have a Material Adverse Effect with respect
to such
party.
5.03 Representations
and Warranties.
Except
as
Previously Disclosed, Company hereby represents and warrants to Parent
and Merger Sub,
and
Parent
hereby
represents and warrants to Company, to the extent applicable, as
follows:
(a) Organization,
Standing and Authority.
Each of
it and, in the case of Parent only, Merger Sub is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction
of its
incorporation. It is duly qualified to do business and is in good standing
in
all jurisdictions where its ownership or leasing of property or assets
or its
conduct of business requires it to be so qualified.
(b) Capitalization.
(1) In
the
case of Company only: The authorized capital stock of Company consists
of
325,000 shares of Company Common Stock. As of the date of this Agreement,
42,101
shares of Company Common Stock were outstanding and are held, as of the
date of
this Agreement, as Previously Disclosed. The outstanding shares of Company
Common Stock have been duly authorized and are validly issued and outstanding,
fully paid and nonassessable, and not subject to preemptive rights (and
were not
issued in violation of any preemptive rights). There are no shares of Company
Stock reserved for issuance, Company does not have any Rights outstanding
with
respect to Company Stock, and Company does not have any commitment to authorize,
issue or sell any Company Stock or Rights. Company has no commitment to
redeem,
repurchase or otherwise acquire, or to register with the SEC, any shares
of
Company Stock.
(2) In
the
case of Parent only: The authorized capital stock of Parent consists of
40,000,000 shares of Parent Common Stock and 10,000,000 shares of Parent
Preferred Stock. As of February 15, 2007, no more than 22,760,615 shares
of
Parent Common Stock and zero shares of Parent Preferred Stock were outstanding,
no more than 859,662 shares of Parent Common Stock were subject to Rights
granted under the stock option and incentive plans of Parent, and no more
than
2,406,620 shares of Parent Common Stock were reserved for issuance under
such
plans. The outstanding shares of Parent Common Stock have been duly authorized
and are validly issued and outstanding, fully paid and nonassessable, and
not
subject to preemptive rights (and were not issued in violation of any preemptive
rights). The shares of Parent Common Stock to be issued in the Merger have
been
duly authorized and, if and when issued in the Merger, will be fully paid
and
nonassessable and not subject to preemptive rights. Except as set forth
above,
as of the date of this Agreement, there are no shares of Parent Stock reserved
for issuance, Parent does not have any Rights issued or outstanding with
respect
to Parent Stock, and Parent does not have any commitment to authorize,
issue or
sell any Parent Stock or Rights, except pursuant to this Agreement and
outstanding Rights under stock option and other equity incentive plans
of
Parent. As of the
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date
of
this Agreement, Parent has no commitment to redeem, repurchase or otherwise
acquire any shares of Parent Stock, except pursuant to stock option and
other
equity incentive plans of Parent.
(c) Subsidiaries.
(1) In
the
case of Company only, (A) it owns, directly or indirectly, all the outstanding
equity securities of each of its Subsidiaries free and clear of any Liens,
(B) no equity securities of any of its Subsidiaries are or may become
required to be issued (other than to it or its wholly owned Subsidiaries)
by
reason of any Right or otherwise, (C) there are no contracts, commitments,
understandings or arrangements by which any of such Subsidiaries is or
may be
bound to sell or otherwise transfer any equity securities of any such
Subsidiaries (other than to it or its wholly owned Subsidiaries), (D) there
are no contracts, commitments, understandings, or arrangements relating
to its
rights to vote or to dispose of such securities, (E) all the equity
securities of each Subsidiary held by it or its Subsidiaries have been
duly
authorized and are validly issued and outstanding, fully paid and nonassessable
(except as provided in 12 U.S.C. § 55 or comparable state laws in the
case of bank Subsidiaries), and (F) each of its Subsidiaries that is a bank
(as defined in the BHC Act) is an “insured bank” as defined in the Federal
Deposit Insurance Act and applicable regulations thereunder.
(2) Each
of
its Subsidiaries, in the case of Company, and its Significant Subsidiaries,
in
the case of Parent, has been duly organized and is validly existing in
good
standing under the laws of the jurisdiction of its organization, and is
duly
qualified to do business and in good standing in all jurisdictions where
its
ownership or leasing of property or its conduct of business requires it
to be so
qualified.
(d) Power.
It and
each of its Subsidiaries has the corporate (or comparable) power and authority
to carry on its business as it is now being conducted and to own all its
properties and assets; and it has the corporate (or comparable) power and
authority to execute, deliver and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby.
(e) Authority.
Each of
it and, in the case of Parent only, Merger Sub has duly authorized, executed
and
delivered this Agreement. Subject only, in the case of Company only, to
the
receipt of the affirmative vote of the holders of a majority of the outstanding
shares of Company Common Stock to approve the plan of merger contained
in this
Agreement, this Agreement and the transactions contemplated hereby have
been
authorized by all necessary respective corporate action. This Agreement
is its
and, in the case of Parent only, Merger Sub’s valid and legally binding
obligation, enforceable in accordance with its terms (except as enforcement
may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating
to or
affecting creditors’ rights or by general equity principles).
(f) Regulatory
Approvals; No Defaults.
(1) No
consents or approvals of, or filings or registrations with, any Governmental
Authority or with any third party are required to be made or obtained by
it or
any of its Subsidiaries in connection with the execution, delivery or
performance by it of this Agreement or to consummate the Merger, except
for
(A) filings of applications and notices with, receipt of approvals or
nonobjections from, and expiration of related waiting
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periods
required by federal and state banking authorities, including applications
and
notices under the BHC Act and an application to the Indiana Department
of
Financial Institutions as required under the Indiana Financial Institutions
Act,
as amended, (B) filing of the Registration Statement with the SEC, and
declaration by the SEC of the Registration Statement’s effectiveness under the
Securities Act, (C) receipt of the applicable shareholder approval
described in Section 5.03(e),
(D) the filing of the Articles of Merger with the Indiana Secretary of
State, and (E) such filings with NASDAQ necessary to obtain the
authorizations for listing of Parent Common Stock to be issued pursuant
to the
terms of this Agreement.
(2) Subject
to receipt of the consents and approvals referred to in the preceding paragraph,
and the expiration of related waiting periods, and required filings under
federal and state securities laws, the execution, delivery and performance
of
this Agreement and the consummation of the transactions contemplated hereby
do
not and will not (A) constitute a breach or violation of, or a default
under, or give rise to any Lien or any acceleration of remedies, penalty,
increase in material benefit payable or right of termination under, any
law,
rule or regulation or any judgment, decree, order, governmental permit
or
license, or agreement, indenture or instrument of it or of any of its
Subsidiaries or to which it or any of its Subsidiaries or properties is
subject
or bound, (B) constitute a breach or violation of, or a default under, its
Constituent Documents or (C) require any consent or approval under any such
law, rule, regulation, judgment, decree, order, governmental permit or
license,
agreement, indenture or instrument.
(3) As
of the
date of this Agreement, it and, in the case of Parent only, Merger Sub
is not
aware of any reason why the necessary regulatory approvals and consents
will not
be received in order to permit consummation of the Merger on a timely
basis.
(g) Financial
Reports and SEC Filings.
(1) In
the
case of Parent only, its Annual Report on Form 10-K for the fiscal year
ended
December 31, 2005, and all other reports, registration statements,
definitive proxy statements or information statements filed by it or any
of its
Subsidiaries subsequent to December 31, 2005 under the Securities Act,
or under
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form filed
(collectively, its “SEC
Filings”)
with
the SEC as of the date filed, (A) complied in all material respects as to
form with the applicable requirements under the Securities Act or the Exchange
Act, as the case may be, and (B) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and each of the statements
of
financial position contained in or incorporated by reference into any such
SEC
Filing (including the related notes and schedules) fairly presented in
all
material respects its financial position and that of its Subsidiaries as
of the
date of such statement, and each of the statements of income and changes in
stockholders’ equity and cash flows or equivalent statements in such SEC Filings
(including any related notes and schedules thereto) fairly presented in
all
material respects, the results of operations, changes in stockholders’ equity
and changes in cash flows, as the case may be, of it and its Subsidiaries
for
the periods to which those statements relate, in each case in accordance
with
GAAP consistently applied during the periods involved, except in each case
as
may be noted therein, and subject to normal year-end audit adjustments
and as
permitted by Form 10-Q in the case of unaudited statements and (ii) in
the case
of Company only, Company Financial Statements were prepared from the books
and
records of Company and its Subsidiaries and fairly present or, in the case
of
any
A-27
Company
Financial Statements delivered after the date hereof, will fairly present,
in
all material respects its financial position and that of its Subsidiaries
as of
the date of such statement, and each of the statements of income and changes
in
stockholders’ equity and cash flows or equivalent statements in such Company
Financial Statements (including any related notes and schedules thereto)
fairly
presented in all material respects, the results of operations, changes
in
stockholders’ equity and changes in cash flows, as the case may be, of it and
its Subsidiaries for the periods to which those statements relate, in each
case
in accordance with GAAP consistently applied during the periods involved,
except
in each case as may be noted therein, and subject to normal year-end audit
adjustments. Parent has been in compliance in all material respects with
the
Securities Act and the Exchange Act, and the rules and regulations of the
SEC
promulgated thereunder and has timely filed all SEC Filings required thereunder,
and it will be in compliance in all material respects with the Securities
Act,
Exchange Act, and all rules and regulations of the SEC promulgated thereunder,
and will file all SEC Filings between the date hereof and the Effective
Time.
(2) In
the
case of Company only, it and its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that:
(i) transactions are executed in accordance with management’s general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of Company Financial Statements in conformity with GAAP
and
to maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management’s general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to
differences. Company and its Subsidiaries have maintained business records
with
respect to their respective assets, businesses and operations which are
true,
accurate and complete in all material respects, and Company is not aware
of any
material deficiencies in such business records. None of Company or its
Subsidiaries has any of their primary records, systems, controls, data
or
information which are material to the operation of the businesses of it
recorded, stored, maintained, operated or otherwise wholly or partly dependent
upon or held by any means (including any electronic, mechanical or photographic
process, whether or not computerized) which (including all means of access
thereto and therefrom) are not under the exclusive ownership and direct
control
of it.
(h) Material
Adverse Effect.
Since
September 30, 2006:
(1) No
event,
state of facts, circumstance, development, change or effect that, individually
or in the aggregate with all other events, states of facts, circumstance,
developments, changes and effects(whether or not described in any other
paragraph of this Section 5.03),
has,
has had or is reasonably likely to have or result in a Material Adverse
Effect
with respect to it.
(2) It
and
its Subsidiaries have conducted their respective businesses in the ordinary
and
usual course consistent with past practice.
(3) It
and
its Subsidiaries have not incurred any liability other than in the ordinary
course of business consistent with past practice.
(4) In
the
case of Company only, it and its Subsidiaries have not taken any action
prior to
the date of this Agreement that, if taken after the date of this Agreement,
would constitute or cause a violation of Section 4.01.
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(i) Litigation.
Except,
in the case of Parent, as set forth in its SEC Filings (without giving
effect to
any amendment filed after the date of this Agreement), there is no suit,
action,
investigation or proceeding pending or, to its knowledge, threatened against
or
affecting it or any of its Subsidiaries, nor is there any judgment, decree,
injunction, rule or order of any governmental entity or arbitration outstanding
against it or any of its Subsidiaries.
(j) Regulatory
Matters.
Except,
in the case of Parent, as set forth in its SEC Filings (without giving
effect to
any amendment filed after the date of this Agreement), neither it nor any
of its
Subsidiaries is subject to, has been advised or has reason to believe that
it is
reasonably likely to become subject to, any written order, decree, agreement
(including an agreement under Section 4(m) of the BHC Act), memorandum
of
understanding or similar arrangement with, or a commitment letter or similar
submission to, or extraordinary supervisory letter from, or adopted any
extraordinary board resolutions at the request of, any Governmental Authority
charged with the supervision or regulation of financial institutions or
issuers
of securities or engaged in the insurance of deposits or the supervision
or
regulation of it or any of its Subsidiaries.
(k) Compliance
with Laws.
Except,
in the case of Parent, as set forth in its SEC Filings (without giving
effect to
any amendment filed after the date of this Agreement), it and each of its
Subsidiaries:
(1) conducts
its business in compliance with all applicable federal, state, local and
foreign
statutes, laws, regulations, ordinances, rules, judgments, orders or decrees
applicable thereto or to the employees conducting such businesses;
(2) has
all
permits, licenses, authorizations, orders and approvals of, and has made
all
filings, applications and registrations with, all Governmental Authorities
that
are required in order to permit them to own or lease their properties and
to
conduct their businesses as presently conducted; all such permits, licenses,
certificates of authority, orders and approvals are in full force and effect
and, to its knowledge, no suspension or cancellation of any of them is
threatened;
(3) has
received, since December 31, 2004, no written notification from any
Governmental Authority (A) asserting that it or any of its Subsidiaries is
not in compliance with any of the statutes, regulations or ordinances which
such
Governmental Authority enforces or (B) threatening to revoke any license,
franchise, permit or governmental authorization; and
(4)
is in
compliance with the provisions of the Bank Secrecy Act, the USA Patriot
Act and
the regulations promulgated thereunder.
(l) Material
Contracts; Defaults.
(1) In
the
case of Company only, neither it nor any of its Subsidiaries is a party
to,
bound by or subject to any of the following agreements, contracts, arrangements,
commitments or understandings (whether written or oral) (each, a “Contract”):
A-29
(A) a
Contract that would be a “direct financial obligation” within the meaning of
Item 2.03(c) of the SEC’s Form 8-K, or an “off-balance sheet arrangement” within
the meaning of Item 303(a)(4)(ii) of the SEC’s Regulation S-K;
(B) a
Contract containing obligations or liabilities of any kind to holders of
the
capital stock of it or any of its Subsidiaries as such (including an obligation
to register any of such securities under any federal or state securities
laws);
(C) a
Contract that restricts the conduct of business by it or any of its Subsidiaries
(including exclusivity obligations) or its or their ability to compete
in any
line of business;
(D) a
Contract with any current or former officer, director, shareholder, employee,
consultant, agent or other representative or with an entity in which any
of the
foregoing is a controlling person or has an interest which involve aggregate
payments in excess of $10,000;
(E) a
Contract with any labor union or association representing any employee;
(F) a
Contract that is a partnership or joint venture agreement;
(G) a
Contract relating to the acquisition by it or any of its Subsidiaries of
any
operating business or the capital stock of any other person;
(H) a
Contract under which it or any of its Subsidiaries agrees to indemnify
any party
or to share Tax liability of any person;
(I) a
Contract for the purchase of materials, supplies, goods, services, equipment
or
assets providing for an annual payment by it or any of its Subsidiaries
of
$10,000 or more;
(J) a
Contract granting options or rights of first refusal for the purchase or
lease
of any property for an aggregate purchase price in excess of $10,000 or
of any
real property; or
(K) any
other
Contracts pursuant to the terms of which there is either a current or future
obligation or right of it or any of the Subsidiaries to make payments in
excess
of $10,000 or receive payments in excess of $10,000.
(2) Neither
it nor any of its Subsidiaries is in default under any material contract,
agreement, commitment, arrangement, lease, insurance policy or other instrument
to which it is a party, by which its respective assets, business, or operations
may be bound or affected, or under which it or its respective assets, business,
or operations receives benefits, and there has not occurred any event that,
with
the lapse of time or the giving of notice or both, would constitute such
a
default.
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(m) Employee
Benefit Plans.
(1) All
of
its Benefit Arrangements are Previously Disclosed, other than those Benefit
Arrangements that are not material. True and complete copies of all Benefit
Arrangements, including any trust instruments and insurance contracts forming
a
part of any Benefit Arrangements, and all amendments thereto, have been
made
available to the other party. All actuarial reports, Forms 5500 (with all
schedules and attachments), audit reports, summary annual reports, summary
plan
descriptions and compliance tests (including nondiscrimination tests required
under Sections 401(a)(4), 401(k) and 401(m) of the Code and coverage tests
under
Section 410(b) of the Code) for the most recent two years for which such
reports
or documents are available, relating to its Benefit Arrangements have been
made
available to the other party. Any documents related to voluntary or involuntary
correction of any Benefit Arrangement under the IRS Employee Plans Compliance
Resolution System or correction programs offered by the Department of Labor
have
been made available to the other party. With respect to any Benefit Arrangement
that is a “multiemployer plan” within the meaning of Section 3(37) of ERISA, it
has made available to the other party a determination of the withdrawal
liability that would be incurred upon withdrawal from such plan as of the
last
day of the most recently completed plan year, or as of a more recent date.
Any
rulings, opinions, information letters, or advisory opinions or similar
documentation issued by or received from the Internal Revenue Service or
Department of Labor with respect to any Benefit Arrangement have been provided.
(2) All
of
its Benefit Arrangements, other than “multiemployer plans” within the meaning of
Section 3(37) of ERISA, are in substantial compliance with ERISA, the Code
and other applicable laws. Each of its Benefit Arrangements which is an
“employee pension benefit plan” within the meaning of Section 3(2) of ERISA
(“Pension
Plan”),
and
which is intended to be qualified under Section 401(a) of the Code, has
received a favorable determination letter from the Internal Revenue Service,
and
it is not aware of any circumstances reasonably likely to result in revocation
of any such favorable determination letter. There is no pending or, to
the
knowledge of Company or Parent, as the case may be, threatened litigation
relating to its Benefit Arrangements. Neither it nor any of its Subsidiaries
has
engaged in a transaction with respect to any of its Benefit Arrangements
that,
assuming the taxable period of such transaction expired as of the date
hereof,
could subject it or any of its Subsidiaries to a material tax or penalty
imposed
by either Section 4975 of the Code or Section 502(i) of
ERISA.
(3) In
all
material respects, all Benefit Arrangements subject to Title IV and Section
302
of ERISA or Section 412 of the Code are in compliance with such sections
of the
Code and ERISA and the regulations promulgated thereunder. No liability
under
Subtitle C or D of Title IV of ERISA has been or is reasonably
expected to be incurred by it or any of its Subsidiaries with respect to
any
ongoing, frozen or terminated “single-employer plan,” within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any of
them, or the single-employer plan of any entity which is considered one
employer
with it under Section 4001 of ERISA or Section 414 of the Code (an
“ERISA
Affiliate”).
None
of it, any of its Subsidiaries or any of its ERISA Affiliates has contributed
to
a “multiemployer plan,” within the meaning of Section 3(37) of ERISA, at
any time within the last six years. No notice of a “reportable event,” within
the meaning of Section 4043 of ERISA for which the 30-day reporting
requirement has not been waived has been required to be filed for any of
its
Pension Plans or by any of its ERISA Affiliates within the 12-month period
ending on the date hereof. All requirements under the Code and ERISA, the
regulations promulgated under the Code and ERISA, and the PBGC
regulations
A-31
have
been
met with respect to any application for a minimum funding waiver under
Section
303 of ERISA and Section 412(d) of the Code, such waiver was approved by
the
Internal Revenue Service, and all requirements under Section 303 of ERISA
and
Section 412(d) were met upon approval of such waiver. All applications,
government responses, and communications to participants related to a minimum
funding waiver application have been provided.
(4) All
contributions required to be made under the terms of any of its Benefit
Arrangements have been timely made as required by the Code, ERISA, and
other
applicable law and have otherwise been reflected on its consolidated financial
statements included in its SEC Filings. Except as otherwise set forth in
paragraph (3), none of its Benefit Arrangements or its ERISA Affiliates’ Benefit
Arrangements, has an “accumulated funding deficiency” (whether or not waived)
within the meaning of Section 412 of the Code or Section 302 of ERISA
and none of its ERISA Affiliates has an outstanding funding waiver. Neither
it
nor any of its Subsidiaries has provided, or is required to provide, security
to
any of its Pension Plans or to any single-employer plan of any of its ERISA
Affiliates pursuant to Section 401(a)(29) of the Code.
(5) Neither
it nor any of its Subsidiaries has any obligations for post-retirement
health,
life, or any other welfare or fringe benefits under any Benefit Arrangement
or
collective bargaining agreement. Either it or its Subsidiaries may amend
or
terminate any such retiree health, life, or fringe benefit plan at any
time
without incurring any liability thereunder other than in respect of claims
incurred prior to such amendment or termination.
(6) Neither
its execution of this Agreement, the consummation of the transactions
contemplated hereby nor shareholder approval of the transactions covered
by this
Agreement will (A) entitle any of its employees or any employees of its
Subsidiaries to severance pay or any increase in severance pay,
(B) accelerate the time of payment or vesting or trigger any payment or
funding (through a grantor trust or otherwise) of compensation or benefits
under, increase the amount payable or trigger any other material obligation
pursuant to, any of its Benefit Arrangements or (C) cause any amounts to be
non-deductible under Section 280G of the Code.
(7) All
Benefit Arrangements that are subject to Section 409A of the Code are in
substantial compliance in all material respects with Section 409A of the
Code
and any regulations or regulatory guidance issued thereunder. It and its
Subsidiaries have not agreed to pay any of the taxes required to be paid
under
section 409A(a)(1) of the Code by reason of a Benefit Arrangement failing
to
comply with Section 409A of the Code and any regulations or regulatory
guidance
issued thereunder.
(8) No
oral
or written representation or communication with respect to any aspect of
a
Benefit Arrangement has been made to any employee on or before the Closing
Date
that is not in accordance with the written or otherwise preexisting terms
and
provisions of such Benefit Arrangements.
(9) All
Benefit Arrangements that are subject to the continuation coverage requirements
as set forth in Section 1001 of the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, and Sections 601 through 608 of ERISA (“COBRA”)
are in
all respects in material compliance with COBRA and the regulations promulgated
thereunder.
A-32
(10) There
has
been no amendment to, written interpretation or announcement (whether or
not
written) by it or its Subsidiaries relating to Employee participation,
coverage
or benefits under any Benefit Arrangement that would increase the expense
to it
or its Subsidiaries maintaining the Benefit Arrangements above the level
of
expenses incurred in respect thereof for the 12-month period ending on
December
31, 2006.
(n) Taxes.
(1) All
Tax Returns that are required to be filed (taking into account any extensions
of
time within which to file) by or with respect to it and its Subsidiaries
have
been duly, timely and accurately filed, (2) all Taxes shown to be due on
the Tax
Returns referred to in clause (1) have been paid in full, (3) all
Taxes that it or any of its Subsidiaries is obligated to withhold from
amounts
owing to any employee, creditor or third party have been paid over to the
proper
Governmental Authority in a timely manner, to the extent due and payable,
and
(4) no extensions or waivers of statutes of limitation have been given by
or requested with respect to any of its U.S. federal income taxes or those
of
its Subsidiaries. In the case of Parent, it has made provision in accordance
with GAAP, in the financial statements included in the SEC Filings filed
on or
before the date hereof, for all Taxes that accrued on or before the end
of the
most recent period covered by its SEC Filings filed before the date hereof.
In
the case of Company, it has made provision in accordance with GAAP, in
each of
Company Financial Statements delivered on or before the date of this Agreement,
for all Taxes that accrued on or before the ending date of such Company
Financial Statement. No Liens for Taxes exist with respect to any of its
assets
or properties or those of its Subsidiaries, except for statutory Liens
for Taxes
not yet due and payable or that are being contested in good faith and reserved
for in accordance with GAAP. Neither it nor any of its Subsidiaries has
been a
party to any distribution occurring during the two-year period prior to
the date
of this Agreement in which the parties to such distribution treated the
distribution as one to which Section 355 of the Code applied, except for
distributions occurring among members of the same group of affiliated
corporations filing a consolidated federal income tax return.
(o) Books
and Records.
Its
books and records and those of its Subsidiaries have been fully, properly
and
accurately reflect in all material respects the transactions and obligations
to
which it or its Subsidiaries is a party, there are no material inaccuracies
or
discrepancies of any kind contained or reflected therein, and such books
and
records have been and are accurate and comply in all material respects
with
applicable legal, regulatory and accounting requirements.
(p) Takeover
Laws and Provisions.
It has
taken all action required to be taken by it in order to exempt this Agreement
and the transactions contemplated hereby from, and this Agreement and the
transactions contemplated hereby are exempt from, the requirements of any
“moratorium,” “interested shareholder,” “control share,” “fair price,”
“affiliate transaction,” “business combination” or other anti-takeover laws and
regulations of any state (collectively, “Takeover
Laws”),
including Chapter 43 of the IBCL. It has taken all action required to be
taken
by it in order to make this Agreement and the transactions contemplated
hereby
comply with, and this Agreement and the transactions contemplated hereby
do
comply with, the requirements of any Articles, Sections or provisions of
its
Constituent Documents concerning “business combination,” “fair price,” “voting
requirement,” “constituency requirement” or other related provisions
(collectively, “Takeover
Provisions”).
(q) Financial
Advisors.
None of
it, its Subsidiaries or any of their officers, directors or employees has
employed any broker or finder or incurred any liability for any brokerage
fees,
commissions or finder’s fees in connection with the transactions contemplated
herein, except that Company has retained Renninger & Associates, LLC as its
financial advisor and Austin
A-33
Financial
Services, Inc. to render a fairness opinion, the arrangements with which
have
been disclosed to Parent prior to the date hereof. Company agrees the payment
of
any fee owing to Renninger & Associates, LLC and Austin Financial Services,
Inc. are the responsibility of Company, and that such fees will be paid
in full
prior to the Effective Time. As of the date of this Agreement, Company
has
received an oral opinion of Austin Financial Services, Inc., issued to
Company,
to the effect that the Merger Consideration is fair from a financial point
of
view to holders of Company Common Stock.
(r) Labor
Matters.
Neither
it nor any of its Subsidiaries is a party to, or is bound by, any collective
bargaining agreement, contract or other agreement or understanding with
a labor
union or labor organization, nor is it or any of its subsidiaries the subject
of
a proceeding asserting that it or any such subsidiary has committed an
unfair
labor practice (within the meaning of the National Labor Relations Act)
or
seeking to compel it or such subsidiary to bargain with any labor organization
as to wages and conditions of employment, nor is there any strike or other
labor
dispute involving it or any of its subsidiaries, pending or, to the best
of its
knowledge, threatened, nor is it aware, as of the date of this Agreement,
of any
activity involving it or any of its subsidiaries’ employees seeking to certify a
collective bargaining unit or engaging in any other organization activity.
There
is no employment-related charge, complaint, grievance, investigation, inquiry
or
obligation of any kind, pending or threatened in any forum, relating to
an
alleged violation or breach by Company or any of its Subsidiaries (or its
or
their officers or directors) of any law, regulation or contract; and to
the
knowledge of Company, no employee or agent of Company, or any of its
Subsidiaries has committed any act or omission giving rise to material
liability
for any such violation or breach.
(s) Environmental
Matters.
There
are no proceedings, claims, actions, or investigations of any kind, pending
or
threatened, in any court, agency, or other governmental authority or in
any
arbitral body against it, arising under any Environmental Laws; there is
no
reasonable basis for any such proceeding, claim, action or investigation;
there
are no agreements, orders, judgments or decrees by or with any court, regulatory
agency or other governmental authority, imposing liability or obligation
on it
under or in respect of any Environmental Laws; there are and have been
no
Materials of Environmental Concern or other conditions at any property
(owned,
operated, or otherwise used by it or any of its subsidiaries); and there
are no
reasonably anticipated future events, conditions, circumstances, practices,
plans, or legal requirements that could give rise to obligations or liabilities
to it under any Environmental Laws.
(t) Intellectual
Property.
In the
case of Company only:
(1) It
and
its Subsidiaries own, or are licensed or otherwise possess sufficient legally
enforceable rights to use, all Intellectual Property (including Technology
Systems) that is used by it and its Subsidiaries in their respective businesses
as currently conducted. Neither it nor any of its Subsidiaries has (A)
licensed
any Intellectual Property owned by it or its Subsidiaries in source code
form to
any person or (B) entered into any exclusive agreements relating to Intellectual
Property owned by it or its Subsidiaries.
(2) It
and
its Subsidiaries have not infringed or otherwise violated the Intellectual
Property rights of any third person. There is no claim asserted, or to
its
knowledge threatened, against it and its Subsidiaries or any indemnitee
thereof
concerning the ownership, validity, registrability, enforceability,
infringement, use or licensed right to use any Intellectual
Property.
A-34
(3) No
third
person has infringed, misappropriated or otherwise violated it or its
Subsidiaries' Intellectual Property rights. There are no claims asserted
or
threatened by it or its Subsidiaries, or decided by them to be asserted
or
threatened, that (A) a third person infringed or otherwise violated any
of their
Intellectual Property rights or (B) a third person's owned or claimed
Intellectual Property interferes with, infringes, dilutes or otherwise
harms any
of their Intellectual Property rights.
(4) It
and
its Subsidiaries have taken reasonable measures to protect the confidentiality
of all trade secrets that are owned, used or held by them.
(u) Merger
Sub.
In the
case of Parent only, all of the issued and outstanding capital stock of
Merger
Sub is, and at the Effective Time will be, owned by Parent or a direct
or
indirect wholly owned subsidiary of Parent. Merger Sub has not conducted
any
business prior to the date hereof and has no, and prior to the Effective
Time
will have no, assets, liabilities or obligations of any nature other than
those
incident to its formation and pursuant to this Agreement and the Merger
and the
other transactions contemplated by this Agreement.
(v) Tax
Treatment of Merger.
Neither
Parent nor Company has any knowledge of any fact or circumstance relating
to it
that would prevent the transactions contemplated by this Agreement from
qualifying as a reorganization under Section 368 of the Code.
(w) Availability
of Funds.
Except
as provided in Section 3.08(c), with respect to Parent only, it has or
will have
availability to it at the Effective Time to pay the aggregate Initial Per
Share
Cash Consideration and any cash consideration to be paid pursuant to any
Purchase Price Increase, and to pay any other amounts pursuant to this
Agreement
and to effect the transactions contemplated hereby.
ARTICLE
VI
Covenants
6.01 Reasonable
Best Efforts.
Subject
to the terms and conditions of this Agreement, Parent,
Merger Sub
and
Company will use reasonable best efforts to take, or cause to be taken,
in good
faith, all actions, and to do, or cause to be done, all things necessary,
proper
or desirable, or advisable under applicable laws, so as to permit consummation
of the Merger as promptly as practicable and otherwise to enable consummation
of
the transactions contemplated hereby, and each will cooperate fully with,
and
furnish information to, the other party to that end.
6.02 Shareholder
Approvals.
(a) The
Company Board has authorized and approved this Agreement and the plan of
merger
it contains and adopted resolutions recommending as of the date hereof
to
Company’s shareholders approval of the plan of merger contained in this
Agreement and any other matters required to be approved or adopted in order
to
effect the Merger and other transactions contemplated hereby.
(b) Subject
to the Company’s right to terminate this Agreement pursuant to Section 8.01(a),
(b), (e) or (f), the Company Board will submit to its shareholders the
plan of
merger contained in this Agreement and any other matters required to be
approved
or adopted by shareholders in order to carry out the intentions of this
Agreement. In furtherance of that obligation, Company will take, in accordance
with applicable law and its respective Constituent
A-35
Documents,
all reasonable action necessary to convene a meeting of its shareholders
(including any adjournment or postponement, the “Company
Meeting”),
as
promptly as reasonably practicable, to consider and vote upon approval
of the
plan of merger as well as any other such matters required to be approved
or
adopted in order to effect the Merger and other transactions contemplated
hereby. The Company Board will use reasonable best efforts to obtain from
its
shareholders the requisite vote approving the plan of merger contained
in this
Agreement, including a recommendation that its respective shareholders
vote in
favor of the Merger.
(c) In
connection with the Company Meeting, Company shall prepare and distribute
to its
shareholders as soon as reasonably practicable a proxy statement and other
proxy
solicitation materials soliciting proxies from the holders of Company Common
Stock in favor of the approval of the Merger (the “Proxy
Statement”)
and
all related documents. Each party will cooperate, and will cause its
Subsidiaries to cooperate, with the other party, its counsel and
representatives, in the preparation of the Proxy Statement. Company shall
cooperate and provide Parent with a reasonable opportunity to review and
comment
on the Proxy Statement and any amendment or supplement thereto prior to
submitting such to the Company shareholders. Each of Parent, Merger Sub
and
Company agrees that none of the information supplied or to be supplied
by it to
be included or incorporated by reference in the Proxy Statement will at
the date
of mailing to Company’s shareholders or at the time of the meeting of Company’s
shareholders held for the purpose of obtaining the shareholders
approval of the Merger and any other matters required to be approved or
adopted
in order to effect the Merger and other transactions contemplated
hereby,
contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they are made, not misleading.
Parent, Merger Sub and Company each further agrees that if it becomes aware
that
any information furnished by it would cause any of the statements in the
Proxy
Statement to be false or misleading with respect to any material fact,
or to
omit to state any material fact necessary to make the statements therein
not
false or misleading, to promptly inform the other party thereof and to
take
appropriate steps to correct the Proxy Statement.
6.03 SEC
Filings.
(a) Parent,
Merger Sub and Company will cooperate in ensuring that all filings required
under SEC Rules 165 and 425 are timely and properly made. Parent will
prepare a registration statement on Form S-4 or other applicable form
(the “Registration
Statement”)
to be
filed by Parent with the SEC in connection with the issuance of Parent
Common
Stock in the Merger. Each party will cooperate, and will cause its Subsidiaries
to cooperate, with the other party, its counsel and its accountants, in
the
preparation of the Registration Statement, and, provided
that the
parties and their respective Subsidiaries have cooperated as required above,
Parent agrees to file the Registration Statement with the SEC as promptly
as
reasonably practicable. Parent will use reasonable best efforts to cause
the
Registration Statement to be declared effective under the Securities Act
as
promptly as reasonably practicable after filing thereof and to maintain
the
effectiveness of such Registration Statement until the Effective Time.
Each
party shall cooperate and provide the other party with a reasonable opportunity
to review and comment on any amendment or supplement to the Registration
Statement prior to filing such with the SEC, and each party will provide
the
other party with a copy of all such filings with the SEC. Parent also agrees
to
use reasonable best efforts to obtain all necessary state securities law
or
“Blue Sky” permits and approvals required to carry out the transactions
contemplated hereby. Company agrees to furnish to Parent all information
concerning Company, its Subsidiaries, officers, directors and shareholders
as
may be reasonably requested in connection with the foregoing.
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(b) Parent
and Company each agrees, as to itself and its Subsidiaries, that none of
the
information supplied or to be supplied by it for inclusion or incorporation
by
reference in the Registration Statement will, at the time the Registration
Statement and each amendment or supplement thereto, if any, becomes effective
under the Securities Act, contain any untrue statement of a material fact
or
omit to state any material fact required to be stated therein or necessary
to
make the statements therein not misleading. Parent and Company each further
agrees that if it becomes aware that any information furnished by it would
cause
any of the statements in the Registration Statement to be false or misleading
with respect to any material fact, or to omit to state any material fact
necessary to make the statements therein not false or misleading, to promptly
inform the other party thereof and to take appropriate steps to correct
the
Registration Statement.
(c) Parent
will advise Company, promptly after Parent receives notice thereof, of
the time
when the Registration Statement has become effective or any supplement
or
amendment has been filed, of the issuance of any stop order or the suspension
of
the qualification of Parent Common Stock for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of
the
Registration Statement or for additional information.
6.04 Company
Financial Statements.
As
promptly as practicable after the date hereof, Company shall cause to be
prepared and delivered to Parent the 2006 Audited Financial Statements.
As
promptly as practicable after each fiscal quarter end, Company shall cause
to be
prepared and delivered to Parent the relevant Subsequent Interim Financial
Statements.
6.05 Press
Releases.
Parent
and Company will consult with each other before issuing any press release,
written employee communication or other written shareholder communication
with
respect to the Merger or this Agreement and will not issue any such
communication or make any such public statement without the prior consent
of the
other party, which will not be unreasonably withheld or delayed; provided,
that
a party may, without the prior consent of the other party (but after prior
consultation, to the extent practicable in the circumstances), issue such
communication or make such public statement as may be required by applicable
law
or securities exchange rules. Parent and Company will cooperate to develop
all
public communications and make appropriate members of management available
at
presentations related to the transactions contemplated hereby as reasonably
requested by the other party.
6.06 Access;
Information.
(a) Each
of
Parent
and
Company agrees that upon reasonable notice and subject to applicable laws
relating to the exchange of information, it will (and will cause its
Subsidiaries to) afford the other party, and the other party’s officers,
employees, counsel, accountants and other authorized Representatives, such
access during normal business hours throughout the period before the Effective
Time to the books, records (including Tax Returns and work papers of independent
auditors), properties, personnel and to such other information as the other
party may reasonably request and, during such period, it will furnish promptly
to the other party (1) a copy of each report, schedule and other document
filed by it pursuant to the requirements of federal or state securities
or
banking laws, and (2) all other information concerning the business,
properties and personnel of it as the other may reasonably request. Neither
Parent
nor
Company will be required to afford access or disclose information that
would
jeopardize attorney-client privilege, contravene any binding agreement
with any
third party, or violate any law or regulation. The parties will make appropriate
substitute arrangements in circumstances where the previous sentence
applies.
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(b) Each
party will hold any information which is nonpublic and confidential to
the
extent required by, and in accordance with, the Confidentiality Agreement
between Parent and Company (the “Confidentiality
Agreement”).
(c) No
investigation by Parent or Company of the business and affairs of the other
party, pursuant to this Section 6.06
or
otherwise, will affect or be deemed to modify or waive any representation,
warranty, covenant or agreement in this Agreement, or the conditions to
any
party’s obligation to consummate the transactions contemplated
hereby.
(d) Each
party hereby acknowledges that it is aware, and that it will advise its
directors, officers, employees, and agents who are informed as to the matters
which are the subject of this Agreement, that the United States securities
laws
prohibit any person who has received from an issuer or its affiliates material,
non-public information from purchasing or selling securities of such issuer
or
from communicating such information to any other person.
6.07 Acquisition
Proposals.
Company
will not, and will cause its Subsidiaries and its Subsidiaries’ officers,
directors, agents, advisors and affiliates not to, initiate, solicit, encourage
or knowingly facilitate inquiries or proposals with respect to, or engage
in any
negotiations concerning, or provide any confidential or nonpublic information
or
data to, or have any discussions with, any person relating to, any Acquisition
Proposal, except as otherwise provided herein. Nothing contained in this Section
6.07 will prohibit Company from engaging in discussions with respect to
any
unsolicited Acquisition Proposals if, in the good faith judgment of the
Board of
Directors based upon the written advice of counsel to Company, failure
to engage
in such discussions would be a breach of its fiduciary duties or any other
obligations under applicable law. Company will immediately cease and cause
to be
terminated any activities, discussions or negotiations conducted before
the date
of this Agreement with any persons other than Parent
with
respect to any Acquisition Proposal and will use its reasonable best efforts
to
enforce any confidentiality or similar agreement relating to an Acquisition
Proposal. Company will promptly (within one business day) advise Parent
following
receipt of any Acquisition Proposal and the substance thereof, and will
keep
Parent
apprised
of any related developments, discussions and negotiations on a current
basis.
6.08 Affiliate
Agreements.
Not
later than the 15th day before the date of mailing of the Proxy Statement,
Company will deliver to Parent a schedule of each person that, to the best
of
its knowledge, is or is reasonably likely to be, as of the date of the
Company
Meeting, deemed to be an “affiliate” of Company (each, a “Company
Affiliate”) as that term is used in Rule 145 under the Securities Act.
Company will use its reasonable best efforts to cause each person who may
be
deemed to be a Company Affiliate to execute and deliver to Parent and Company
on
or before the date of mailing of the Proxy Statement an agreement in
substantially the form attached hereto as Exhibit B.
6.09 Takeover
Laws and Provisions.
Neither
party will take any action that would cause the transactions contemplated
hereby
to be subject to requirements imposed by any Takeover Law and each of them
will
take all necessary steps within its control to exempt (or ensure the continued
exemption of) those transactions from, or if necessary challenge the validity
or
applicability of, any applicable Takeover Law, as now or hereafter in effect.
Neither party will take any action that would cause the transactions
contemplated hereby not to comply with any Takeover Provisions and each
of them
will take all necessary steps within its control to make those transactions
comply with (or continue to comply with) the Takeover Provisions.
6.10 Exchange
Listing.
Parent
will
use
all reasonable best efforts to cause the shares of Parent
Common
Stock to be issued in the Merger to be approved for listing on NASDAQ,
subject
to official notice of issuance, as promptly as practicable, and in any
event
before the Effective Time.
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6.11 Regulatory
Applications.
Parent
and Company and their respective Subsidiaries will cooperate and use all
reasonable best efforts to prepare as promptly as possible all documentation,
to
effect all filings and to obtain all permits, consents, approvals and
authorizations of all third parties and Governmental Authorities necessary
to
consummate the transactions contemplated hereby, (the “Requisite Regulatory
Approvals”) as promptly as practicable, and will make all necessary filings in
respect of those Requisite Regulatory Approvals as soon as practicable;
provided, that Parent shall not be required to consummate the transactions
contemplated hereby if, in the reasonable good faith judgment of Parent,
any
conditions or restrictions imposed in connection with any such Requisite
Regulatory Approval may reasonably be expected to materially impair the
ability
of Parent to consummate the transactions contemplated hereby or operate
any
business operated by Parent, Company or any of their respective Subsidiaries
following the Effective Time in substantially the same manner it has been
operated prior to the date of this Agreement (a “Burdensome Condition”). Parent
and Company will, upon request, furnish the other party with all information
concerning itself, its Subsidiaries, directors, officers and shareholders
and
such other matters as may be reasonably necessary or advisable in connection
with any filing, notice or application made by or on behalf of such other
party
or any of its Subsidiaries with or to any third party or Governmental Authority
in connection with the transactions contemplated hereby.
6.12 Indemnification.
(a) Following
the Effective Time and for a period of six years following the Effective
Time,
the Surviving Corporation shall and Parent will cause the Surviving Corporation
to, indemnify, defend and hold harmless the present and former directors
and
officers of Company and its Subsidiaries (each, an “Indemnified
Party”),
against costs or expenses (including reasonable attorneys’ fees), judgments,
fines, losses, claims, damages or liabilities as incurred, in connection
with
any claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of actions or omissions occurring
at or before the Effective Time (including the transactions contemplated
hereby), to the same extent as such persons are indemnified or have the
right to
advancement of expenses pursuant to the Constituent Documents and
indemnification agreements, if any, in effect on the date of this Agreement
with
Company and its Subsidiaries.
(b) Prior
to
the Effective Date, Company will obtain tail coverage, in addition to its
existing director and officer liability insurance coverage, to provide
director’s and officer’s liability insurance through the sixth anniversary of
the Effective Date that serves to reimburse the present and former officers
and
directors of Company or any of their respective Subsidiaries (determined
as of
the Effective Time) (as opposed to Company or such Subsidiary) with respect
to
claims against such directors and officers arising from facts or events
occurring before the Effective Time (including the transactions contemplated
hereby), which insurance will contain at least the same coverage and amounts,
and contain terms and conditions no less advantageous to the Indemnified
Party
as that coverage currently provided by Company; provided,
that
officers and directors of Company or any Subsidiary may be required to
make
application and provide customary representations and warranties to Company’s
insurance carrier for the purpose of obtaining such insurance.
(c) Any
Indemnified Party wishing to claim indemnification under
Section 6.12(a),
upon
learning of any claim, action, suit, proceeding or investigation described
above, will promptly notify Parent; provided,
that
failure so to notify will not affect the obligations of Parent under
Section 6.12(a)
unless
and to the extent that Parent is actually prejudiced as a
consequence.
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(d) If
Parent
or any of its successors or assigns consolidates with or merges into any
other
entity and is not the continuing or surviving entity of such consolidation
or
merger or transfers all or substantially all of its assets to any other
entity,
then and in each case, Parent will cause proper provision to be made so
that the
successors and assigns of Parent will assume the obligations set forth
in this
Section 6.12.
(e) The
provisions of this Section 6.12
shall
survive the Effective Time and are intended to be for the benefit of, and
will
be enforceable by, each Indemnified Party and his or her heirs and
Representatives.
(f) Parent
shall be entitled to recover from, and be reimbursed out of, the Escrow
Account
in an amount up to the Indemnity Escrow Amount for any and all losses,
liabilities (including any liabilities under Section 6.12(a) which are
not
otherwise covered by insurance), claims, expenses (including costs of
investigation and defense and reasonable attorneys’ and accountants’ fees and
expenses), or damages of any kind or nature whatsoever, whether or not
involving
a third party claim (collectively, the “Damages”) imposed upon, incurred by or
asserted against Parent or any of its subsidiaries (including but not
limited to
the Surviving Corporation), directors, officers, employees, or other
agents or
representatives, or any of their respective successors or assigns (collectively
“Parent Indemnitees”), resulting from, arising out of or based upon (X) any
claim or action (whether pending or threatened) of a type Previously
Disclosed
against the Company, or (Y) any claim or action relating to Dissenting
Shares
(D&O Claims, (X) and (Y) collectively, the “Claims”) or (Z) any breach of
any representation, warranty or covenant of Company (collectively, a
“Breach”);
provided, however, that any claim by Parent for indemnification pursuant
to this
Section 6.12(f) relating to any Claims must be made by providing notice
thereof
to the Shareholders Agent and the Escrow Agent on or before September
18, 2012,
and any claim by Parent for indemnification pursuant to this Section
6.12(f)
relating to any Breach must be made on or before the date the Escrow
Agent
releases the Purchase Price Adjustment Escrow in accordance with Section
3.07(d)
above. The amount of any Claim with respect to the Dissenting Shares
shall be
equal to the difference between the amount per Dissenting Share paid
pursuant to
Section 3.04 of this Agreement and the Initial Per Share Cash Consideration,
as
adjusted for any Purchase Price Increase or Purchase Price Decrease.
If at any
time prior to September 18, 2012 Company or Parent receives a full release
of
all Parent Indemnitees in form reasonably satisfactory to Parent, with
regard to
any Claims made or threatened prior to that date, the Escrow Agent shall
release
to the former shareholders of the Company entitled to receive payments
from the
Escrow Account pursuant to Section 3.01(a)(2) any amount remaining in
the Escrow
Account attributable to the Indemnity Escrow Amount after full payment
to Parent
of any amounts to which it is entitled under this Section 6.12(f). If
Company or
Parent does not receive such a release, then the Escrow Agent may not
release
any amount until the date which is thirty (30) days from the date on
which any
Claim is dismissed with prejudice, or determined by judge or jury and
such
dismissal or determination has become a final and non-appealable judgment.
If
Parent has not notified the Escrow Agent and the Shareholders Agent of
any Claim
prior to September 18, 2012, the Escrow Agent shall release to the former
shareholders of the Company entitled to receive payments from the Escrow
Account
pursuant to Section 3.01(a)(2) any amount remaining in the Escrow Account
attributable to the Indemnity Escrow Amount after full payment to Parent
of any
amounts to which it is entitled under this Section 6.12(f). The amounts
to be
released pursuant to this Section 6.12(f) shall be set forth in a spreadsheet,
or other form of written notice, provided jointly by Parent and the
Shareholders’ Agent to the Escrow Agent and authorizing the payment of such
specified amounts to Shareholders.
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(g) Pursuant
to Section 3.07(d) of this Agreement, in the event that the Estimated Purchase
Price set forth on the Estimated Purchase Price Statement exceeds the Purchase
Price set forth on the Final Purchase Price Adjustment Statement, then
Parent
and the Shareholders’ Agent shall execute and deliver a joint written direction
to the Escrow Agent directing the Escrow Agent to (i) distribute to Parent
an amount equal to such Purchase Price Decrease, but in no event shall
Parent be
entitled to recover an amount greater than the Purchase Price Adjustment
Escrow
Amount, and (ii) distribute any remaining Escrow Funds in excess of the
Indemnity Escrow Amount to the former holders of Company Common Stock in
accordance with the provisions of the Escrow Agreement. Upon receipt of
such
joint written direction, the Escrow Agent shall make the distributions
to such
accounts as Parent and Shareholders shall have designated to the Escrow
Agent in
writing.
(h) Pursuant
to Section 3.07(d) of this Agreement, in the event that the Purchase Price
set
forth on the Final Purchase Price Adjustment Statement exceeds the Estimated
Purchase Price set forth on the Estimated Purchase Price Statement, then
Parent
and the Shareholders’ Agent shall execute and deliver a joint written direction
to the Escrow Agent directing the Escrow Agent to (i) accept from Parent
the deposit of an amount of cash equal to the Purchase Price Increase,
and
(ii) distribute to the Shareholders all Escrow Funds other than the amount
of the Escrow Indemnity Amount, including such additional deposited cash.
Upon
receipt of such joint written direction, the Escrow Agent shall make the
distributions to such accounts as Shareholders shall have designated to
the
Escrow Agent in writing.
6.13 Employee
Matters.
(a) As
soon
as practicable after the Effective Time, Parent shall provide the employees
as
of the Effective Time of Company and its Subsidiaries (the “Covered
Employees”)
with
employee benefits and compensation plans, programs and arrangements (including
base salary, annual bonus opportunities and annual equity grants) that
are
substantially similar to those provided to similarly situated employees
of
Parent and its Subsidiaries (without regard to grandfathered benefits provided
to limited groups of employees of Parent). In addition, subject to the
terms and
conditions of Schedule
A
hereto,
after the Effective Date, a Covered Employee whose employment is terminated
due
to Merger-related elimination of the Covered Employee’s position and who
executes a valid waiver and release in a form acceptable to Parent (and
who does
not revoke such waiver and release during any applicable revocation period),
shall be entitled to receive severance payments and benefits in accordance
with
Schedule
A.
(b) Parent
shall (1) provide all Covered Employees with service credit for purposes of
eligibility (including eligibility for retirement), participation, vesting,
levels of benefits and benefit accruals, under any employee benefit or
compensation plan, program or arrangement adopted, maintained or contributed
to
by Parent or any of its Subsidiaries in which Covered Employees are eligible
to
participate, for all periods of employment with Company or any of its
Subsidiaries (or their predecessor entities) prior to the Effective Time
to the
extent credited by Company for purposes of a comparable plan (provided
that
there will be no duplication of benefits) and (2) cause any pre-existing
conditions, limitations, eligibility waiting periods or required physical
examinations under any welfare benefit plans of Parent or any of its
Subsidiaries to be waived with respect to the Covered Employees and their
eligible dependents, to the extent waived under the corresponding plan
(for a
comparable level of coverage) in which the applicable Covered Employee
participated immediately prior to the Effective Time.
(c) After
the
date of this Agreement: (i) Company shall, except as otherwise provided
in
Section 6.13(d), continue to sponsor, maintain and administer its 401(k)
plan
(the
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“401(k)
Plan”) and employee stock ownership plan (“ESOP”) in accordance with its terms
and conditions as set forth in its plan and trust documents as of the date
of
this Agreement, and in accordance with applicable law; (ii) Parent shall
continue to sponsor and maintain the 1st Source Corporation Employee Stock
Ownership and Profit Sharing Plan (the “Parent Plan”) in accordance with terms
and conditions of the Parent Plan as set forth in its plan and trust documents
as of the date of this Agreement and any amendments thereto, and in accordance
with applicable law; (iii) the Company shall fund all unpaid employee
contributions accrued through the Closing Date and owed to the 401(k) Plan,
as
well as any discretionary employer contributions to the 401(k) Plan or
ESOP
(with respect to compensation earned by participants through the Closing
Date)
determined by the Company before the Closing Date (and disclosed to Parent)
in
amounts not in excess of the discretionary employer contributions previously
made by the Company and its affiliates to the 401(k) Plan and ESOP; (iv)
Parent
shall fund all unpaid employee contributions accrued through the Closing
Date
and owed to the Parent Plan, as well as any discretionary employer contributions
(with respect to compensation earned by participants through the Closing
Date)
determined by Parent before the Closing Date in amounts not in excess of
the
discretionary employer contributions previously made by Parent to the Parent
Plan; (v) the Company shall amend the 401(k) Plan and ESOP (after Parent
has
been given the opportunity to review and comment on each such amendment),
to the
extent not amended by the Closing Date, as may be necessary to maintain
the
tax-qualification of the 401(k) Plan and ESOP and their related employee benefit
trusts for favorable income tax treatment under Sections 401(a) and 501(a)
of
the Code, respectively, and to implement the amendments referred to in
subsection (d) of this Section 6.13; (vi) Parent shall amend the Parent
Plan
(after the Company has been given the opportunity to review and comment
on each
such amendment), to the extent not amended by the Closing Date, as may
be
necessary to maintain the tax-qualification of the Parent Plan and its
related
employee benefit trust for favorable income tax treatment under Sections
401(a)
and 501(a) of the Code, respectively; (vii) Company shall do whatever the
Parent
and Company determine is necessary to correct any failures in the administration
of the 401(k) Plan and ESOP that could affect the tax qualification of
the
401(k) Plan and ESOP prior to the Closing Date, including a filing under
the
Internal Revenue Service’s Employee Plans Compliance Resolution System or the
Department of Labor’s Voluntary Fiduciary Correction Program; (viii) Company
shall pay any excise taxes due if it is determined that a prohibited transaction
has occurred in the 401(k) Plan or ESOP; and (ix) after the Closing, Parent
shall either terminate the ESOP or merge it into Parent Plan at a time
and in
the manner determined by the Parent.
(d) Immediately
prior to the Closing, the Company Board shall adopt resolutions (which
may
include appropriate amendments to the 401(k) Plan, including the full vesting
of
all 401(k) Plan participants upon termination) that terminate the 401(k)
Plan
effective immediately prior to the Closing. If any of the individual fiduciaries
responsible for administering the 401(k) Plan resign from that position
upon or
after the date of this Agreement, the Company shall appoint another individual
to that position (in the manner provided in the 401(k) Plan). Promptly
after the
Closing, Parent shall or shall cause Surviving Corporation to notify the
401(k)
Plan participants and beneficiaries of the name, address and telephone
number of
each of the fiduciaries of the 401(k) Plan to whom questions about benefits
due
under the 401(k) Plan may be directed after the Closing. Parent also shall,
or
cause Surviving Corporation to, file or cause to be filed an application
with
the IRS for a favorable determination letter to the 401(k) Plan. Following
receipt of such letter and the final liquidation of assets under the 401(k)
Plan, such assets (net of any liabilities) shall be (i) distributed to
each
participant in accordance with the applicable distribution provisions of
the
401(k) Plan, (ii) if directed by a participant, directly rolled over to
an
individual retirement arrangement or to a qualified plan of another employer
that accepts direct rollovers, or (iii) if directed by any such participant,
transferred in a direct
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rollover
to the Parent Plan; provided,
however,
that
the Parent Plan will not be obligated to accept any such rollover contributions
prior to the receipt of such favorable determination letter. Parent shall,
or
cause Subsidiary Corporation to, timely file or cause to be filed an annual
return (IRS Form 5500) for the 401(k) Plan for each plan year ending on
or after
the Closing Date for which such a return is required to be filed.
6.14 Notification
of Certain Matters.
Parent
and
Company will give prompt notice to the other of any fact, event or circumstance
known to it that (a) is reasonably likely, individually or taken together
with all other facts, events and circumstances known to it, to result in
any
Material Adverse Effect with respect to it, (b) would cause or constitute a
material breach of any of its representations, warranties, covenants or
agreements contained herein that reasonably could be expected to give rise,
individually or in the aggregate, to the failure of a condition in
Article VII or (c) could reasonably be expected to result in a change to
the investment securities portfolio policies, procedures, practices,
characteristics or composition of Company or its Subsidiaries.
6.15 Certain
Modifications; Restructuring Charges.
Company
and Parent shall consult with respect to their loan, litigation and real
estate
valuation policies and practices (including loan classifications and levels
of
reserves) and Company shall make such modifications or changes to its policies
and practices, if any, and at such date prior to the Effective Time, as
may be
mutually agreed upon. Company and Parent shall also consult with respect
to the
character, amount and timing of restructuring charges to be taken by each
of
them in connection with the transactions contemplated hereby and Company
shall
take such charges in accordance with GAAP, as may be mutually agreed upon.
No
party’s representations, warranties and covenants contained in this Agreement
shall be deemed to be untrue or breached in any respect for any purpose
as a
consequence of any modifications or changes to such policies and practices
which
may be undertaken on account of this Section 6.15.
6.16 Termination
of Agreements.
Company
shall use its commercially reasonably efforts to terminate the agreements
identified in Section 6.16
of
Company’s Disclosure Schedule, on or prior to the Closing Date.
6.17 Sale
of Certain Real Property.
Company
shall use its commercially reasonably efforts to sell in arms-length
transactions at commercially reasonable prices and other commercially reasonable
terms the real property identified in Section 6.17
of
Company’s Disclosure Schedule, on or prior to the Closing Date, subject to the
approval of Parent, which approval shall not be unreasonably
withheld.
6.18 Shareholders’
Agent.
(a) Company
has designated Wayne B. Welter as the initial “Shareholders’
Agent”
hereunder, and approval of this Agreement (including the plan of merger
contained herein) by the requisite vote of the holders of Company Common
Stock
shall constitute ratification and approval of the designation of the
Shareholders’ Agent as their true and lawful attorney-in-fact, for them in their
name and on their behalf, (i) to give and accept notice in accordance with
this Agreement and the Escrow Agreement or other agreement or document
entered
into in connection with the transactions contemplated by this Agreement
and the
Escrow Agreement, whether prior to, on or after the Effective Time, (ii) to
execute the Escrow Agreement and any other agreement or document entered
into in
connection with the transactions contemplated by this Agreement and the
Escrow
Agreement, whether prior to, on or after the Effective Time, (iii) to waive
any
provisions of any such agreements, (iv) to authorize delivery to Parent
of any
funds from the Escrow Fund in accordance with the Escrow Agreement, (v)
to
settle disputes between the parties and (vi) to perform the other duties
required of the Shareholders’ Agent under this Agreement, the Escrow Agreement
and any other agreement or document to which
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the
Shareholders’ Agent is a party. This power of attorney shall not be terminated
or otherwise affected by the disability of any holder of Company Common
Stock.
This power of attorney shall terminate only when the duties of the Shareholders’
Agent have been fully performed or upon resignation as provided below.
From and
after the Effective Time, Parent
and the Surviving Corporation shall be entitled to conclusively rely as
to any
obligation they may have hereunder to the former holders of Company Common
Stock
upon any written instruction, waiver, notice, request, demand or other
communication delivered by or on behalf of the shareholders of Company
by the
Shareholders’ Agent.
(b) In
the event of the resignation, death or incapacity of any Shareholders’ Agent, a
new Shareholders’
Agent shall
be appointed by a three (3) person committee consisting of Donna D. Welter,
Wendy N. Meyers, and Cyril J. Welter (the
“Shareholders’
Committee”).
In the event that any individual authorized hereunder as a Shareholders’
Committee member shall die, become incapacitated, resign or otherwise fail
to
act on behalf of the Shareholders for any reason, a new individual shall
be
appointed to the committee by action or written consent of persons who
held
immediately prior to the Effective Time no less than a majority of the
outstanding Company Common Stock (other than Excluded Shares) (the “Majority
Holders”),
and if none is so selected within thirty (30) days, then the Shareholders’
Committee shall be reduced by one member. The vote of the majority of the
members of the Shareholders’ Committee members shall constitute the act of the
Shareholders’ Committee. Upon formation, the Shareholders’ Committee shall
designate one member as the notice recipient and furnish such member’s contact
information to Parent. Thereafter, in each case under this Agreement whereby
Parent is required to notify, contact or otherwise provide information
or
documents to the Shareholders’
Agent, if there is no person currently serving as a Shareholders’ Agent,
such
requirement shall be satisfied by Parent’s notification, contact or provision of
information or documents to the designated Shareholders’ Committee member.
Notwithstanding the formation of the Shareholders’ Committee, nothing in this
Section 6.18(b)
shall allow any extension or delay in the period of time that the Shareholders’
Agent is
required to respond or otherwise act as set forth in this Agreement or
the
Escrow Agreement.
(c) The
Shareholders’ Agent shall have such powers and authority as are necessary to
carry out the functions assigned to it under this Agreement; provided,
however,
that the
Shareholders’ Agent will have no obligation to act on behalf of the holders of
Company Common Stock, except as expressly provided herein. The Shareholders’
Agent will have no liability to Parent, Merger Sub, Company, the Surviving
Corporation or the holders of Company Common Stock with respect to actions
taken
or omitted to be taken in its capacity as Shareholders’ Agent, except with
respect to the Shareholders’ Agent’s gross negligence or willful misconduct.
Parent shall not be liable in any way to the shareholders of Company or
Company
based on any act or omission of the Shareholders’ Agent relating to this
Agreement or the Escrow Agreement. The Shareholders’ Agent will at all times be
entitled to rely on any directions received from the Majority Holders;
provided,
however,
that the
Shareholders’ Agent shall not be required to seek or follow any such direction,
and shall be under no obligation to take any action in its capacity as
Shareholders’ Agent, unless the Shareholders’ Agent is holding funds delivered
to it under this Agreement or the Escrow Agreement and/or has been provided
with
other funds, security or indemnities which, in the sole determination of
the
Shareholders’ Agent, are sufficient to protect the Shareholders’ Agent against
the losses which may be incurred by the Shareholders’ Agent in responding to
such direction or taking such action. The Shareholders’ Agent shall be entitled
to engage such counsel, experts and other agents and consultants as it
shall
deem necessary in connection with exercising its powers and performing
its
function hereunder and (in the absence of bad faith on the part of the
Shareholders’ Agent) shall be entitled to conclusively rely on the opinions and
advice of such persons. Any expenses
A-44
incurred
by the Shareholders’ Agent with respect to the foregoing shall be reimbursed out
of the Escrow Fund, or if such fund has been depleted, and notwithstanding
any
provision hereof to the contrary, at the instruction of the Shareholders’ Agent
out of and prior to any distributions to be made to the holders of Company
Common Stock (other than holders of Dissenting Shares) pursuant to this
Agreement or the Escrow Agreement, or such other mechanism established
by the
Shareholders’ Agent for the benefit of the holders of Company Common Stock
(other than holders of Dissenting Shares) for such purpose, and in no event
shall the Shareholders’ Agent be entitled to any other reimbursement for any
expenses from the Escrow Fund.
6.19 Current
Public Information.
Parent
agrees that it shall, for a period of three (3) years following the Effective
Time, use its best efforts to meet the current public information requirements
as set forth in paragraph (c) of Rule 144 promulgated under the Securities
Act,
and will provide those persons providing affiliate letters pursuant to
this
Agreement with such other information as they may reasonably require and
to
otherwise cooperate with such persons to facilitate any sales of Parent
Common
Stock issued to such persons pursuant to this Agreement in compliance with
the
provisions of Rule 144 and/or Rule 145 promulgated under the Securities
Act.
6.20 Parent
Stock.
Parent
and Company each agrees that it shall not, and shall cause its directors,
officers, subsidiaries and affiliates to not, directly or indirectly, take
any
action that is intended to manipulate the Closing Parent Share
Price.
ARTICLE
VII
Conditions
to the Merger
7.01 Conditions
to Each Party’s Obligation to Effect the Merger.
The
respective obligation of each of Parent,
Merger Sub and
Company to consummate the Merger is subject to the fulfillment or written
waiver
by Parent,
Merger Sub and
Company before the Effective Time of each of the following
conditions:
(b) Regulatory
Approvals.
All
Requisite Regulatory Approvals (1) shall have been obtained and shall
remain in full force and effect and all statutory waiting periods in respect
thereof shall have expired and (2) shall not include or impose a Burdensome
Condition.
(c) No
Injunction.
No
Governmental Authority of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, judgment,
decree, injunction or other order (whether temporary, preliminary or permanent)
which is in effect and precludes consummation of the Merger.
(d) Registration
Statement.
The
Registration Statement shall have become effective under the Securities
Act and
no stop order suspending the effectiveness of the Registration Statement
shall
have been issued and be in effect and no proceedings for that purpose shall
have
been initiated by the SEC and not withdrawn.
(e) Exchange
Listing.
The
shares of Parent Common Stock to be issued in the Merger shall have been
approved for listing on NASDAQ, subject to official notice of
issuance.
A-45
(f) Opinion
of Tax Counsel.
Subject
to Section 3.08(b) hereof, Parent
and Company shall have received an opinion of Krieg DeVault LLP (or
another law firm as may be mutually agree upon in writing in good faith
by
Parent and Company) dated
the
Closing Date and based on facts, representations and assumptions described
in
such opinion, to the effect that (1) the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code,
(2) Parent and Company will each be a party to that reorganization within
the meaning of Section 368(b) of the Code and (3) no gain or loss will be
recognized by shareholders of Company who receive shares of Parent Common
Stock
in exchange for their Company Common Stock, except with respect to any
cash
received. In rendering such opinion, Krieg DeVault LLP (or such other law
firm)
will be entitled to receive and rely upon customary certificates and
representations of officers of Parent and Company.
(g) Escrow
Agent and Agreement.
Parent
shall have designated the Escrow Agent, subject to the approval of Company
(which approval shall not be unreasonably withheld or delayed) and the
Escrow
Agent shall have agreed to serve in such capacity, and Parent, the Shareholders’
Agent and the Escrow Agent will have duly executed and delivered a copy
of the
Escrow Agreement.
7.02 Conditions
to Company’s Obligation.
Company’s
obligation to consummate the Merger is also subject to the fulfillment
or
written waiver by Company before the Effective Time of each of the following
conditions:
(a) Parent’s
Representations and Warranties.
The
representations and warranties of Parent in this Agreement shall be true
and
correct as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date subject to the standard
set
forth in Section 5.02;
and
Company shall have received a certificate, dated the Closing Date, signed
on
behalf of Parent by an authorized officer of Parent to that effect.
(b) Performance
of Parent’s Obligations.
Parent
shall have performed in all material respects all obligations required
to be
performed by it under this Agreement at or before the Effective Time; and
Company shall have received a certificate, dated the Closing Date, signed
on
behalf of Parent by an authorized officer of Parent to that effect.
7.03 Conditions
to Parent’s Obligation.
Parent’s
obligation to consummate the Merger is also subject to the fulfillment,
or
written waiver by Parent,
before
the Effective Time of each of the following conditions:
(a) Company’s
Representations and Warranties.
The
representations and warranties of Company in this Agreement shall be true
and
correct as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date subject to the standard
set
forth in Section 5.02;
and
Parent shall have received a certificate, dated the Closing Date, signed
on
behalf of Company by the Chief Executive Officer and Chief Financial Officer
of
Company to that effect.
(b) Performance
of Company’s Obligations.
Company
shall have performed in all material respects all obligations required
to be
performed by it under this Agreement at or before the Effective Time; and
Parent
shall have received a certificate, dated the Closing Date, signed on behalf
of
Company by the Chief Executive Officer and Chief Financial Officer of Company
to
that effect.
A-46
ARTICLE
VIII
Termination
8.01 Termination.
This
Agreement may be terminated, and the Merger may be abandoned, at any time
before
the Effective Time:
(a) Mutual
Agreement.
By
mutual agreement of the parties in writing.
(b) Breach.
By
Parent or Company, upon 60 days’ prior written notice of termination, if
there has occurred and is continuing: (1) a breach by the other party of
any representation or warranty contained herein; or (2) a breach by the
other party of any of the covenants or agreements in this Agreement;
provided,
that
such breach (under either clause (1) or (2)) would entitle the non-breaching
party not to consummate the Merger under Article VII.
(c) Delay.
By
Parent or Company, if the Effective Time has not occurred by the close
of
business on August 31, 2007 (the “Termination
Date”);
provided,
that
the right to terminate this Agreement under this Section 8.01(c)
shall
not be available to any party whose failure to comply with any provision
of this
Agreement has been the cause of, or materially contributed to, the failure
of
the Effective Time to occur on or before such date; provided,
further,
that
the Termination Date will be tolled for any period of time during which
the
Merger is enjoined by way of a temporary restraining order, injunction
or
otherwise.
(d) Denial
of Regulatory Approval.
By
Parent or Company, if the approval of any Governmental Authority required
for
consummation of the Merger and the other transactions contemplated hereby
is
denied by final, nonappealable action of such Governmental Authority;
provided,
that
the right to terminate this Agreement under this Section 8.01(d) shall not
be available to any party whose failure to comply with any provision of
this
Agreement has been the cause of, or materially contributed to, such
action.
(e) Acceptance
of Acquisition Proposal by Company.
By
Company, prior to the approval of the Merger at the Company Meeting, in
order to
concurrently enter into an agreement respecting an Acquisition Proposal
that (i)
has been received by the Company Board in compliance with Section 6.07
hereof,
and (ii) the Company Board, based
upon the written advice of counsel to Company and
after
consultation with its financial advisors and taking
into account all legal, financial, tax, regulatory and other aspects of
the
proposal (including, without limitation, any break-up fees, expense
reimbursement provisions, required financing and whether conditions to
consummation are reasonably capable of being completed) has concluded
in
good
faith that
failure to terminate this Agreement and accept the Acquisition Proposal
would be
a breach of the fiduciary duty of the Company Board or any other obligation
under applicable law;
provided,
however, that
this
Agreement may be terminated by the Company pursuant to this Section 8.01(e)
only after the fifteenth calendar day following the Company’s provision of
written notice to Parent advising Parent that the Board of Directors is
prepared
to accept an Acquisition Proposal and setting forth the material terms
and
conditions of any such Acquisition Proposal, including the amount of
consideration per share of Company Common Stock the stockholders of the
Company
will receive (valuing any non-cash consideration at what the Company Board
determines in good faith, after consultation with its independent financial
advisor, to be the fair value of the non-cash consideration) and only if
(i)
during such fifteen-calendar day period, the Company has caused its financial
and legal advisors to negotiate with Parent in good faith to make such
adjustments in the terms and conditions of this Agreement such that acceptance
of such Acquisition Proposal would no longer be in the best interests of
the
A-47
Company,
and (ii)
the Company Board has considered such adjustments in the terms and conditions
of
this Agreement resulting from such negotiations and has concluded in good
faith,
based upon consultation with its financial and legal advisers, that failure
to
terminate this Agreement and accept the Acquisition Proposal, even after
giving
effect to the adjustments proposed by Parent, would be a breach of the
fiduciary
duties of the Company Board or any other obligations under applicable laws;
and
provided
further that
such
termination shall not be effective until the Company pays the Termination
Fee in
accordance with Section 8.02(b) hereof.
(f) Acceptance
of Acquisition Proposal by Parent.
By
Company if Parent has entered into an agreement with respect to an Acquisition
Proposal which would result in the acquisition of all Parent Common Stock
by a
person or entity not an affiliate of Parent as of the date hereof.
8.02 Effect
of Termination and Abandonment.
(a) General
Provisions.
If this
Agreement is terminated and the Merger is abandoned, no party will have
any
liability or further obligation under this Agreement, except that termination
will not relieve a party from liability for any breach by it of this Agreement
and except that the first sentence of Section 5.03(q),
Section 6.06(b), this Section 8.02 and Article IX will survive
termination of this Agreement.
(b) Termination
Fee to Parent.
If the
Company terminates this Agreement pursuant to Section 8.01(e), then the
Company
shall pay Parent an amount equal to $4,500,000 in immediately available
funds by
wire-transfer to an account designated by Parent, on or prior to the earlier
of
the date on which an agreement with respect to the Acquisition Proposal
is
executed and the date on which the Acquisition Proposal is consummated.
Notwithstanding anything to the contrary contained in this Agreement, any
payment of the fee pursuant to this Section 8.02(b) shall represent the
sole
remedy for any termination of this Agreement requiring such payment and
the
Company and its Subsidiaries shall have no further liability under this
Agreement.
ARTICLE
IX
Miscellaneous
9.01 Survival.
All
representations, warranties, covenants and agreements made or undertaken
by
Parent or Company in this Agreement are material, have been relied upon
by the
other, shall survive the Effective Time, shall not merge in the performance
of
any obligation by any party, and shall terminate and expire on the date
on which
the Purchase Price Increase or Purchase Price Decrease, as applicable,
is paid
pursuant to Section 3.07. Notwithstanding anything in this Agreement to
the
contrary, this Article IX and the covenant of Parent made pursuant to Section
6.12 will survive the Effective Time.
9.02 Waiver;
Amendment.
Before
the Effective Time, any provision of this Agreement may be (a) waived by
the party benefited by the provision, but only in writing, or (b) amended
or modified at any time, but only by a written agreement executed in the
same
manner as this Agreement, except to the extent that any such amendment
would
violate applicable law or, after any approval of the plan of merger contained
in
this Agreement by the shareholders of Parent
or
Company, require submission or resubmission of this Agreement or the plan
of
merger contained herein to the shareholders of Parent
or
Company without the further approval of such shareholders.
A-48
9.03 Counterparts.
This
Agreement may be executed in one or more counterparts, each of which will
be
deemed to constitute an original.
9.04 Governing
Law.
This
Agreement is governed by, and will be interpreted in accordance with, the
laws
of the State of Indiana applicable to contracts made and to be performed
entirely within that State.
9.05 Expenses.
Except
as
set forth in Section 8.02
or the
Escrow Agreement, each party will bear all expenses incurred by it in connection
with this Agreement and the transactions contemplated hereby, and all such
expenses shall be paid or accrued prior to the Effective Time.
9.06 Notices.
All
notices, requests and other communications given or made under this Agreement
must be in writing and will be deemed given when personally delivered,
facsimile
transmitted (with confirmation) or mailed by registered or certified mail
(return receipt requested) to the persons and addresses set forth below
or such
other place as such party may specify by notice.
If
to
Company, to:
FINA
Bancorp, Inc.
14
Indiana Avenue
Valparaiso,
Indiana 46383-5699
Attention:
Wayne B.
Welter, President
Facsimile: (219)
464-3874
with
a copy to:
John
W.
Tanselle
Krieg
DeVault LLP
One
Indiana Square, Suite 2800
Indianapolis,
Indiana 46204
Facsimile: (317)
636-1507
If
to
Parent or Merger Sub, to:
1st
Source
Corporation
100
North
Michigan Street
South
Bend, Indiana 46601
Attention:
Christopher J. Murphy III, President and Chief Executive Officer
Facsimile: (574)
235-2033
with
a copy to:
Richard
L. Mintz
Barnes
& Thornburg LLP
100
North
Michigan
600
First
Source Bank Center
South
Bend, Indiana 46601
Facsimile: (574)
237-1125
A-49
If
to
the shareholders of Company or the Shareholders’ Agent:
Wayne
B.
Welter
3201
Parker Drive
Valparaiso,
IN 46383
9.07 Entire
Understanding; No Third Party Beneficiaries.
This
Agreement represents the entire understanding of Parent
and
Company regarding the transactions contemplated hereby and supersede any
and all
other oral or written agreements previously made or purported to be made,
other
than the Confidentiality Agreements. No representation, warranty, inducement,
promise, understanding or condition not set forth in this Agreement has
been
made or relied on by any party in entering into this Agreement. Except
for
Section 6.12,
which
is intended to benefit the Indemnified Parties to the extent stated, and
the
provisions of the Escrow Agreement, nothing expressed or implied in this
Agreement is intended to confer any rights, remedies, obligations or liabilities
upon any person other than Parent
and
Company.
9.08 Severability .
If
any
provision of this Agreement or the application thereof to any person or
circumstance is determined by a court of competent jurisdiction to be invalid,
void or unenforceable, the remaining provisions, or the application of
such
provision to persons or circumstances other than those as to which it has
been
held invalid or unenforceable, will remain in full force and effect and
will in
no way be affected, impaired or invalidated thereby, so long as the economic
or
legal substance of the transactions contemplated hereby is not affected
in any
manner materially adverse to any party. Upon such determination, the parties
will negotiate in good faith in an effort to agree upon a suitable and
equitable
substitute provision to effect the original intent of the parties.
9.09 Alternative
Structure.
Notwithstanding
anything to the contrary contained in this Agreement or the Confidentiality
Agreements, before the Effective Time, Parent
may
revise the structure of the Merger or otherwise revise the method of effecting
the Merger and related transactions, provided, that (1) such revision does
not alter or change the kind or amount of consideration to be delivered
to the
shareholders of Company, (2) such revision does not adversely affect the
tax consequences to the shareholders of Company; provided that, if Section
3.08(b) becomes applicable, clause (2) of this Section 9.09 shall not be
applicable, (3) such revised structure or method is reasonably capable of
consummation without significant delay in relation to the structure contemplated
herein, and (4) such revision does not otherwise cause any of the
conditions set forth in Article VII not to be capable of being fulfilled
(unless duly waived by the party entitled to the benefits thereof), other
than
Section 7.01(f) if Section 3.08(b) becomes applicable. This Agreement and any
related documents will be appropriately amended in order to reflect any
such
revised structure or method.
*******************************************
A-50
IN
WITNESS WHEREOF,
the
parties have caused this Agreement to be executed by their duly authorized
officers as of the day and year first above written.
|
1st
SOURCE CORPORATION
|
||
|
By:
|
/s/ Christopher J. Murphy III | |
|
Christopher
J. Murphy III
|
||
|
President
and Chief Executive Officer
|
||
|
HICKORY
ACQUISITION, INC.
|
||
|
By:
|
/s/ Christopher J. Murphy III | |
|
Christopher
J. Murphy III
|
||
|
President
and Chief Executive Officer
|
||
|
FINA
BANCORP, INC.
|
||
|
By:
|
/s/ Wayne B. Welter | |
|
Wayne
B. Welter, President
|
||
|
WAYNE
B. WELTER, AS SHAREHOLDERS’ AGENT
|
||
|
By:
|
/s/ Wayne B. Welter | |
|
Wayne
B. Welter, as Shareholders’ Agent
|
||
A-51
FIRST
AMENDMENT
TO
AGREEMENT
AND PLAN OF MERGER
THIS
AMENDMENT (this “Amendment”) is made as of April 10, 2007, by and among 1st
Source Corporation, an Indiana corporation (“Parent”),
FINA
Bancorp, Inc., an Indiana corporation (“Company”),
Hickory Acquisition, Inc., an Indiana corporation and a wholly owned
subsidiary
of Parent (“Merger
Sub”),
and
Wayne B. Welter, in his capacity as Shareholders’ Agent (“Agent”)
with
regard to the following facts and circumstances.
RECITALS
WHEREAS,
Parent,
Company, Merger Sub and Agent are parties to that certain AGREEMENT AND
PLAN OF
MERGER,
dated as
of February 19, 2007 (the “Original
Agreement”);
WHEREAS,
the
Original Agreement contemplates the merger of Company with and into Merger
Sub,
thereby becoming a wholly-owned subsidiary of Parent, all on the terms
and
subject to the conditions set forth in the Original Agreement (the “Merger”);
WHEREAS,
Section
7.01 (b) of the Original Agreement conditions the obligations of Parent,
Merger
Sub and Company to consummate the Merger on receipt of all “Regulatory
Approvals”
(as
defined therein) and Section 7.01 (b) of the Original Agreement contains
the
covenant of Parent and Company to use all reasonable efforts to obtain
all
Regulatory Approvals necessary for the Merger;
WHEREAS,
Section
6.12 of the Original Agreement sets forth certain obligations of Merger
Sub
after the effective time of the proposed merger (the “Effective
Time”)
to
indemnify former officers and directors of Company with respect to certain
matters arising prior to the Effective Time;
WHEREAS,
on
March 26, 2007, Parent filed with the Federal Reserve Bank of Chicago
(the
“Federal
Reserve Bank”)
its
application for approval of the Merger and on April 2, 2007 Parent received
correspondence from the Federal Reserve Bank which commented on Section
6.12 of
the Original Agreement and suggesting a specified amendment of that section;
and
WHEREAS,
Parent,
Merger Sub, Company and Agent are each willing to so amend the Original
Agreement on the terms set forth in this Amendment.
NOW,
THEREFORE,
in
consideration of the foregoing premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the
parties hereto hereby agree as follows:
Section
1. Incorporation
of Recitals.
The
foregoing recitals to this Amendment are hereby incorporated in and made
a part
of this Amendment to the same extent as if set forth in full
herein.
A-52
Section
2. Definitions.
Unless
otherwise defined in this Amendment, all capitalized terms shall have
the
meanings assigned to such terms in the Original Agreement.
Section
3. Amendment.
The
Original Agreement is amended, effective on the date of this Amendment,
as
follows:
(a) Section
6.12 Section
6.12 of the Original Agreement is herby amended by inserting as a second
and
final sentence in subsection (a) thereof the following sentence:
“Notwithstanding
any provision of this Agreement to the contrary, the indemnification
obligations
of the Surviving Corporation are limited by federal banking law and,
to the
extent that they may otherwise violate federal banking law, will be invalid
and
unenforceable.”
Section
4.
Effect on the Agreement and Plan of Merger.
Upon
the
effectiveness of this Amendment, each reference in the Original Agreement
to
“this Agreement,” “hereunder,” “hereof,” “herein” or words of similar import
shall mean and be a reference to the Original Agreement as amended by
this
Amendment. Except as specifically amended above, the Original Agreement
shall
remain in full force and effect, and is hereby ratified and
confirmed.
Section
5. Governing
Law.
This
Amendment shall be governed by and construed in accordance with the laws
of the
State of Indiana.
Section
6. Headings.
Section
headings in this Amendment are included for convenience of reference
only and
shall not constitute a part of this Amendment for any other
purpose.
Section
7. Counterparts.
This
Amendment may be executed in one or more counterparts, which taken together
shall be deemed to constitute one and the same instrument.
[REMAINDER
OF PAGE INTENTIONALLY BLANK, SIGNATURES FOLLOW]
A-53
IN
WITNESS WHEREOF,
this
Amendment has been executed as of the day and year first above
written.
|
1st
SOURCE CORPORATION
|
||
|
By:
|
/s/ Christopher J. Murphy III | |
|
Christopher
J. Murphy III
|
||
|
President
and Chief Executive Officer
|
||
|
HICKORY
ACQUISITION, INC.
|
||
|
By:
|
/s/ Christopher J. Murphy III | |
|
Christopher
J. Murphy III
|
||
|
President
and Chief Executive Officer
|
||
|
FINA
BANCORP, INC.
|
||
|
By:
|
/s/ Wayne B. Welter | |
|
Wayne
B. Welter, President
|
||
|
WAYNE
B. WELTER, AS SHAREHOLDERS’ AGENT
|
||
|
By:
|
/s/Wayne B. Welter | |
|
Wayne
B. Welter, as Shareholders’ Agent
|
||
A-54
APPENDIX
B
FAIRNESS
OPINION
May
4,
2007
Board
of
Directors
FINA
Bancorp, Inc.
14
Indiana Avenue
Valparaiso,
IN 46383
Members
of the Board:
You
have
requested our opinion, from a financial point of view, as to the fairness
to
FINA Bancorp, Inc., Valparaiso, IN and its shareholders of the terms of the
Agreement and Plan of Merger, dated February 19, 2007 among FINA Bancorp,
Inc.,
1st
Source
Corporation (South Bend, IN), Shareholders’ Agent, and Hickory Acquisition, Inc.
(”Merger Sub”). The terms of the Agreement provide for the
merger of FINA Bancorp with and into Merger Sub with Merger Sub, the surviving
corporation, a wholly owned subsidiary of 1st
Source.
Austin
Financial Services (“AFSI”) is a nationally recognized investment banking firm
specializing in the banking and financial services industry. AFSI is frequently
engaged in the valuation of businesses and securities in connection with
mergers
and acquisitions and valuations for estate, corporate and other purposes.
In the
past ten years, AFSI has not provided professional services and/or products
to
FINA Bancorp or 1st Source in the ordinary course of business. Furthermore,
AFSI does not contemplate any future business with FINA Bancorp and/or 1st
Source arising from this engagement, nor has its opinion concerning the fairness
of the Agreement been subject to indications of future business with either
FINA
Bancorp or 1st Source.
In
rendering its opinion, AFSI made the following assumptions:
|
§
|
that
the merger will be accounted for as a purchase in accordance with
generally accepted accounting
principles;
|
|
§
|
that
all material governmental, regulatory and other consents and approvals
necessary for the consummation of the merger would be obtained
without any
adverse effect on FINA Bancorp, 1st Source or on the anticipated
benefits
of the merger;
|
B-1
|
§
|
that
FINA Bancorp had provided it with all of the information prepared
by FINA
Bancorp or its other representatives that might be material to
AFSI in its
review; and
|
|
§
|
that
the financial projections it reviewed were reasonably prepared
on a basis
reflecting the best currently available estimates and judgment
of the
management of FINA Bancorp as to the future operating and financial
performance of FINA Bancorp.
|
In
connection with its opinion dated May 4, 2007, 2007, AFSI reviewed:
|
§
|
the
agreement and plan of merger;
|
|
§
|
Consolidated
Reports of Condition and Income of First National Bank, Valparaiso
for the
five years ended December 31,
2006;
|
|
§
|
Consolidated
Reports of Condition and Income of 1st
Source Bank for the year ended December 31,
2006;
|
|
§
|
the
audited financial statements of FINA Bancorp for the years ended
December 31, 2004 and 2005;
|
|
§
|
the
audited financial statements of 1st
Source for the five years ended December 31,
2006;
|
|
§
|
the
2004 and 2005 Annual Reports of 1st
Source;
|
|
§
|
the
1st
Source Corp. Consolidated 2007
plan;
|
|
§
|
the
1st
Source Corporate Plan 2010;
|
|
§
|
March
31, 2007 Consolidated Reports of Condition and Income of
First National Bank, Valparaiso;
|
|
§
|
Parent
Company Only Financial Statements of FINA Bancorp dated March 31,
2007;
|
|
§
|
Form
10-Q of 1st
Source dated September 30, 2006;
|
|
§
|
Parent
Company Only Financial Statements of FINA Bancorp dated December
31,
2006;
|
|
§
|
First
National Bank of Valparaiso Uniform Bank Performance Reports dated
December 31, 2005, September 30, 2006, December 31, 2006 and March
31,
2007;
|
|
§
|
Bank
holding FINA Bancorp Performance Report of FINA Bancorp dated September
30, 2006 and December 31, 2006;
|
|
§
|
SNL
Financial Briefing Book and SNL Interactive Briefing Book regarding
1st
Source;
|
|
§
|
other
internal financial and operating information which was provided
to AFSI by
FINA Bancorp and 1st
Source;
|
|
§
|
publicly
available information concerning certain other banks and bank holding
companies, the trading markets for their securities and the nature
and
terms of certain other merger and acquisition transactions believed
relevant to its inquiry;
|
B-2
|
§
|
the
financial terms of certain recent business combinations in the
financial
institution industry;
|
|
§
|
the
prospectus and proxy statement related to the merger transaction;
and
|
|
§
|
other
financial and operating information with respect to the business,
operations and prospects of FINA Bancorp and 1st
Source.
|
In
addition, AFSI:
|
§
|
held
discussions with members of management of FINA Bancorp and 1st
Source
regarding the historical and current business operations, financial
condition and future prospects of their respective
companies;
|
|
§
|
reviewed
the historical market prices and trading activity for the common
stock of
FINA Bancorp and 1st Source;
|
|
§
|
compared
the results of operations of FINA Bancorp and 1st Source with those
of
certain financial institutions which it deemed to be
relevant;
|
|
§
|
compared
the financial terms of the merger with the financial terms, to
the extent
publicly available, of certain other recent business combinations
of
financial institutions; and
|
|
§
|
conducted
such other studies, analyses, inquiries and examinations as AFSI
deemed
appropriate.
|
As
part
of preparing its fairness opinion, AFSI performed limited due diligence
investigations in January, 2007 including a visitation to 1st Source on January
25, 2007. As part of the due diligence, AFSI requested information regarding
the
financial condition and performance of the corporation including budgets,
an
allowance for loan losses reconciliation and delinquent loans; information
regarding pending or potential environmental, shareholder, regulatory and
general litigation or claims; information regarding any outstanding stock
options or planned programs; board and committee minutes; director meeting
information packages; information regarding regulatory administrative orders
or
other actions imposed on 1st
Source
Corporation or its affiliates; regulatory exams; and other items.
In
conjunction with the on-site review of these materials, AFSI met with
1st
Source
Corporation officers Richard Q. Stifel, Executive Vice President and Chief
Credit Officer; Larry E. Lentych, Senior Vice President, Teasurer and Chief
Financial Officer; and John B. Griffith, Senior Vice President, General Counsel
and Secretary. In addition, AFSI addressed a series of questions regarding
any
current, known or suspected and undisclosed issues or matters that would
have a
materially adverse impact on the current or future financial condition or
performance of the bank to 1st
Source
Corporation officers Lentych and Griffith.
B-3
AFSI
also
took into account its assessment of general economic, market and financial
conditions and its experience in other transactions, as well as its experience
in securities valuation and its knowledge of the banking industry generally.
AFSI's opinion was necessarily based upon conditions as they existed and
could
be evaluated on the date of the opinion and the information made available
to
AFSI through that date.
AFSI
relied upon and assumed without independent verification the accuracy and
completeness of all of the financial and other information provided to it
by
FINA Bancorp and 1st
Source
or from public sources. AFSI has not made an independent evaluation of the
assets of FINA Bancorp or 1st
Source,
but has relied upon the books and records of FINA Bancorp and 1st
Source
and the audited financial statements as presented to AFSI as the valuators
of
the fair value of FINA Bancorp. In addition, AFSI did not independently verify
and relied on and assumed that the aggregate allowances for loan losses set
forth in the balance sheets of each of FINA Bancorp and 1st
Source
were adequate to cover such losses and complied fully with applicable law,
regulatory policy and sound banking practice as of the date of such financial
statements. Furthermore, AFSI did not independently verify the carrying values
of other real estate owned or loans classified as in-substance foreclosures
of
each of FINA Bancorp and 1st
Source
and assumed that such carrying values complied fully with applicable law,
regulatory policy and sound banking practice as of the reported date. AFSI
was
not retained to and did not conduct a physical inspection of any of the
properties or facilities of FINA Bancorp or 1st
Source,
nor did AFSI make any independent evaluation or appraisal of the assets,
liabilities or prospects of FINA Bancorp or 1st
Source
or 1st Source, was not furnished with any such evaluation or appraisal, and
did
not review any individual credit files.
In
its
analyses, AFSI made numerous assumptions with respect to industry performance,
business and economic conditions, and other matters, many of which are beyond
the control of FINA
Bancorp and 1st
Source.
Any
estimates contained in AFSI's analyses are not necessarily indicative of
future
results or value, which may be significantly more or less favorable than
such
estimates. Estimates of values of companies do not purport to be appraisals
or
necessarily reflect the price at which companies or their securities actually
may be sold. No FINA Bancorp or transaction utilized in AFSI's analyses was
identical to FINA Bancorp or 1st Source or the Merger. Accordingly, such
analyses are not based solely on arithmetic calculations; rather, they involve
complex considerations and judgments concerning differences in financial
and
operating characteristics of the relevant companies, the timing of the relevant
transactions and prospective buyer interest, as well as other factors that
could
affect the public trading markets of the FINA Bancorp or companies to which
they
are being compared. None of the analyses performed by AFSI was assigned a
greater significance by AFSI than any other.
The
aggregate purchase price to be paid by 1st
Source
in the merger will be approximately $135 million, subject to adjustment in
accordance with the merger agreement. The cash portion of the merger
consideration will be between 58% and 60% of the aggregate purchase
consideration. After setting aside between $4 million and $5.5 million in
escrow
for purposes of adjusting the purchase price and providing indemnity to
1st
Source,
the balance of the purchase price will be allocated among the FINA Bancorp
shareholders based on their written elections whether to take cash or
1st
Source
common stock as consideration for their shares. Depending on the elections
by
all of the FINA Bancorp shareholders, the cash and stock consideration may
be
reallocated among the FINA Bancorp shareholders to ensure that the total
mix of
cash and stock consideration is within the parameters required by the merger
agreement. The actual number of shares to be issued by 1st
Source
in the merger will depend in part on the average closing price of 1st Source
common stock on the NASDAQ Global Select Market for the ten full trading
days
ending on the third full trading day before the completion of the merger.
B-4
Valuation
Methodology
The
following is a summary of all material analyses performed by AFSI in connection
with its written opinion provided to the FINA Bancorp board of directors
dated
May 4, 2007. The summary does not purport to be a complete description of
the
analyses performed by AFSI.
The
principal step in determining the fair market value of FINA Bancorp is to
evaluate its wholly owned subsidiary, First National Bank, Valparaiso. First
National Bank, Valparaiso represented 96.84% of the total assets (excluding
cash) of FINA Bancorp at March 31, 2007. In evaluating FINA Bancorp, AFSI
considered numerous appraisal methods and eventually determined that two
methods
were proper in calculating FINA Bancorp’s fair market value. The two selected
methods were the discounted cash flow and the adjusted book value.
Discounted
Cash Flow Approach
Using
a
discounted future cash flow analysis, AFSI projected cash flows of FINA
Bancorp’s wholly owned subsidiary bank, First National Bank (“FNB”), five years
into the future. The principal behind the discounted future cash flow analysis
is that the worth of a business is equal to the present value of the future
expected cash flows of the business. Besides determining five years of future
cash flows, AFSI also estimated First National Bank’s residual
value.
The
residual value represents the value of the institution beyond the explicit
forecast period. This value is based on the cash flow during the year following
the final projected year. The steps involved in determining First National
Bank’s value utilizing the discounted future cash flow analysis included the
following: (1) the projected earnings in excess over the amount necessary
to
maintain a 6.00% equity capital to asset ratio were added to book charges
such
as depreciation less any projected capital expenditures in order to determine
future cash flow; (2) the future cash flows were then converted to a present
value equivalent using a discount rate of 15.61%, which was determined from
the
use of the Capital Asset Pricing Model (“CAPM”); (3) the residual value was then
calculated by dividing the projected cash flows for the 6th
year by
the capitalization rate.
The
capitalization rate not only includes all aspects of the CAPM but also reflects
the long-term income growth prospects of First National Bank’s, as well as
specific FINA Bancorp risk factors; (4) the present value equivalent of the
projected residual value was calculated using the 15.61% discount rate; and
(5)
the present value of the cash flows and the residual value were added together.
The value per share of First National Bank’s common stock resulting from this
analysis was $62.96 million.
B-5
Adjusted
Book Value
AFSI
also
determined the fair market value of First National Bank’s utilizing the adjusted
book method as an alternative valuation method. The adjusted book value approach
requires a three-step process. First, the book value is determined. This
figure,
representing the summary measure of stockholders’ claims against the assets on a
historical cost basis, is derived from the March 31, 2007 balance
sheet.
Second,
assets and liabilities are restated to their fair market values. The adjusted
book value calculation considers each major asset and liability account
classification. Finally, additional “off-balance sheet” adjustments are
calculated, if necessary. The value per share of First National Bank’s common
stock resulting from this analysis was $93.83 million.
AFSI
accorded an equal weight to each of the values derived from its analysis
in
order to arrive at an aggregate value of First National Bank’s. The weightings
were based on AFSI’s review of the financial position, history and recent
performance of First National Bank’s. The sum of the weighted values, or $78.4
million, equates to the fair market value of First National Bank as of March
31,
2007.
The
sum
of the weighted values equates to the fair market value of First National
Bank
as a going concern. Subsequently, AFSI replaced the book value of First National
Bank as represented in FINA Bancorp’s March 31, 2007, parent company only
balance sheet with the fair market value of Fist National Bank. This
substitution results in a fair market value of FINA Bancorp as a going concern
of $81.0 million.
Comparable
Transactions
AFSI
also
analyzed certain other merger/acquisition transactions that have consummated
over the past two years in the Midwest (Iowa, Illinois, Indiana, Kansas,
Michigan, Minnesota, Missouri, North Dakota, Nebraska, Ohio, South Dakota,
and
Wisconsin) which involved target financial institutions with assets between
$250
million to $1 billion. AFSI compared the median transaction multiples of
book
value and earnings for these comparable transactions to FINA Bancorp’s book
value and last 12 months earnings.
These
multiples, when applied to FINA Bancorp’s book value and last 12 months earnings
as of and for the twelve months ending December 31, 2006, suggest the purchase
consideration received by FINA Bancorp would be slightly below comparable
transaction values on a book value basis adjusted for the higher ratio of
equity
to assets maintained at FINA Bancorp and well in excess of transaction values
on
an earnings basis even after adjusting for “normalized” earnings. The results
produced in this analysis do not purport to be indicative of actual value
or
expected value of FINA Bancorp shares of common stock.
B-6
Set
forth
below are the median transaction multiples:
|
Selected
Midwest
Bank
Acquisitions
|
1st
Source
Purchase
Offer
|
||||||
|
Price/Earnings
|
21.1
x
|
41.1(1
|
)
|
||||
|
Price/Book
Value
|
272.05
|
%
|
250.09%(2
|
)
|
|||
(1)
Based
on tax-adjusted earnings before securities losses
(2)
Adjusted for the higher ratio of equity to assets maintained at FINA
Bancorp
The
financial institution acquisition transactions announced for all of 2006
included in the above multiples include:
|
Buyer
Target
|
State
of
Target
|
Target
Assets
(000s)
|
Price
to
LTM
Earnings
|
Price
to
Book
Value
|
|
BancorpSouth
Inc./ City Bancorp
|
MO
|
827,343
|
20.31
|
240.42
|
|
BMO
Financial Group/ Edville Bankcorp Incorporated
|
IL
|
287,763
|
17.39
|
281.27
|
|
Castle
Creek Capital III LLC/ LDF Incorporated
|
IL
|
410,254
|
11.45
|
181.00
|
|
Castle
Creek Capital III LLC/ BB&T Bancshares Corp.
|
IL
|
438,272
|
25.53
|
265.06
|
|
Commerce
Bancshares Inc./ West Pointe Bancorp Inc.
|
IL
|
477,391
|
22.80
|
227.15
|
|
Emprise
Financial Corporation/ Prairie Capital Inc.
|
KS
|
289,492
|
NM
|
196.90
|
|
FBOP
Corp./ United Financial Holdings Inc.
|
IL
|
252,956
|
51.39
|
240.77
|
|
Fidelity
Holding Co./ Fidelity Bancshares Inc.
|
MN
|
331,086
|
NA
|
NA
|
|
Inland
Bancorp Holding Company/ Cambank Inc.
|
IL
|
303,165
|
16.72
|
279.04
|
|
Integra
Bank Corp./ Prairie Financial Corporation
|
IL
|
575,081
|
17.71
|
341.88
|
|
Marshall
& Ilsley Corp./ Trustcorp Financial Inc.
|
MO
|
705,359
|
21.74
|
355.93
|
|
Midwest
Banc Holdings Inc./ Royal American Corporation
|
IL
|
507,252
|
25.99
|
295.09
|
|
National
Bancshares Inc./ Metrocorp Inc.
|
IL
|
570,536
|
16.18
|
182.12
|
|
National
City Corp./ Forbes First Financial Corp.
|
MO
|
505,229
|
NM
|
316.14
|
|
Old
National Bancorp/ St. Joseph Capital Corp.
|
IN
|
490,906
|
27.59
|
241.84
|
|
PrivateBancorp
Inc./ Bloomfield Hills Bancorp Inc.
|
MI
|
313,523
|
19.48
|
338.91
|
|
UnionBancorp
Inc./ Centrue Financial Corporation
|
IL
|
626,303
|
NM
|
NM
|
|
Western
Illinois Bancshares/ Midwest Bank of Western IL
|
IL
|
274,115
|
20.44
|
150.00
|
|
Wintrust
Financial Corp./ Hinsbrook Bancshares Inc.
|
IL
|
506,212
|
20.40
|
321.59
|
Based
on
the results of the various analyses described above, AFSI concluded that
the
consideration to be received by FINA Bancorp shareholders under the agreement
and plan of merger is fair, from a financial point of view, to the shareholders
of FINA Bancorp.
The
opinion expressed by AFSI was based upon market, economic and other relevant
considerations as they existed and could be evaluated as of the date of the
opinion. Events occurring after the date of issuance of the opinion, including
but not limited to, changes affecting the securities markets, the results
of
operations or material changes in the assets or liabilities of FINA Bancorp
or
1st Source could materially affect the assumptions used in preparing the
opinion.
AFSI
will
receive a fee equal to $50,000.00 plus out-of-pocket expenses incurred for
all
services performed in connection with the rendering of the fairness opinion.
In
addition, FINA Bancorp has agreed to indemnify AFSI and its directors, officers
and employees, from liability in connection with the transaction, and to
hold
AFSI harmless from any losses, actions, claims, damages, expenses or liabilities
related to any of AFSI’s acts or decisions made in good faith and in the best
interest of FINA Bancorp.
On
behalf
of:
|
AFSI,
LLC
|
|
|
DBA
Austin Financial Services
|
|
 |
|
|
Craig
D. Bernard
President
|
B-7
APPENDIX
C
SHAREHOLDER
VOTING AGREEMENT
SHAREHOLDER
VOTING AGREEMENT
SHAREHOLDER
VOTING AGREEMENT, dated as of February 19, 2007 (this “Agreement”),
among
1st Source Corporation, an Indiana corporation (“Parent”),
and
the persons listed on the signature pages hereof under the heading
“Shareholders” (each, a “Shareholder”
and,
collectively, the “Shareholders”).
Parent and the Shareholders are sometimes collectively referred to herein
as the
“parties”.
W
I T
N E S S E T H :
WHEREAS,
FINA Bancorp, Inc. is a corporation organized under the laws of the State
of
Indiana (“Company”).
Each
Shareholder owns, or has the power to direct a fiduciary to vote any shares
in
which they have a beneficial interest, the number of shares of common stock,
no
par value per share, of Company that have been Previously Disclosed by
the
Company (the “Company
Common Stock”)
(such
shares being collectively referred to as the “Subject
Shares”);
WHEREAS,
concurrently with the execution and delivery of this Agreement, Company,
Parent
and Hickory Acquisition, Inc.,
a
corporation
organized under the laws of the State of Indiana and a wholly owned subsidiary
of Parent (“Merger
Sub”),
are
entering into an Agreement and Plan of Merger (as the same may from time
to time
be modified, amended, supplemented or restated, the “Merger
Agreement”)
providing for the merger of the Company with and into Merger Sub (the
“Merger”),
upon
the terms and subject to the conditions set forth therein (capitalized
terms
used but not defined herein shall have the meanings ascribed thereto in
the
Merger Agreement); and
WHEREAS,
as a condition to entering into the Merger Agreement, Parent has required
that
the Shareholders enter into this Agreement, and the Shareholders desire
to enter
into this Agreement to induce Parent to enter into the Merger
Agreement.
NOW,
THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements herein contained, and intending to be legally bound hereby,
the
parties agree as follows:
1. Covenants
of Each Shareholder.
Until
the termination of this Agreement in accordance with Section 7, each
Shareholder, severally and not jointly, agrees as follows:
(a) At
any
meeting of shareholders of Company called to vote upon the Merger and the
Merger
Agreement or at any adjournment thereof or in any other circumstances upon
which
a vote, consent or other approval (including by written consent) with respect
to
the Merger and the Merger Agreement is sought, such Shareholder shall vote
(or
cause to be voted) or direct any fiduciary to vote any shares in which
such
Shareholder has a beneficial interest, the Subject Shares in favor of the
adoption by Company of the Merger and the approval of the Merger Agreement
and
each of the transactions contemplated by the Merger Agreement.
(b) To
the
extent Shareholder has the power to elect (or cause an election to be made
with
respect to) the form of consideration into which any of the Subject Shares
will
be converted in the Merger, the Shareholder agrees to make an irrevocable
election (or to cause an irrevocable election to be made) to receive cash
in
respect of 60 percent of such Subject Shares and shares of Parent Common
Stock
in respect of 40 percent of such Subject Shares.
(c) At
any
meeting of shareholders of Company or at any adjournment thereof or in
any other
circumstances upon which a vote, consent or other approval of all or some
of the
shareholders
C-1
of
Company is sought, such Shareholder shall vote (or cause to be voted) its
Subject Shares against (i) any merger agreement or merger (other than the
Merger Agreement and the Merger), consolidation, combination, sale or transfer
of a material amount of assets, reorganization, recapitalization, dissolution,
liquidation or winding up of or by Company or any Acquisition Proposal,
and
(ii) any amendment of the Company’s articles of incorporation or by-laws or
other proposal or transaction involving Company or any of its Subsidiaries,
which amendment or other proposal or transaction would in any manner delay,
impede, frustrate, prevent or nullify the Merger, the Merger Agreement
or any of
the other transactions contemplated by the Merger Agreement or change in
any
manner the voting rights of the Company Common Stock.
(d) Except
as
provided in the following sentence of this Section 1(d), such Shareholder
agrees
not to, directly or indirectly, (i) sell, transfer, assign, grant a
participation interest in, option pledge, hypothecate or otherwise dispose
or
encumber (each, a “Transfer”)
or
enter into any agreement, option or other arrangement (including any profit
sharing arrangement) with respect to the Transfer of any Subject Shares
to any
person, other than in accordance with the Merger Agreement and other than
pursuant to pledge and similar agreements entered into in the ordinary
course of
business, or (ii) grant any proxies or deposit any Subject Shares into any
voting trust or enter into any voting arrangement, whether by proxy, voting
agreement or otherwise, with respect to any Subject Shares, other than
pursuant
to this Agreement. Notwithstanding the foregoing, such Shareholder shall
have
the right to Transfer its Subject Shares to a Permitted Transferee (as
defined
in this Section 1(d)) of such Shareholder if and only if such Permitted
Transferee shall have agreed in writing, in a manner acceptable in form
and
substance to Parent, (i) to accept such Subject Shares subject to the terms
and conditions of this Agreement, and (ii) to be bound by this Agreement
and to agree and acknowledge that such person shall constitute a Shareholder
for
all purposes of this Agreement. “Permitted
Transferee”
means,
with respect to any Shareholder, (A) any other person who becomes a
Shareholder hereunder, (B) any charitable organization described in Section
170(c) of the U.S. Internal Revenue Code of 1986, as amended, (C) any
trust, the trustees of which include only the persons named in clause (A)
or (B)
and the beneficiaries of which include only the persons named in clause
(A) or
(B), (D) any corporation, limited liability company or partnership, the
stockholders, members or general or limited partners of which include only
the
persons named in clause (A) or (B), or (E) if such Shareholder is a trust,
the beneficiary or beneficiaries authorized or entitled to receive distributions
from such trust.
(e) Subject
to the terms of Section 2, such Shareholder shall not, directly or indirectly,
initiate, solicit (including by way of furnishing information), encourage
or
respond to or take any other action knowingly to facilitate, any inquiries
or
the making of any proposal by any person (other than Parent or any Affiliate
of
Parent) with respect to Company that constitutes an Acquisition Proposal,
or
enter into or maintain or continue discussions or negotiate with any person
in
furtherance of such inquiries or to obtain any Acquisition Proposal, or
agree to
or endorse any Acquisition Proposal, or authorize or permit any person
acting on
behalf of such Shareholder to do any of the foregoing, and such Shareholder
shall not, alone or together with any other person, make an Acquisition
Proposal. If such Shareholder receives any inquiry or proposal regarding
any
Acquisition Proposal, such Shareholder shall promptly inform Parent of
such
inquiry or proposal and the details thereof.
(f) In
the
event that the Company’s board of directors or management does not call a
special meeting of the shareholders upon which a vote, consent or other
approval
of all or some of the shareholders for the Merger by May 1, 2007, unless
the
Company has terminated the Agreement pursuant to Section 8.01(e) of the
Agreement, the Shareholders shall themselves call a special meeting of
the
shareholders to approve the Merger pursuant to Article 1, Section 2 of
the
Company By-laws.
(g) Subject
to the terms of Section 2, such Shareholder further agrees not to commit
or
agrees to take any action inconsistent with the foregoing.
C-2
2. Shareholder
Capacity.
No
person executing this Agreement who is or becomes during the term hereof
a
director or officer of Company shall be deemed to make any agreement or
under-stand-ing in this Agreement in such person’s capacity as a director or
officer and nothing herein shall affect the ability of any person to take
action
on behalf of Company or any Subsidiary in its capacity as either a director
or
officer of Company or any Subsidiary thereof that is permissible under
applicable law and not otherwise prohibited under the Merger Agreement
or as
such director in its capacity as such may reasonably determine to be otherwise
necessary to comply with its fiduciary duties as a director of Company
or any
Subsidiary thereof, whether or not such actions are consistent with the
obligations of such person under this Agreement. Each Shareholder is entering
into this Agreement solely in its capacity as the record holder or beneficial
owner of such Shareholder’s Subject Shares.
3. Representations
and Warranties of Each Shareholder.
Each
Shareholder, severally and not jointly, represents and warrants to Parent
as
follows:
(a) Such
Shareholder has all requisite power and authority to enter into this Agreement
and to consummate the transactions contemplated hereby. This Agreement
has been
duly authorized, executed and delivered by such Shareholder and constitutes
a
valid and binding obligation of such Shareholder enforceable in accordance
with
its terms.
(b) Neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby and compliance with the terms hereof will
violate, conflict with or result in a breach, or constitute a default (with
or
without notice of lapse of time or both) under any provision of, any trust
agreement, loan or credit agreement, note, bond, mortgage, indenture, lease
or
other agreement, instrument, permit, concession, franchise, license, judgment,
order, notice, decree, statute, law, ordinance, rule or regulation applicable
to
such Shareholder or to such Shareholder’s property or assets, which would
adversely affect such Shareholder’s ability to perform any of its obligations
hereunder.
(c) Such
Shareholder is the record and beneficial owner of the Subject Shares set
forth
opposite such Shareholder’s name on the list Previously Disclosed to Parent and
at the time of any vote or consent pursuant to Section 1(a) or (c) or any
election pursuant to Section 1(b), the Subject Shares will be free and
clear of
any mortgage, lien, pledge, charge, encumbrance, security interest or other
adverse claim. Such Shareholder has the sole right to vote, or to dispose,
of
such Subject Shares, and none of such Subject Shares is subject to any
agreement, arrangement or restriction with respect to the voting of such
Subject
Shares, except as contemplated by this Agreement. Except for this Agreement
and
other than pledge and similar agreements entered into in the ordinary course
of
business, (i) there are no agreements or arrangements of any kind,
contingent or otherwise, obligating such Shareholder to Transfer, or cause
to be
Transferred, any of the Subject Shares, and (ii) no person (as defined in
the Merger Agreement) has any contractual or other right or obligation
to
purchase or otherwise acquire any of the Subject Shares.
(d) Such
Shareholder understands and acknowledges that Parent is entering into,
and
causing the Merger Sub to enter into, the Merger Agreement in reliance
upon such
Shareholder’s execution and delivery of this Agreement.
4. Representations
and Warranties of Parent.
Parent
hereby represents and warrants to each Shareholder that Parent has all
requisite
corporate power and authority to enter into this Agreement and to consummate
the
transactions contemplated hereby. The execution and delivery of this Agreement
by Parent, and the consummation of the transactions contemplated hereby,
have
been duly authorized by all necessary corporate action on the part of Parent.
This Agreement has been duly executed and delivered by Parent and constitutes
a
valid and binding obligation of Parent enforceable in accordance
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with
its
terms. Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby and compliance with
the
terms hereof will violate, conflict with or result in a breach, or constitute
a
default (with or without notice or lapse of time or both) under any provision
of, the articles of incorporation or bylaws of Parent or any trust agreement,
loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise, license, judgment,
order,
notice, decree, statute, law, ordinance, rule or regulation applicable
to Parent
or to Parent’s property or assets, which would adversely affect Parent’s ability
to perform any of its obligations hereunder.
5. Shareholder
Representative.
(a) Each
Shareholder hereby designates and appoints (and each permitted Transferee
of
each such Shareholder is hereby deemed to have so designated and appointed)
Wayne B. Welter (the “Shareholder
Representative”),
as
its attorney-in-fact with full power of substitution, to serve as the
representative of such Shareholder to perform all such acts as are required,
authorized or contemplated by this Agreement to be performed by such Shareholder
(including the voting of the Subject Shares in accordance with Sections
1(a) and
1(c) and the making of elections with respect to the Subject Shares in
accordance with Section 1(b)), and hereby acknowledges that the Shareholder
Representative shall be authorized to take any action so required, authorized
or
contemplated by this Agreement. Each such Shareholder further acknowledges
that
the foregoing appointment and designation shall be deemed to be coupled
with an
interest. Each such Shareholder hereby authorizes (and each such Permitted
Transferee of such Shareholder shall be deemed to have authorized) the
other
parties hereto to disregard any notices or other action taken by such
Shareholder pursuant to this Agreement, except for notices and actions
taken by
the Shareholder Representative. Parent is and will be entitled to rely
on any
action so taken or any notice given by the Shareholder Representative and
is and
will be entitled and authorized to give notices only to the Shareholder
Representative for any notice contemplated by this Agreement to be given
to any
such Shareholder. A successor to the Shareholder Representative may be
chosen by
a majority in interest of the Shareholders; provided,
that
notice thereof is given by the new Shareholder Representative to
Parent.
(b) Notwithstanding
the generality of Section 5(a), each Shareholder hereby constitutes and
appoints
the Shareholder Representative, with full power of substitution, as the
proxy
pursuant to the provisions of the IBCL and attorney of such Shareholder,
and
hereby authorizes and empowers the Shareholder Representative to represent,
vote
and otherwise act (by voting at any meeting of the shareholders of Company,
by
written consent in lieu thereof or otherwise) with respect to the Subject
Shares
owned or held by such Shareholder regarding the matters referred to in
Sections
1(a), 1(b), 1(c) and 1(d) until the termination of this Agreement, to the
same
extent and with the same effect as such Shareholder might or could do under
applicable law, rules and regulations. The proxy granted pursuant to the
immediately preceding sentence is coupled with an interest and shall be
irrevocable. Each Shareholder hereby revokes any and all previous proxies
or
powers of attorney granted with respect to any of the Subject Shares owned
or
held by such Shareholder regarding the matters referred to in Sections
1(a),
1(b) or 1(c).
6. Specific
Performance.
Each
Shareholder acknowledges and agrees that (i) the covenants, obligations and
agreements of such Shareholder contained in this Agreement relate to special,
unique and extraordinary matters, (ii) Parent is and will be relying on
such covenants in connection with entering into the Merger Agreement and
the
performance of its obligations under the Merger Agreement, and (iii) a
violation of any of the terms of such covenants, obligations or agreements
will
cause Parent irreparable injury for which adequate remedies are not available
at
law. Therefore, each Shareholder agrees that Parent shall be entitled to
an
injunction, restraining order or such other equitable relief (without the
requirement to post bond) as a court of competent jurisdiction may deem
necessary or appropriate to
C-4
restrain
such Shareholder from committing any violation of such covenants, obligations
or
agreements. These injunctive remedies are cumulative and in addition to
any
other rights and remedies Parent may have.
7. Termination.
This
Agreement shall terminate upon the earliest to occur of (A) the Effective
Time, (B) the date of the termination of the Merger Agreement or
(C) at any time upon notice by Parent to the Shareholder Representative. No
party hereto shall be relieved from any liability for breach of this Agreement
by reason of any such termination.
8. Entire
Agreement.
This
Agreement constitutes the full and entire understanding and agreement of
the
parties with respect to the subject matter hereof and thereof and supersede
any
and all prior understandings or agreements relating to the subject matter
hereof.
9. Amendments;
Waivers; Remedies.
Neither
this Agreement nor any term hereof may be amended or otherwise modified
other
than by an instrument in writing signed by Parent and the Shareholders
Representative. No provision of this Agreement may be waived, discharged
or
terminated other than by an instrument in writing signed by the party against
whom the enforcement of such waiver, discharge or termination is sought;
provided,
that
the Shareholder Representative’s authority under Section 5 hereof shall include
the authority to agree to any such waiver, discharge or termination on
behalf of
any Shareholder. No failure or delay by any party in exercising any right,
power
or privilege under this Agreement shall operate as a waiver thereof nor
shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights
and
remedies provided herein shall be cumulative and not exclusive of any rights
or
remedies provided by law.
10. Severability.
If any
term or other provision of this Agreement is invalid, illegal or incapable
of
being enforced by any rule of law, or public policy is held to be invalid
or
unenforceable for any reason, it shall be adjusted rather than voided,
if
possible, in order to achieve the intent of the parties hereto to the maximum
extent possible. In any event, the invalidity or unenforceability of any
provision of this Agreement in any jurisdiction shall not affect the validity
or
enforceability of the remainder of this Agreement in that jurisdiction
or the
validity or enforceability of this Agreement, including that provision,
in any
other jurisdiction.
11. Assignment.
This
Agreement shall not be assignable or otherwise transferable by a party
without
the prior consent of the other parties, and any attempt to so assign or
otherwise transfer this Agreement without such consent shall be void and
of no
effect; provided,
that
(i) any Permitted Transferee acquiring any Subject Shares in accordance
with Section 1(d) shall, upon the delivery of the documents contemplated
by
Section 1(d), become a “Shareholder” and (ii) Parent may, in its sole
discretion, assign or transfer all or any of its rights, interests and
obligations under this Agreement to Merger Sub or any direct or indirect
wholly
owned subsidiary of Parent. This Agreement shall be binding upon the respective
heirs, successors, legal representatives and permitted assigns of the parties
hereto. Nothing in this Agreement shall be construed as giving any person,
other
than the parties hereto and their heirs, successors, legal representatives
and
permitted assigns, any right, remedy or claim under or in respect of this
Agreement or any provision hereof.
12. Governing
Law.
This
Agreement shall be governed by, and construed in accordance with, the internal
laws of the State of Indiana applicable to contracts executed and fully
performed within such state, without regard to the conflicts of laws provisions
thereof.
13. Jurisdiction;
Waiver of Venue.
Each of
the parties hereto irrevocably and unconditionally (i) agrees that any
legal
suit, action or proceeding brought by any party hereto arising out
C-5
of
or
based upon this Agreement or the transactions contemplated hereby may be
brought
in the Courts of the State of Indiana or the United States District Court
for
the Northern District of Indiana located in St. Joseph County (each, a
“Designated
Court”),
(ii) waives, to the fullest extent it may effectively do so, any objection
which it may now or hereafter have to the laying of venue of any such proceeding
brought in any Designated Court, and any claim that any such action or
proceeding brought in any Designated Court has been brought in an inconvenient
forum, and (iii) submits to the non-exclusive jurisdiction of Designated
Courts in any suit, action or proceeding. Each of the parties agrees that
a
judgment in any suit, action or proceeding brought in a Designated Court
shall
be conclusive and binding upon it and may be enforced in any other courts
to
whose jurisdiction it is or may be subject, by suit upon such
judgment.
14. Notices.
All
notices, consents, requests, instructions, approvals and other communica-tions
given or made pursuant hereto shall be in writing and shall be deemed to
have
been duly given or made as of the date delivered or mailed if delivered
personally or mailed by registered or certified mail (postage prepaid,
return
receipt requested) to the parties at the following addresses (or at such
other
address for a party as shall be specified by like changes of address which
shall
be effective upon receipt):
If
to
Parent, to:
1st
Source Corporation
100
North Michigan Street
South
Bend, Indiana 46601
Attention: General
Counsel
with
copies to:
Barnes
& Thornburg LLP
600
1st
Source Bank Center
100
North
Michigan Street
South
Bend, Indiana 46601
Attention: Peter
G.
Trybula, Esq.
If
to any
Shareholder, to:
Wayne
Welter
3201
Parker Drive
Valparaiso,
Indiana 46383
with
a copy to:
Krieg
DeVault LLP
One
Indiana Square, Suite 2800
Indianapolis,
Indiana 46204
Attention:
John W. Tanselle, Esq.
15. Headings.
The
headings contained in this Agreement are for reference purposes only and
shall
not affect in any way the meaning or interpretation of this
Agreement.
16. Counterparts.
This
Agreement may be executed in one or more counterparts, and by the different
parties hereto in separate counterparts, each of which when executed shall
be
deemed to be an
C-6
original,
but all of which taken together shall constitute one and the same agreement.
The
exchange of copies of this Agreement and of signature pages by facsimile
or
electronic transmission shall constitute effective execution and delivery
of
this Agreement by the parties hereto, and may be used in lieu of the original
signature pages to this Agreement for all purposes.
[Signature
page follows.]
C-7
IN
WITNESS WHEREOF,
the
parties have caused this Agreement to be executed as of the date first
written
above.
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1ST
SOURCE CORPORATION
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By:
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/s/ Christopher J. Murphy III | |
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Christopher
J. Murphy III
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||
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President
and Chief Executive Officer
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||
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SHAREHOLDER
REPRESENTATIVE:
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The
undersigned hereby (i) acknowledges and accepts his appointment as
Shareholder Representative pursuant to Section 5(a) and the grant
of the
proxy referred to in Section 5(b), and (ii) agrees and confirms
that he
will vote all Subject Shares in accordance with Sections 1(a)
and 1(c) and
make all elections in respect of Subject Shares in accordance
with Section
1(b):
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| /s/ Wayne B. Welter | |
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Name:
Wayne B. Welter
|
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SHAREHOLDERS:
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| /s/ Donna D. Welter | |
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Name:
Donna D. Welter
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| /s/ Wendy N. Meyers | |
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Name:
Wendy N. Meyers
|
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| /s/ Wayne B. Welter | |
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Name:
Wayne B. Welter
|
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| /s/ Cyril J. Welter | |
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Name:
Cyril J. Welter
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C-8
APPENDIX
D
PROVISIONS
OF INDIANA LAW RELATING TO DISSENTING SHAREHOLDERS
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Title
23. Business and Other Associations
Article
1. Indiana Business Corporation Law
Chapter
44. Dissenters’ Rights
23-1-44-1
“Corporation” defined
Sec.
1. As used in this chapter, “corporation” means the issuer of the shares
held by a dissenter before the corporate action, or the surviving
or
acquiring corporation by merger or share exchange of that issuer.
23-1-44-2
“Dissenter” defined
Sec.
2. As used in this chapter, “dissenter” means a shareholder who is
entitled to dissent from corporate action under section 8 of
this chapter
and who exercises that right when and in the manner required
by sections
10 through 18 of this chapter.
23-1-44-3
“Fair value” defined
Sec.
3. As used in this chapter, “fair value”, with respect to a dissenter’s
shares, means the value of the shares immediately before the
effectuation
of the corporate action to which the dissenter objects, excluding
any
appreciation or depreciation in anticipation of the corporate
action
unless exclusion would be inequitable.
23-1-44-4
“Interest” defined
Sec.
4. As used in this chapter, “interest” means interest from the effective
date of the corporate action until the date of payment, at the
average
rate currently paid by the corporation on its principal bank
loans or, if
none, at a rate that is fair and equitable under all the circumstances.
23-1-44-5
“Record shareholder” defined
Sec.
5. As used in this chapter, “record shareholder” means the person in whose
name shares are registered in the records of a corporation or
the
beneficial owner of shares to the extent that treatment as a
record
shareholder is provided under a recognition procedure or a disclosure
procedure established under IC 23-1-30-4.
23-1-44-6
“Beneficial shareholder” defined
Sec.
6. As used in this chapter, “beneficial shareholder” means the person who
is a beneficial owner of shares held by a nominee as the record
shareholder.
23-1-44-7
“Shareholder” defined
Sec.
7. As used in this chapter, “shareholder” means the record shareholder or
the beneficial shareholder.
23-1-44-8
Right to dissent and obtain payment for shares
Sec.
8. (a) A shareholder is entitled to dissent from, and obtain
payment of
the fair value of the shareholder’s shares in the event of, any of the
following corporate actions:
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(1)
Consummation of a plan of merger to which the corporation is
a party if:
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(A)
shareholder approval is required for the merger by IC 23-1-40-3
or the
articles of incorporation; and
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(B)
the shareholder is entitled to vote on the merger.
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(2)
Consummation of a plan of share exchange to which the corporation
is a
party as the corporation whose shares will be acquired, if the
shareholder
is entitled to vote on the plan.
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(3)
Consummation of a sale or exchange of all, or substantially all,
of the
property of the corporation other than in the usual and regular
course of
business, if the shareholder is entitled to vote on the sale
or exchange,
including a sale in dissolution, but not including a sale pursuant
to
court order or a sale for cash pursuant to a plan by which all
or
substantially all of the net proceeds of the sale will be distributed
to
the shareholders within one (1) year after the date of sale.
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(4)
The approval of a control share acquisition under IC 23-1-42.
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(5)
Any corporate action taken pursuant to a shareholder vote to
the extent
the articles of incorporation, bylaws, or a resolution of the
board of
directors provides that voting or nonvoting shareholders are
entitled to
dissent and obtain payment for their shares.
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(b)
This section does not apply to the holders of shares of any class
or
series if, on the date fixed to determine the shareholders entitled
to
receive notice of and vote at the meeting of shareholders at
which the
merger, plan of share exchange, or sale or exchange of property
is to be
acted on, the shares of that class or series were:
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(1)
registered on a United States securities exchange registered
under the
Exchange Act (as defined in IC 23-1-43-9); or
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(2)
traded on the National Association of Securities Dealers, Inc.
Automated
Quotations System Over-the-Counter Markets — National Market Issues or a
similar market.
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(c)
A shareholder:
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(1)
who is entitled to dissent and obtain payment for the shareholder’s shares
under this chapter; or
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(2)
who would be so entitled to dissent and obtain payment but for
the
provisions of subsection (b); may not challenge the corporate
action
creating (or that, but for the provisions of subsection (b),
would have
created) the shareholder’s entitlement.
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23-1-44-9
Dissenters’ rights of beneficial shareholder
Sec.
9. (a) A record shareholder may assert dissenters’rights as to fewer than
all the shares registered in the shareholder’s name only if the
shareholder dissents with respect to all shares beneficially
owned by any
one (1) person and notifies the corporation in writing of the
name and
address of each person on whose behalf the shareholder asserts
dissenters’
rights. The rights of a partial dissenter under this subsection
are
determined as if the shares as to which the shareholder dissents
and the
shareholder’s other shares were registered in the names of different
shareholders.
(b)
A beneficial shareholder may assert dissenters’ rights as to shares held
on the shareholder’s behalf only if:
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(1)
the beneficial shareholder submits to the corporation the record
shareholder’s written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters’ rights; and
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(2)
the beneficial shareholder does so with respect to all the beneficial
shareholder’s shares or those shares over which the beneficial shareholder
has power to direct the vote.
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23-1-44-10
Proposed action creating dissenters’ rights; notice
Sec.
10. (a) If proposed corporate action creating dissenters’ rights under
section 8 of this chapter is submitted to a vote at a shareholders’
meeting, the meeting notice must state that shareholders are
or may be
entitled to assert dissenters’ rights under this chapter.
(b)
If corporate action creating dissenters’ rights under section 8 of this
chapter is taken without a vote of shareholders, the corporation
shall
notify in writing all shareholders entitled to assert dissenters’ rights
that the action was taken and send them the dissenters’ notice described
in section 12 of this chapter.
23-1-44-11
Proposed action creating dissenters’ rights; assertion of dissenters’
rights
Sec.
11. (a) If proposed corporate action creating dissenters’ rights under
section 8 of this chapter is submitted to a vote at a shareholders’
meeting, a shareholder who wishes to assert dissenters’ rights:
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(1)
must deliver to the corporation before the vote is taken written
notice of
the shareholder’s intent to demand payment for the shareholder’s shares if
the proposed action is effectuated; and
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(2)
must not vote the shareholder’s shares in favor of the proposed action.
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(b)
A shareholder who does not satisfy the requirements of subsection
(a) is
not entitled to payment for the shareholder’s shares under this chapter.
23-1-44-12
Dissenters’ notice; contents
Sec.
12. (a) If proposed corporate action creating dissenters’ rights under
section 8 of this chapter is authorized at a shareholders’ meeting, the
corporation shall deliver a written dissenters’ notice to all shareholders
who satisfied the requirements of section 11 of this chapter.
(b)
The dissenters’ notice must be sent no later than ten (10) days after
approval by the shareholders, or if corporate action is taken
without
approval by the shareholders, then ten (10) days after the corporate
action was taken. The dissenters’ notice must:
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(1)
state where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
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(2)
inform holders of uncertificated shares to what extent transfer
of the
shares will be restricted after the payment demand is received;
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(3)
supply a form for demanding payment that includes the date of
the first
announcement to news media or to shareholders of the terms of
the proposed
corporate action and requires that the person asserting dissenters’ rights
certify whether or not the person acquired beneficial ownership
of the
shares before that date;
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(4)
set a date by which the corporation must receive the payment
demand, which
date may not be fewer than thirty (30) nor more than sixty (60)
days after
the date the subsection (a) notice is delivered; and
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(5)
be accompanied by a copy of this chapter.
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23-1-44-13
Demand for payment and deposit of shares by shareholder
Sec.
13. (a) A shareholder sent a dissenters’ notice described in IC 23-
1-42-11 or in section 12 of this chapter must demand payment,
certify
whether the shareholder acquired beneficial ownership of the
shares before
the date required to be set forth in the dissenter’s notice under section
12(b)(3) of this chapter, and deposit the shareholder’s certificates in
accordance with the terms of the notice.
(b)
The shareholder who demands payment and deposits the shareholder’s shares
under subsection (a) retains all other rights of a shareholder
until these
rights are cancelled or modified by the taking of the proposed
corporate
action.
(c)
A shareholder who does not demand payment or deposit the shareholder’s
share certificates where required, each by the date set in the
dissenters’
notice, is not entitled to payment for the shareholder’s shares under this
chapter and is considered, for purposes of this article, to have
voted the
shareholder’s shares in favor of the proposed corporate action.
23-1-44-14
Uncertificated shares; restriction on transfer; dissenters’ rights
Sec.
14. (a) The corporation may restrict the transfer of uncertificated
shares
from the date the demand for their payment is received until
the proposed
corporate action is taken or the restrictions released under
section 16 of
this chapter.
(b)
The person for whom dissenters’ rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these
rights are
cancelled or modified by the taking of the proposed corporate
action.
23-1-44-15
Payment to dissenter
Sec.
15. (a) Except as provided in section 17 of this chapter, as
soon as the
proposed corporate action is taken, or, if the transaction did
not need
shareholder approval and has been completed, upon receipt of
a payment
demand, the corporation shall pay each dissenter who complied
with section
13 of this chapter the amount the corporation estimates to be
the fair
value of the dissenter’s shares.
(b)
The payment must be accompanied by:
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(1)
the corporation’s balance sheet as of the end of a fiscal year ending not
more than sixteen (16) months before the date of payment, an
income
statement for that year, a statement of changes in shareholders’ equity
for that year, and the latest available interim financial statements,
if
any;
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(2)
a statement of the corporation’s estimate of the fair value of the shares;
and
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(3)
a statement of the dissenter’s right to demand payment under section 18 of
this chapter.
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23-1-44-16
Failure to take action; return of certificates; new action by
corporation
Sec.
16. (a) If the corporation does not take the proposed action
within sixty
(60) days after the date set for demanding payment and depositing
share
certificates, the corporation shall return the deposited certificates
and
release the transfer restrictions imposed on uncertificated shares.
(b)
If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must
send a
new dissenters’ notice under section 12 of this chapter and repeat the
payment demand procedure.
23-1-44-17
Withholding payment by corporation; corporation’s estimate of fair value;
after-acquired shares
Sec.
17. (a) A corporation may elect to withhold payment required
by section 15
of this chapter from a dissenter unless the dissenter was the
beneficial
owner of the shares before the date set forth in the dissenters’ notice as
the date of the first announcement to news media or to shareholders
of the
terms of the proposed corporate action.
(b)
To the extent the corporation elects to withhold payment under
subsection
(a), after taking the proposed corporate action, it shall estimate
the
fair value of the shares and shall pay this amount to each dissenter
who
agrees to accept it in full satisfaction of the dissenter’s demand. The
corporation shall send with its offer a statement of its estimate
of the
fair value of the shares and a statement of the dissenter’s right to
demand payment under section 18 of this chapter.
23-1-44-18
Dissenters’ estimate of fair value; demand for payment; waiver
Sec.
18. (a) A dissenter may notify the corporation in writing of
the
dissenter’s own estimate of the fair value of the dissenter’s shares and
demand payment of the dissenter’s estimate (less any payment under section
15 of this chapter), or reject the corporation’s offer under section 17 of
this chapter and demand payment of the fair value of the dissenter’s
shares, if:
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(1)
the dissenter believes that the amount paid under section 15
of this
chapter or offered under section 17 of this chapter is less than
the fair
value of the dissenter’s shares;
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(2)
the corporation fails to make payment under section 15 of this
chapter
within sixty (60) days after the date set for demanding payment;
or
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(3)
the corporation, having failed to take the proposed action, does
not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty (60) days after
the date set
for demanding payment.
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(b)
A dissenter waives the right to demand payment under this section
unless
the dissenter notifies the corporation of the dissenter’s demand in
writing under subsection (a) within thirty (30) days after the
corporation
made or offered payment for the dissenter’s shares.
23-1-44-19
Court proceeding to determine fair value; judicial appraisal
Sec.
19. (a) If a demand for payment under IC 23-1-42-11 or under
section 18 of
this chapter remains unsettled, the corporation shall commence
a
proceeding within sixty (60) days after receiving the payment
demand and
petition the court to determine the fair value of the shares.
If the
corporation does not commence the proceeding within the sixty
(60) day
period, it shall pay each dissenter whose demand remains unsettled
the
amount demanded.
(b)
The corporation shall commence the proceeding in the circuit
or superior
court of the county where a corporation’s principal office (or, if none in
Indiana, its registered office) is located. If the corporation
is a
foreign corporation without a registered office in Indiana, it
shall
commence the proceeding in the county in Indiana where the
registered office of the domestic corporation merged with or
whose shares
were acquired by the foreign corporation was located.
(c)
The corporation shall make all dissenters (whether or not residents
of
this state) whose demands remain unsettled parties to the proceeding
as in
an action against their shares and all parties must be served
with a copy
of the petition. Nonresidents may be served by registered or
certified
mail or by publication as provided by law.
(d)
The jurisdiction of the court in which the proceeding is commenced
under
subsection (b) is plenary and exclusive. The court may appoint
one (1) or
more persons as appraisers to receive evidence and recommend
decision on
the question of fair value. The appraisers have the powers described
in
the order appointing them or in any amendment to it. The dissenters
are
entitled to the same discovery rights as parties in other civil
proceedings.
(e)
Each dissenter made a party to the proceeding is entitled to
judgment:
|
|
(1)
for the amount, if any, by which the court finds the fair value
of the
dissenter’s shares, plus interest, exceeds the amount paid by the
corporation; or
|
|
(2)
for the fair value, plus accrued interest, of the dissenter’s
after-acquired shares for which the corporation elected to withhold
payment under section 17 of this
chapter.
|
|
23-1-44-20
Costs; fees; attorney fees
Sec.
20. (a) The court in an appraisal proceeding commenced under
section 19 of
this chapter shall determine all costs of the proceeding, including
the
reasonable compensation and expenses of appraisers appointed
by the court.
The court shall assess the costs against such parties and in
such amounts
as the court finds equitable.
(b)
The court may also assess the fees and expenses of counsel and
experts for
the respective parties, in amounts the court finds equitable:
|
|
(1)
against the corporation and in favor of any or all dissenters
if the court
finds the corporation did not substantially comply with the requirements
of sections 10 through 18 of this chapter; or
|
|
(2)
against either the corporation or a dissenter, in favor of any
other
party, if the court finds that the party against whom the fees
and
expenses are assessed acted arbitrarily, vexatiously, or not
in good faith
with respect to the rights provided by this chapter.
|
|
(c)
If the court finds that the services of counsel for any dissenter
were of
substantial benefit to other dissenters similarly situated and
that the
fees for those services should not be assessed against the corporation,
the court may award to these counsel reasonable fees to be paid
out of the
amounts awarded the dissenters who were benefited.
|
APPENDIX
E
SUPPLEMENTAL
INFORMATION REGARDING 1ST SOURCE CORPORATION
Appendix
E
SUPPLEMENTAL
INFORMATION
REGARDING 1st SOURCE CORPORATION
REGARDING 1st SOURCE CORPORATION
1st
SOURCE CORPORATION
1st
Source Corporation, an Indiana corporation incorporated in 1971, is a bank
holding company headquartered in South Bend, Indiana that provides, through
our
subsidiaries (collectively referred to as "1st Source"), a broad array
of
financial products and services. 1st Source Bank ("Bank"), our principal
subsidiary, offers commercial and consumer banking services, trust and
investment management services, and insurance to individual and business
clients
through most of our 67 banking center locations in 16 counties, one Trustcorp
Mortgage office located in each state of Indiana and Ohio. 1st Source Bank
Specialty Finance Group, with 24 locations nationwide, offers specialized
financing services for new and used private and cargo aircraft, automobiles
and
light trucks for leasing and rental agencies, medium and heavy duty trucks,
construction equipment, and environmental equipment. While concentrated
in
certain equipment types, we enjoy serving a very diverse client base. We
are not
dependent upon any single industry or client. At December 31, 2006, we
had
consolidated total assets of $3.81 billion, loans and leases of $2.70 billion,
deposits of $3.05 billion, and total shareholders’ equity of $368.90 million.
Our
principal executive office is located at 100 North Michigan Street, South
Bend,
Indiana 46601 and our telephone number is 574 235-2000. Access to our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form
8-K, and all amendments to those reports is available, free of charge,
at
www.1stsource.com soon after the material is electronically filed with
the
Securities Exchange Commission (SEC). We will provide a printed copy of
any of
the aforementioned documents to any requesting shareholder.
1st
SOURCE BANK
1st
Source Bank is a wholly owned subsidiary of 1st Source Corporation that
offers a
broad range of consumer and commercial banking services through its lending
operations, retail branches, and fee based businesses.
Commercial,
Agricultural, and Real Estate Loans— 1st Source Bank provides
commercial and agriculture loans to corporations and other business clients
primarily located within our regional market area. Loans are made for a
wide
variety of general corporate purposes, including financing for industrial
and
commercial properties, financing for equipment, inventories and accounts
receivable, and acquisition financing. Other services include commercial
leasing
and cash management services.
Consumer
Services— 1st Source Bank provides a full range of consumer banking
services, including checking accounts, on-line banking, savings programs,
installment and real estate loans, home equity loans and lines of credit,
drive-in and night deposit services, safe deposit facilities, automated
teller
machines, overdraft facilities, debit and credit card services, and brokerage
services.
Trust
Services— 1st Source Bank provides a wide range of trust, investment,
agency, and custodial services for individual and corporate clients. These
services include the administration of estates and personal trusts, as
well as
the management of investment accounts for individuals, employee benefit
plans,
and charitable foundations.
Specialty
Finance Group Services— 1st Source Bank, through its Specialty Finance
Group, provides a broad range of comprehensive lease and equipment finance
products addressing the financing needs of diverse companies. This Group
can be
broken down into four areas: auto, light truck, and environmental equipment
financing; medium and heavy duty truck financing; aircraft financing; and
construction equipment financing.
Auto,
light truck, and environmental equipment financing consists of financings
to
automobile rental and leasing companies, light truck rental and leasing
companies, and environmental equipment companies. Auto, light truck, and
environmental equipment finance receivables generally range from $50,000
to $15
million with fixed or variable interest rates and terms of two to seven
years.
Medium
and heavy duty truck financing consists of financings for highway tractors
and
trailers and delivery trucks to the commercial trucking industry. Medium
and
heavy duty truck finance receivables generally range from $50,000 to $15
million
with fixed or variable interest rates and terms of two to seven
years.
Aircraft
financing consists of financings for new and used aircraft for individual
and
corporate aircraft users, aircraft dealers, charter operators, and air
cargo
carriers. Aircraft finance receivables generally range from $100,000 to
$15
million with fixed or variable interest rates and terms of two to ten
years.
E-1
Construction
equipment financing includes financing of equipment (i.e., asphalt and
concrete
plants, bulldozers, excavators, cranes, and loaders, etc.) to the construction
industry. Construction equipment finance receivables generally range from
$100,000 to $15 million with fixed or variable interest rates and terms
of three
to seven years.
We
also
generate equipment rental income through the leasing of construction equipment,
various trucks, and other equipment to clients through operating
leases.
SPECIALITY
FINANCE GROUP SUBSIDIARIES
The
Specialty Finance Group also consists of separate wholly owned subsidiaries
of
1st Source Bank which include: Michigan Transportation Finance Corporation,
1st
Source Specialty Finance, Inc., SFG Equipment Leasing, Inc., 1st Source
Intermediate Holding, LLC, 1st Source Commercial Aircraft Leasing, Inc.,
and SFG
Equipment Leasing Corporation I.
TRUSTCORP
MORTGAGE COMPANY
Trustcorp
Mortgage Company (Trustcorp) is a mortgage banking company with one office
in
Indiana and one office in Ohio and is a wholly owned subsidiary of 1st
Source
Corporation. Trustcorp provides real estate mortgage loan services primarily
in
the one-to-four family residential housing market. Most of the residential
mortgages originated and/or purchased are sold into the secondary market
and
serviced by Trustcorp.
1st
SOURCE INSURANCE, INC.
1st
Source Insurance, Inc. is a wholly owned subsidiary of 1st Source Bank
that
provides insurance services to individuals and businesses covering corporate
and
personal property products, casualty insurance products, and individual
and
group health and life insurance products.
1st
SOURCE CORPORATION INVESTMENT ADVISORS, INC.
1st
Source Corporation Investment Advisors, Inc. is a wholly owned subsidiary
of 1st
Source Bank that provides investment advisory services to trust and investment
clients of 1st Source Bank and to the 1st Source Monogram Funds. 1st
Source Corporation Investment Advisors, Inc. is
registered as an investment advisor with the Securities and Exchange
Commision under the Investment Advisors Act of 1940. 1st Source Corporation
Investment Advisors, Inc. serves strictly in an advisory capacity and,
as such,
does not hold any client securities.
OTHER
CONSOLIDATED SUBSIDIARIES
We
have
various other subsidiaries that are not significant to the consolidated
entity.
1st
SOURCE CAPITAL TRUST II, III, AND IV
Our
unconsolidated subsidiaries include, 1st Source Capital Trust II, III,
and IV
(1st Source Capital Trust I was dissolved on May 26, 2005). These subsidiaries
were created for the purposes of issuing $17.25 million, $10.00 million,
and
$30.00 million of trust preferred securities, respectively, and lending
the
proceeds to 1st Source. We guarantee, on a limited basis, payments of
distributions on the trust preferred securities and payments on redemption
of
the trust preferred securities.
COMPETITION
The
activities in which we and the Bank engage are highly competitive. These
activities and the geographic markets served involve competition with other
banks, some of which are affiliated with large bank holding companies
headquartered outside of our principal market. We generally compete on
the basis
of client service and responsiveness to client needs, available loan and
deposit
products, the rates of interest charged on loans and leases, the rates
of
interest paid for funds, other credit and service charges, the quality
of
services rendered, the convenience of banking facilities, and in the case
of
loans and leases to large commercial borrowers, relative lending
limits.
In
addition to competing with other banks within our primary service areas,
the
Bank also competes with other financial service companies, 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 our
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 us in providing some services.
E-2
We
compete against these financial institutions by offering a full array of
products and highly personalized services. We also rely on our history
in our
core market dating back to 1863, as well as, relationships that long-term
colleagues have with our clients, and the capacity we have for quick local
decision-making.
EMPLOYEES
At
December 31, 2006, we had approximately 1,200 employees on a full-time
equivalent basis. We provide a wide range of employee benefits and consider
employee relations to be good.
REGULATION
AND SUPERVISION
General—
1st Source and the Bank are extensively regulated under Federal and State
law.
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 our business and our prospective
business. Our operations may be affected by legislative changes and by
the
policies of various regulatory authorities. We are unable to predict the
nature
or the extent of the effects on our business and earnings that fiscal or
monetary policies, economic controls, or new Federal or State legislation
may
have in the future.
We
are a
registered bank holding company under the Bank Holding Company Act of 1956
(BHCA) and, as such, we are subject to regulation, supervision, and examination
by the Board of Governors of the Federal Reserve System (Federal Reserve).
We
are 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 and member of the Federal Reserve System, is supervised
by the Indiana Department of Financial Institutions (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 Federal Deposit
Insurance Corporation (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
Holding Company Act— Under the BHCA, as amended, our activities are
limited to business so closely related to banking, managing, or controlling
banks as to be a proper incident thereto. We are 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. At December 31,
2006,
the Bank was categorized as "well capitalized," meaning that its total
risk-based capital ratio exceeded 10.00%, its Tier 1 risk-based capital
ratio
exceeded 6.00%, its leverage ratio exceeded 5.00%, and it was not subject
to a
regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure.
Federal
Deposit Insurance Reform Act— On February 1, 2006, Congress approved
the Federal Deposit Insurance Reform Act of 2005 (FDIRA). Among other things,
the FDIRA provides for the merger of the Bank Insurance Fund with the Savings
Association Insurance Fund and for an immediate increase in Federal deposit
insurance for certain retirement accounts up to $250,000. The statute further
provides for the indexing of the maximum deposit insurance coverage for
all
types of deposit accounts in the future to account for inflation. The FDIRA
also
requires the FDIC to provide certain banks and thrifts that were in existence
prior to December 31, 1996 with one-time credits against future premiums
based
on the amount of their payments to the Bank Insurance Fund or Savings
Association Insurance Fund prior to that date.
Securities
and Exchange Commission (SEC) and The Nasdaq Stock Market
(Nasdaq)— We are under the jurisdiction of the SEC and certain
state securities commissions for matters relating to the offering and sale
of
our securities and our investment advisory services. We are subject to
the
disclosure and regulatory requirements of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, as administered
by
the SEC. We are listed on the Nasdaq Global Select Market under the trading
symbol "SRCE," and we are subject to the rules of Nasdaq for listed companies.
E-3
Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994— Congress
enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994
(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 it 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 (EGRPRA) was signed
into
law on September 30, 1996. Among other things, EGRPRA streamlined the
non-banking activities application process for well-capitalized and well-managed
bank holding companies.
Gramm-Leach-Bliley
Act of 1999— The Gramm-Leach-Bliley Act of 1999 (GLBA) 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 GLBA
establishes a new type of bank holding company, known as a financial holding
company, which 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 GLBA 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 GLBA 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 activities that are not financial in nature, 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 GLBA regarding activities
that
may be conducted through a financial subsidiary directly apply only to
national
banks, those provisions indirectly apply to state-chartered banks. In addition,
the Bank is subject to other provisions of the GLBA, including those relating
to
CRA and privacy, regardless of whether we elect to become a financial holding
company or to conduct activities through a financial subsidiary of the
Bank. We
do not, however, currently intend to file notice with the Board to become
a
financial holding company or to engage in expanded financial activities
through
a financial subsidiary of the Bank.
Financial
Privacy— In accordance with the GLBA, Federal banking regulators
adopted rules that limit the ability of banks and other financial institutions
to disclose non-public information about customers to nonaffiliated third
parties. These limitations require disclosure of privacy policies to consumers
and, in some circumstances, allow consumers to prevent disclosure of certain
personal information to a nonaffiliated third party. The privacy provisions
of
the GLBA affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors.
USA
Patriot Act of 2001— The USA Patriot Act of 2001 (USA Patriot Act) was
signed into law primarily as a result of the terrorist attacks of September
11,
2001. The USA Patriot Act is comprehensive anti-terrorism legislation that,
among other things, substantially broadened the scope of anti-money laundering
laws and regulations by imposing significant new compliance and due diligence
obligations on financial institutions.
The
regulations adopted by the United States Treasury Department under the
USA
Patriot Act impose new obligations on financial institutions to maintain
appropriate policies, procedures and controls to detect, prevent and report
money laundering, and terrorist financing. Additionally, the regulations
require
that we, upon request from the appropriate Federal regulatory agency, provide
records related to anti-money laundering, perform due diligence of private
banking and correspondent accounts, establish standards for verifying customer
identity, and perform other related duties.
Failure
of a financial institution to comply with the USA Patriot Act's requirements
could have serious legal and reputational consequences for the
institution.
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 capital falls below the minimum levels established
by
these guidelines, a bank holding company or bank will be required to submit
an
acceptable plan for achieving compliance with the capital guidelines and
will be
subject to denial of applications and appropriate supervisory enforcement
actions. The various regulatory capital requirements that we are subject
to are
disclosed in Part II, Item 8, Financial Statements and Supplementary Data
— Note
Q of the Notes to Consolidated Financial Statements. Our management believes
that the risk-weighting of assets and the risk-based capital guidelines
does not
have a material adverse impact on our operations or on the operations of
the
Bank.
E-4
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. Federal banking regulators are required
to
consider a financial institution's performance in these areas as they review
applications filed by the institution to engage in mergers or acquisitions
or 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 1st
Source or our subsidiaries, or investments in our securities and on the
use of
our securities as collateral for loans to any borrowers. These regulations
and
restrictions may limit our ability to obtain funds from the Bank for our
cash
needs, including funds for acquisitions and for payment of dividends, interest
and operating expenses. Further, the BHCA, certain regulations of the Federal
Reserve, state laws and many other Federal laws govern the extensions of
credit
and generally prohibit a bank from extending credit, engaging in a lease
or sale
of property, or furnishing services to a customer on the condition that
the
customer obtain additional services from the bank’s holding company or from one
of its subsidiaries.
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 at least as stringent
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 account deposits. Reserves
of
3.00% must be maintained against net transaction accounts greater than
$7.80
million and less than $48.3 million (subject to adjustment by the Federal
Reserve) and reserves of 10.00% must be maintained against that portion
of net
transaction accounts in excess of $48.3 million.
Dividends
— The ability of the Bank to pay dividends and management fees is
limited by various state and Federal laws, by certain covenant agreements,
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
we engage 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 and leases
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 our future business and earnings, and the effect on the future business
and
earnings of the Bank cannot be predicted.
Sarbanes-Oxley
Act of 2002— On July 30, 2002, the Sarbanes-Oxley Act of 2002 (SOA) was
signed into law. The SOA's stated goals include enhancing corporate
responsibility, increasing penalties for accounting and auditing improprieties
at publicly traded companies and protecting investors by improving the
accuracy
and reliability of corporate disclosures pursuant to the securities laws.
The
SOA generally applies to all companies that file or are required to file
periodic reports with the SEC under the Securities Exchange Act of 1934
(Exchange Act.)
Among
other things, the SOA creates the Public Company Accounting Oversight Board
as
an independent body subject to SEC supervision with responsibility for
setting
auditing, quality control, and ethical standards for auditors of public
companies. The SOA also requires public companies to make faster and
more-extensive financial disclosures, requires the chief executive officer
and
the chief financial officer of public companies to provide signed certifications
as to the accuracy and completeness of financial information filed with
the SEC,
and provides enhanced criminal and civil penalties for violations of the
Federal
securities laws.
The
SOA
also addresses functions and responsibilities of audit committees of public
companies. The statute, by mandating certain stock exchange listing
rules, makes the audit committee directly responsible for the appointment,
compensation, and oversight of the work of the company's outside auditor,
and
requires the auditor to report directly to the audit committee. The SOA
authorizes each audit committee to engage independent counsel and other
advisors, and requires a public company to provide the appropriate funding,
as
determined by its audit committees, to pay the company's auditors and any
advisors that its audit committee retains. The SOA also requires public
companies to include an internal control report and assessment by management,
along with an attestation to this report prepared by the company's registered
public accounting firm, in their annual reports to stockholders.
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. We cannot
predict whether or in what form any proposals will be adopted or the extent
to
which our business may be affected thereby.
E-5
Our
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. Also, in 1982, we sold the building and entered
into a
leaseback agreement with the purchaser for a term of 30 years. The building
is a
structure of approximately 160,000 square feet, with 1st Source and our
subsidiaries occupying approximately 70% of the available office space
and
approximately 30% subleased to unrelated tenants.
At
December 31, 2006, we also owned property and/or buildings on which 46
of the
Bank subsidiary’s 67 banking centers were located, including the facilities in
Allen, Elkhart, Fulton, Huntington, Kosciusko, LaPorte, Marshall, Porter,
St.
Joseph, Starke, and Wells Counties in the State of Indiana and Berrien
and Cass
Counties in the State of Michigan, as well as an operations center, training
facility, warehouse, and our former headquarters building, which is utilized
for
additional business operations. The Bank leases additional property and/or
buildings to and from third parties under lease agreements negotiated at
arms-length.
1st Source
and our subsidiaries are involved in various legal proceedings incidental
to the
conduct of our businesses. Our management does not expect that the outcome
of
any such proceedings will have a material adverse effect on our consolidated
financial position or results of operations.
The
following table summarizes our share repurchase activity during the three
months
ended December 31, 2006.
|
Issuer
Purchases of Equity Securities
|
|||||
|
|
|
||||
|
|
|
|
|
Total
Number of
|
Maximum
Number (or Approximate
|
|
|
Shares
Purchased as
|
Dollar
Value) of Shares that
|
|||
|
|
Total
Number of
|
|
Average
Price
|
Part
of Publicly Announced
|
may
yet be Purchased Under
|
|
Period
|
Shares
Purchased
|
|
Paid
Per Share
|
Plans
or Programs*
|
the
Plans or Programs
|
|
October
01 - 31, 2006
|
-
|
$
|
-
|
-
|
954,796
|
|
November
01 - 30, 2006
|
5,571
|
|
30.80
|
5,571
|
949,225
|
|
December
01 - 31, 2006
|
536
|
|
31.47
|
536
|
948,689
|
|
*1st
Source maintains a stock repurchase plan that was authorized
by the Board
of Directors on April 27, 2006. Under the terms of the plan,
1st Source
may repurchase up to
|
|||||
|
1,025,248
shares of its common stock when favorable conditions exist
on the open
market or through private transactions at various prices from
time to
time. Since the inception
|
|||||
|
of
the plan, 1st Source has repurchased a total of 76,559 shares.
|
|
||||
Federal
laws and regulations contain restrictions on the ability of 1st Source
and the
Bank to pay dividends. For information regarding restrictions on dividends,
see
Part I, Item 1, Business - Regulation and Supervision - Dividends and Part
II,
Item 8, Financial Statements and Supplementary Data - Note Q of the Notes
to
Consolidated Financial Statements.
The
purpose of this analysis is to provide the reader with information relevant
to
understanding and assessing our results of operations for each of the past
three
years and financial condition for each of the past two years. In order
to fully
appreciate this analysis the reader is encouraged to review the consolidated
financial statements and statistical data presented in this
document.
FORWARD-LOOKING
STATEMENTS
This
report, including Management’s Discussion and Analysis of Financial Condition
and Results of Operations, contains forward-looking statements. Forward-looking
statements include statements with respect to our beliefs, plans, objectives,
goals, expectations, anticipations, assumptions, estimates, intentions,
and
future performance, and involve known and unknown risks, uncertainties
and other
factors, which may be beyond our control, and which may cause actual results,
performance or achievements to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements.
E-6
All
statements other than statements of historical fact are statements that
could be
forward-looking statements. Words such as “believe”, “contemplate”, “seek”,
“estimate”, “plan”, “project”, “anticipate”, “assume”, “expect”, “intend”,
“targeted”, “continue”, “remain”, “will”, “should”, “indicate”, “would”, “may”
and other similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking
statements provide current expectations or forecasts of future events and
are
not guarantees of future performance, nor should they be relied upon as
representing management’s views as of any subsequent date. The forward-looking
statements are based on our expectations and are subject to a number of
risks
and uncertainties.
All
written or oral forward-looking statements that are made by or attributable
to
us are expressly qualified in their entirety by this cautionary notice.
We have
no obligation and do not undertake to update, revise, or correct any of
the
forward-looking statements after the date of this report, or after the
respective dates on which such statements otherwise are made. We have expressed
our expectations, beliefs, and projections in good faith and we believe
they
have a reasonable basis. However, we make no assurances that our expectations,
beliefs, or projections will be achieved or accomplished. These forward-looking
statements may not be realized due to a variety of factors, including,
without
limitation, the following:
| · |
Local,
regional, national, and international economic conditions and the
impact
they may have on us and our clients and our assessment of that
impact.
|
| · |
Changes
in the level of nonperforming assets and
charge-offs.
|
| · |
Changes
in estimates of future cash reserve requirements based upon the
periodic
review thereof under relevant regulatory and accounting
requirements.
|
| · |
The
effects of and changes in trade and monetary and fiscal policies
and laws,
including the interest rate policies of the Federal Reserve
Board.
|
| · |
Inflation,
interest rate, securities market, and monetary
fluctuations.
|
| · |
Political
instability.
|
| · |
Acts
of war or terrorism.
|
| · |
Substantial
increases in the cost of fuel.
|
| · |
The
timely development and acceptance of new products and services
and
perceived overall value of these products and services by
others.
|
| · |
Changes
in consumer spending, borrowings, and savings
habits.
|
| · |
Changes
in the financial performance and/or condition of our
borrowers.
|
| · |
Technological
changes.
|
| · |
Acquisitions
and integration of acquired businesses.
|
| · |
The
ability to increase market share and control
expenses.
|
| · |
Changes
in the competitive environment among bank holding
companies.
|
| · |
The
effect of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities, and insurance) with which
we and
our subsidiaries must comply.
|
| · |
The
effect of changes in accounting policies and practices and auditing
requirements, as may be adopted by the regulatory agencies, as
well as the
Public Company Accounting Oversight Board, the Financial Accounting
Standards Board, and other accounting standard
setters.
|
| · |
Changes
in our organization, compensation, and benefit
plans.
|
| · |
The
costs and effects of legal and regulatory developments including
the
resolution of legal proceedings or regulatory or other governmental
inquires and the results of regulatory examinations or
reviews.
|
| · |
Greater
than expected costs or difficulties related to the integration
of new
products and lines of business.
|
| · |
Our
success at managing the risks described in Item 1A. Risk
Factors.
|
EXECUTIVE
SUMMARY
Our
mission is to help individuals, institutions, businesses, and communities
achieve security, build wealth, and realize their dreams. We accomplish
our
mission by maintaining a high degree of integrity, offering outstanding
client
service, attaining superior quality in everything we do, working as a team,
and
providing leadership in the communities we serve.
We
have
established goals in our 2010 strategic plan which are being driven by
six
initiatives - develop our people; vitalize sales; roll out full services
in all
markets; open new markets; upgrade our core systems; and achieve superior
financial performance.
In
order
to meet our 2010 objectives we have focused our staff development on recruiting,
hiring, and retaining employees who share our core values of being accessible
and attentive to the needs of our clients. To vitalize sales, we opened
newly
designed banking centers to give better service and more convenience to
our
customers. We focused on small business clients and became the #1 SBA lender
in
Northern Indiana and Southwestern Michigan in 2006; and we piloted a program
of
retail bankers who became "micro-lenders" serving the needs of small business
clients. In Fort Wayne, we added private banking, agricultural and small
business banking, investment and asset management, and business banking
to our
service offerings. In our retail banking system, we added asset advisors
to
assist our clients in investments and we opened a new banking center in
our
traditional market.
E-7
In
2006,
we also focused on opening in totally new markets. To gain new clients,
we
opened a facility in Kalamazoo which will initially focus on private banking
and
small business clients; and have hired leadership for our efforts in Lafayette,
Indiana which will open in 2007. Additionally, we conducted significant
analysis
on areas within our own markets and across the country to showcase opportunities
where 1st Source might expand through de novo branching or acquisitions.
Our
goal is to find acquisition partners that are culturally similar and possess
significant market presence or have potential for improved profitability
through
financial management, economies of scale, and expanded services. Consistent
with our goal of growth market expansion, on February 19, 2007, we announced
the
agreement and plan of merger with FINA Bancorp, Inc., the parent company
of
First National Bank, Valparaiso. Pending customary closing conditions,
including
regulatory approval, we expect the merger to be completed in the second
quarter
of 2007. We believe this acquisition provides us with an opportunity to
join two
strong local banks with similar values, history, and legacies. First National
Bank, Valparaiso is located in the fastest growing area of our retail market
and
will serve as a platform for future expansion.
None
of
this can be accomplished without the proper infrastructure. We are in the
process of replacing our core accounting and management systems that will
allow
us to grow and expand by becoming more effective and efficient. A major
portion
of this will be installed during 2007.
CRITICAL
ACCOUNTING POLICIES
Our
consolidated financial statements are prepared in accordance with U. S.
generally accepted accounting principles and follow general practices within
the
industries in which we operate. Application of these principles requires
our
management to make estimates or judgments that affect the amounts reported
in
the financial statements and accompanying notes. These estimates or judgments
reflect our management’s view of the most appropriate manner in which to record
and report our overall financial performance. Because these estimates or
judgments are based on current circumstances, they may change over time
or prove
to be inaccurate based on actual experience. As such, changes in these
estimates, judgments, and/or assumptions may have a significant impact
on our
financial statements. All accounting policies are important, and all policies
described in Part II, Item 8, Financial Statements and Supplementary Data,
Note
A (Note A), should be reviewed for a greater understanding of how our financial
performance is recorded and reported.
We
have
identified three policies as being critical because they require our management
to make particularly difficult, subjective, and/or complex estimates or
judgments about matters that are inherently uncertain and because of the
likelihood that materially different amounts would be reported under different
conditions or using different assumptions. These policies relate to the
determination of the reserve for loan and lease losses, the valuation of
mortgage servicing rights, and the valuation of securities. Our management
has
used the best information available to make the estimations or judgments
necessary to value the related assets and liabilities. Actual performance
that
differs from estimates or judgments and future changes in the key variables
could change future valuations and impact net income. Our management has
reviewed the application of these policies with the Audit Committee of
the Board
of Directors. A brief discussion of our critical accounting policies appears
below.
Reserve
for Loan and Lease Losses— The reserve for loan and lease losses
represents our management’s estimate of probable losses inherent in the loan and
lease portfolio and the establishment of a reserve that is sufficient to
absorb
those losses. In determining an adequate reserve, our management makes
numerous
judgments, assumptions, and estimates based on continuous review of the
loan and
lease portfolio, estimates of future client performance, collateral values,
and
disposition, as well as historical loss rates and expected cash flows.
In
assessing these factors, our management benefits from a lengthy organizational
history and experience with credit decisions and related outcomes. Nonetheless,
if our management’s underlying assumptions prove to be inaccurate, the reserve
for loan and lease losses would have to be adjusted. Our accounting policy
related to the reserve is disclosed in Note A under the heading "Reserve
for
Loan and Lease Losses."
Mortgage
Servicing Rights Valuation— We recognize as assets the rights to
service mortgage loans for others, known as mortgage servicing rights whether
the servicing rights are acquired through purchases or through originated
loans.
Mortgage servicing rights do not trade in an active open market with readily
observable market prices. Although sales of mortgage servicing rights do
occur,
the precise terms and conditions may not be readily available. As such,
the
value of mortgage servicing assets are established and valued using discounted
cash flow modeling techniques which require management to make estimates
regarding estimated future net servicing cash flows, taking into consideration
actual and expected mortgage loan prepayment rates, discount rates, servicing
costs, and other economic factors. The expected and actual rates of mortgage
loan prepayments are the most significant factors driving the value of
mortgage
servicing assets. Increases in mortgage loan prepayments reduce estimated
future
net servicing cash flows because the life of the underlying loan is reduced.
In
determining the fair value of the mortgage servicing assets, mortgage interest
rates (which are used to determine prepayment rates), and discount rates
are
held constant over the estimated life of the portfolio. Expected mortgage
loan
prepayment rates are derived from a third-party model and adjusted to reflect
our actual prepayment experience. Mortgage servicing assets are carried
at the
lower of the initial capitalized amount, net of accumulated amortization
or fair
value. The values of these assets are sensitive to changes in the assumptions
used and readily available market pricing does not exist. The valuation
of
mortgage servicing assets is discussed further in Note A under the heading
"Mortgage Banking Activities."
Valuation
of Securities—Our available-for-sale security portfolio is reported at
fair value. The fair value of a security is determined based on quoted
market
prices. If quoted market prices are not available, fair value is determined
based on quoted prices of similar instruments. Available-for-sale and
held-to-maturity securities are reviewed quarterly for possible
other-than-temporary impairment. The review includes an analysis of the
facts
and circumstances of each individual investment such as length of time
the fair
value has been below cost, the expectation for that security's performance,
the
credit worthiness of the issuer, and our intent and ability to hold the
security
for a time necessary to recover the amortized cost. A decline in value
that is
considered to be other-than-temporary is recorded as investment securities
and
other investment losses in the Consolidated Statements of Income. The valuation
of securities is discussed further in Note A under the heading
"Securities."
E-8
EARNINGS
SUMMARY
Net
income in 2006 was $39.30 million, up from $33.75 million in 2005 and up
from
$24.97 million in 2004. We declared a 10% stock dividend on July 27, 2006;
therefore, all share and per share information has been adjusted accordingly.
Diluted net income per common share was $1.72 in 2006, $1.46 in 2005, and
$1.08
in 2004. Return on average total assets was 1.11% in 2006 compared to 1.00%
in
2005, and 0.75% in 2004. Return on average common shareholders' equity
was
10.98% in 2006 versus 10.12% in 2005, and 7.81% in 2004.
Net
income in 2006 was favorably affected by a strong increase in noninterest
income
that was primarily related to solid progress in growing our leased equipment
portfolio during the year and positive market valuation adjustments related
to
our investments in venture partnerships. Net interest income improved 8.13%
for
2006 over 2005. The improvement in net interest income was driven primarily
by
an increase in average earning assets; however, the higher cost of deposits
greatly offset the increase in average earning assets. Noninterest expense
increased moderately in 2006 as compared to 2005. Net income in 2005 was
favorably affected by a recovery in the provision for loan and lease losses,
a
reduction in loan and lease collection and repossession expense, and decreased
professional fee expense. In addition, income from deposit fees increased
and
losses on investment securities decreased notably from 2005 and 2004. Equipment
rental income decreased and depreciation on leased equipment decreased
accordingly in 2005 from 2004. We did not record any other-than-temporary
impairment on investment securities in 2006. Net income included $0.61
million
and $4.78 million of other-than-temporary impairment on investment securities,
for 2005 and 2004, respectively.
Dividends
paid on common stock in 2006 amounted to $0.534 per share, compared to
$0.445
per share in 2005, and $0.382 per share in 2004. The level of earnings
reinvested and dividend payouts are based on management’s assessment of future
growth opportunities and the level of capital necessary to support
them.
Upgrade
of Core Systems— On December 1, 2005, 1st Source Bank, entered into a
license and service agreement with Fiserv Solutions, Inc. (Fiserv), a subsidiary
of Fiserv, Inc. The agreement was an integral part of the decision we made
to
upgrade a majority of our core and ancillary data processing systems. We
expect
the completion of core systems upgrade will increase the effectiveness
and
efficiency of our operations and facilitate future growth. We also expect
that,
over time, this investment should be offset by elimination of current costs
for ongoing support of the current technology platform.
Under
the
agreement, 1st Source and our affiliates are licensing integrated core
technology and ancillary systems from Fiserv. The core technology licensing
includes a loan system, deposit system, general ledger system, and customer
information file system. Fiserv is obligated to provide professional services
for installation of the technology and training, and maintenance support
services. The agreement provides an initial five year maintenance period
to
begin no later than March 2007. The agreement provides for automatic renewal
of
the maintenance period, after the initial five year term, unless either
party
notifies the other of its intent not to renew. We are subject to termination
fees for early termination of the maintenance period. We expect the initial
cost
will be approximately $6.0 million for the technology licenses, professional
fees for installation and training, and hardware delivered under the Fiserv
agreement.
During
2006, we worked to organize the various components of this large conversion
effort. Numerous internal teams have been formed to manage the installation
and
conversion of data and various systems. Additionally, ATM networks, a voice
response unit (VRU) system, and document imaging systems have been or are
being
installed. We are relying on several third party vendors to integrate several
systems, including internet banking and cash management. Our intent is
to
convert independent systems, such as the legacy centralized information
repository and document image systems, as they are ready. Our goal is to
convert the core systems in 2007. Our timeframe for conversion could be
impacted
by the delivery of systems from outside vendors, as well as our own internal
testing. We will implement these new systems only when we are confident
and
certain of their successful conversion. We look forward to the implementation
of
new core systems and their impact on the effectiveness and efficiency of
our
operations and the increased functionality that will facilitate future
growth.
Net
Interest Income— Our primary source of earnings is net interest income,
the difference between income on earning assets and the cost of funds supporting
those assets. Significant categories of earning assets are loans and securities
while deposits and borrowings represent the major portion of interest-bearing
liabilities. For purposes of the following discussion, comparison of net
interest income is done on a tax equivalent basis, which provides a common
basis
for comparing yields on earning assets exempt from federal income taxes
to those
which are fully taxable.
Net
interest margin (the ratio of net interest income to average earning assets)
is
affected by movements in interest rates and changes in the mix of earning
assets
and the liabilities that fund those assets. Net interest margin on a fully
taxable equivalent basis was 3.29% in 2006 compared to 3.21% in 2005, and
3.25%
in 2004. Our focus on loan and lease portfolio credit quality coupled with
increased competition for deposits across all markets offset efforts to
improve
the net interest margin resulting in nominal changes in our net interest
margin
for the past three years.
Net
interest income was $106.43 million for 2006, compared to $98.43 million
for
2005. Tax-equivalent net interest income totaled $108.98 million for 2006,
an
increase of $7.88 million from the $101.10 million reported for 2005. The
increase reflects a $5.97 million increase due to increased volume and
a $1.91
million increase due to rate changes on the underlying assets and
liabilities.
E-9
During
2006, average earning assets increased $162.87 million while average
interest-bearing liabilities increased $189.66 million over the comparable
period. The yield on average earning assets increased 95 basis points to
6.38%
for 2006 from 5.43% for 2005. The rate earned on assets was positively
impacted
by the continued increases in short-term market interest rates throughout
2005
and the first two quarters of 2006. Total cost of average interest-bearing
liabilities increased 98 basis points during 2006 as liabilities were also
affected by increases in short-term market interest rates. The result was
a
decrease of three basis points to net interest spread, or the difference
between
interest income on earning assets and expense on interest-bearing liabilities.
Our tax-equivalent net interest margin of 3.29% for 2006 was a moderate
increase
from 3.21% in 2005.
The
largest contributor to the increase in the yield on average earning assets
in
2006, on a volume-weighted basis, was the $217.53 million increase in net
loans
and leases. The loan and lease portfolio contributed approximately $34.83
million to the change in interest income, while the portfolio's average
yield
increased 84 basis points from the prior year to 6.94%.
During
2006, the tax-equivalent yield on securities available for sale increased
103
basis points to 4.23% while the average balance decreased $58.51 million.
Although the portfolio decreased through the year, the average tax-equivalent
yield increased due to the addition of higher-rate securities and the maturities
of lower-rate securities. Funds received from the maturities, calls, and
sales
of investment securities helped fund loan growth.
Average
interest-bearing deposits increased $200.42 million during 2006 while the
effective rate paid on those deposits increased 98 basis points. The increase
in
the average cost of interest-bearing deposits was primarily the result
of
increases in interest rates offered on deposit products due to increases
in
short-term market interest rates and increased competition for deposits
across
all markets.
Average
demand deposits decreased $40.27 million during 2006. Much of the decline
was
attributed to fact that clients preferred the interest provided on fixed-term
Certificates on Deposit over the liquidity provided by noninterest bearing
deposit accounts and low interest bearing savings accounts.
Average
short-term borrowings decreased $29.45 million during 2006; however, the
effective rate paid increased 122 basis points. Average subordinated notes
which
represent our trust preferred borrowings remained unchanged from 2005 to
2006
while the effective rate increased 53 basis points. Interest paid on short-term
and trust preferred borrowings increased due to the interest rate increase
in
adjustable rate borrowings. Average long-term debt increased $18.68 million
during 2006 as the effective rate declined 32 basis points. The majority
of the
increase in long-term debt was made up of Federal Home Loan Bank (FHLB)
borrowings.
The
following table provides an analysis of net interest income and illustrates
interest income earned and interest expense charged for each major component
of
interest earning assets and the interest bearing liabilities. Yields/rates
are
computed on a tax-equivalent basis, using a 35% rate. Nonaccrual loans
and
leases are included in the average loan and lease balance
outstanding.
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||
|
Interest
|
Interest
|
Interest
|
||||||||||||||||||||||||||
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
|||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||
|
Investment
securities:
|
||||||||||||||||||||||||||||
|
Taxable
|
$
|
470,447
|
$
|
19,816
|
4.21
|
%
|
$
|
515,992
|
$
|
14,777
|
2.86
|
%
|
$
|
590,786
|
$
|
16,361
|
2.77
|
%
|
||||||||||
|
Tax-exempt
|
173,652
|
7,416
|
4.27
|
186,614
|
7,682
|
4.12
|
171,600
|
7,502
|
4.37
|
|||||||||||||||||||
|
Mortgages
held for sale
|
53,034
|
3,549
|
6.69
|
82,174
|
4,779
|
5.82
|
69,964
|
3,868
|
5.53
|
|||||||||||||||||||
|
Net
loans and leases
|
2,566,217
|
178,125
|
6.94
|
2,348,690
|
143,295
|
6.10
|
2,240,055
|
125,469
|
5.60
|
|||||||||||||||||||
|
Other
investments
|
51,754
|
2,632
|
5.09
|
18,765
|
666
|
3.55
|
49,585
|
952
|
1.92
|
|||||||||||||||||||
|
Total
earning assets
|
3,315,104
|
211,538
|
6.38
|
3,152,235
|
171,199
|
5.43
|
3,121,990
|
154,152
|
4.94
|
|||||||||||||||||||
|
Cash
and due from banks
|
78,365
|
84,517
|
81,334
|
|||||||||||||||||||||||||
|
Reserve
for loan and
|
||||||||||||||||||||||||||||
|
lease
losses
|
(59,082
|
)
|
(61,072
|
)
|
(69,567
|
)
|
||||||||||||||||||||||
|
Other
assets
|
217,914
|
|
197,457
|
215,607
|
||||||||||||||||||||||||
|
Total
assets
|
$
|
3,552,301
|
$
|
3,373,137
|
$
|
3,349,364
|
||||||||||||||||||||||
|
LIABILITIES
AND
|
||||||||||||||||||||||||||||
|
SHAREHOLDERS’
EQUITY
|
||||||||||||||||||||||||||||
|
Interest
bearing deposits
|
$
|
2,418,344
|
$
|
85,067
|
3.52
|
%
|
$
|
2,217,923
|
$
|
56,341
|
2.54
|
%
|
$
|
2,105,013
|
$
|
41,698
|
1.98
|
%
|
||||||||||
|
Short-term
borrowings
|
265,824
|
11,011
|
4.14
|
295,271
|
8,628
|
2.92
|
405,192
|
6,079
|
1.50
|
|||||||||||||||||||
|
Subordinated
notes
|
59,022
|
4,320
|
7.32
|
59,022
|
4,008
|
6.79
|
57,198
|
3,863
|
6.75
|
|||||||||||||||||||
|
Long-term
debt and
|
||||||||||||||||||||||||||||
|
mandatorily
redeemable
|
||||||||||||||||||||||||||||
|
securities
|
36,952
|
2,163
|
5.85
|
18,270
|
1,127
|
6.17
|
22,921
|
1,109
|
4.84
|
|||||||||||||||||||
|
Total
interest bearing liabilities
|
2,780,142
|
102,561
|
3.69
|
2,590,486
|
70,104
|
2.71
|
2,590,324
|
52,749
|
2.04
|
|||||||||||||||||||
|
Noninterest
bearing deposits
|
352,204
|
392,475
|
384,157
|
|||||||||||||||||||||||||
|
Other
liabilities
|
62,196
|
56,553
|
55,146
|
|||||||||||||||||||||||||
|
Shareholders'
equity
|
357,759
|
333,623
|
319,737
|
|||||||||||||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||||||||||||
|
shareholders’
equity
|
$
|
3,552,301
|
$
|
3,373,137
|
$
|
3,349,364
|
||||||||||||||||||||||
|
Net
interest income
|
$
|
108,977
|
$
|
101,095
|
$
|
101,403
|
||||||||||||||||||||||
|
Net
interest margin on a tax
|
||||||||||||||||||||||||||||
|
equivalent
basis
|
3.29
|
%
|
3.21
|
%
|
3.25
|
%
|
||||||||||||||||||||||
E-10
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. The following table shows changes in tax equivalent interest
earned and interest paid, resulting from changes in volume and changes in
rates:
|
Increase
(Decrease) due to
|
||||||||||
|
(Dollars
in thousands)
|
Volume
|
Rate
|
Net
|
|||||||
|
2006
compared to 2005
|
||||||||||
|
Interest
earned on:
|
||||||||||
|
Investment
securities:
|
||||||||||
|
Taxable
|
$
|
(1,169
|
)
|
$
|
6,208
|
$
|
5,039
|
|||
|
Tax-exempt
|
(568
|
)
|
302
|
(266
|
)
|
|||||
|
Mortgages
held for sale
|
(2,143
|
)
|
913
|
(1,230
|
)
|
|||||
|
Net
loans and leases
|
14,009
|
20,821
|
34,830
|
|||||||
|
Other
investments
|
1,576
|
390
|
1,966
|
|||||||
|
Total
earning assets
|
$
|
11,705
|
$
|
28,634
|
$
|
40,339
|
||||
|
Interest
paid on:
|
||||||||||
|
Interest
bearing deposits
|
$
|
5,395
|
$
|
23,331
|
$
|
28,726
|
||||
|
Short-term
borrowings
|
(747
|
)
|
3,130
|
2,383
|
||||||
|
Subordinated
notes
|
-
|
312
|
312
|
|||||||
|
Long-term
debt and mandatorily redeemable securities
|
1,091
|
(55
|
)
|
1,036
|
||||||
|
Total
interest bearing liabilities
|
$
|
5,739
|
$
|
26,718
|
$
|
32,457
|
||||
|
Net
interest income
|
$
|
5,966
|
$
|
1,916
|
$
|
7,882
|
||||
|
2005
compared to 2004
|
||||||||||
|
Interest
earned on:
|
||||||||||
|
Investment
securities:
|
||||||||||
|
Taxable
|
$
|
(2,139
|
)
|
$
|
555
|
$
|
(1,584
|
)
|
||
|
Tax-exempt
|
534
|
(354
|
)
|
180
|
||||||
|
Mortgages
held for sale
|
700
|
211
|
911
|
|||||||
|
Net
loans and leases
|
6,273
|
11,553
|
17,826
|
|||||||
|
Other
investments
|
781
|
(1,067
|
)
|
(286
|
)
|
|||||
|
Total
earning assets
|
$
|
6,149
|
$
|
10,898
|
$
|
17,047
|
||||
|
Interest
paid on:
|
||||||||||
|
Interest
bearing deposits
|
$
|
2,323
|
$
|
12,320
|
$
|
14,643
|
||||
|
Short-term
borrowings
|
(1,020
|
)
|
3,569
|
2,549
|
||||||
|
Subordinated
notes
|
122
|
23
|
145
|
|||||||
|
Long-term
debt and mandatorily redeemable securities
|
(51
|
)
|
69
|
18
|
||||||
|
Total
interest bearing liabilities
|
$
|
1,374
|
$
|
15,981
|
$
|
17,355
|
||||
|
Net
interest income
|
$
|
4,775
|
$
|
(5,083
|
)
|
$
|
(308
|
)
|
||
Noninterest
Income— Noninterest income for the most recent three years ended
December 31 was as follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Noninterest
income:
|
||||||||||
|
Trust
fees
|
$
|
13,806
|
$
|
12,877
|
$
|
12,361
|
||||
|
Service
charges on deposit accounts
|
19,040
|
17,775
|
16,228
|
|||||||
|
Mortgage
banking income
|
11,637
|
10,868
|
9,553
|
|||||||
|
Insurance
commissions
|
4,574
|
4,133
|
3,695
|
|||||||
|
Equipment
rental income
|
18,972
|
16,067
|
18,856
|
|||||||
|
Other
income
|
6,554
|
6,463
|
6,759
|
|||||||
|
Investment
securities and other investment gains (losses)
|
2,002
|
350
|
(4,719
|
)
|
||||||
|
Total
noninterest income
|
$
|
76,585
|
$
|
68,533
|
$
|
62,733
|
||||
E-11
Noninterest
income increased 11.75% in 2006 over 2005 mainly due to increases
in the operating lease portfolio that resulted in increased equipment rental
income; market valuation adjustments that resulted in gains on venture
partnership investments; growth in assets under management and an increase
in
IRA custodian revenue that resulted in increased trust fee income; and increased
overdraft and NSF activity that resulted in increased service charges on
deposit
accounts. Noninterest
income increased 9.25% in 2005 from 2004 mainly due to recoveries of mortgage
servicing rights impairment, decreased charges for other-than-temporary
impairment of securities, and market valuation adjustments resulting in gains
on
partnership investments.
Equipment
rental income generated from operating leases grew by 18.08% during 2006
from
2005 compared to a decrease of 14.79% in 2005 from 2004. Revenues from operating
leases for construction equipment, various trucks, and other equipment increased
as clients responded positively to our strong marketing efforts and entered
into
new lease agreements over the course of 2006. Revenues for 2005 were negatively
affected due to maturities of leases and revenues for 2004 were negatively
affected as clients opted to take advantage of the tax benefits available
for
purchases of equipment versus equipment rental.
Investment
securities and other investment gains totaled $2.00 million for the year
ended
2006 compared to $0.35 million for the year ended 2005. Favorable market
valuation adjustments on our venture partnership investments during 2006
were
the main factor contributing to the gains. Gains on venture capital investments
during 2005 were partially offset by other-than-temporary impairment of $0.61
million for 2005. In 2004, investment securities and other investment losses
totaled $4.72 million, of this amount $4.58 million was comprised of
other-than-temporary impairment charges on investments in Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC) preferred stock.
Service
charges on deposit accounts increased 7.12% in 2006 from 2005 compared to
an
increase of 9.53% in 2005 from 2004. Growth in the number of deposit accounts
led to
increased consumer NSF and overdraft fees.
Trust
fees (which includes investment management fees, estate administration fees,
mutual fund fees, annuity fees, and fiduciary fees) increased by 7.21% in
2006 from 2005 compared to an increase of 4.17% in 2005 over 2004. Trust
fees
are largely based on the size of client relationships and the market value
and
mix of assets under management. The market value of trust assets under
management at December 31, 2006 and 2005, were $2.98 billion and $2.66 billion,
respectively. At
December 31, 2006, these trust assets were comprised of $1.49 billion of
personal and agency trusts, $1.03 billion of employee benefit plan assets,
$358.84 million of estate administration assets, and $98.56 million of custody
assets. Growth
in
trust fees was mainly attributed to an increase in assets under management
coupled with a stronger stock and bond market in 2006. A
weaker
stock and bond market slowed the growth of trust fees in 2005 from
2004.
Mortgage
banking income increased 7.08% in 2006 over 2005, compared to an increase
of
13.77% in 2005 from 2004. The increase in 2006 was primarily due to $4.75
million, pre-tax gains on bulk sales of mortgage servicing rights related
to
both governmental and conventional loans that occurred during the second
and
third quarters. The increase in 2005 was primarily the result of a recovery
of
impairment on mortgage servicing assets of $2.27 million versus impairment
recoveries of $0.28 million during 2004. During 2006 and 2005, we determined
that no permanent write-down was necessary for previously recorded impairment
on
mortgage servicing assets. Mortgage production declined 17.96% during 2006
compared to 2005 as the Bank and Trustcorp, jointly, produced $678.14 million
in
new mortgages --$103.00 million through the Bank; $126.89 million through
Trustcorp; and $448.25 million from wholesale production sources. During
2005,
the Bank and Trustcorp together produced $826.63 million in new mortgages
--
$139.06 million through the Bank; $214.05 million through Trustcorp; and
$473.52
million purchased from wholesale production sources.
Insurance
commissions were up 10.67% in 2006 from 2005 compared to an increase of 11.85%
in 2005 from 2004. The increases for 2006 and 2005 were mainly attributed
to
higher contingent commissions and new business sales growth,
respectively.
Other
income remained relatively unchanged in 2006 as compared to 2005 compared
to a
decrease of 4.38% in 2005 from 2004. The decline in other income during 2005
was
primarily the result of lower standby letter of credit fee income which
decreased by $0.17 million and miscellaneous fee income which decreased by
$0.31
million.
Noninterest
Expense— Noninterest expense for the recent three years ended December
31 was as follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Noninterest
expense:
|
||||||||||
|
Salaries
and employee benefits
|
$
|
66,605
|
$
|
69,767
|
$
|
63,083
|
||||
|
Net
occupancy expense
|
7,492
|
7,749
|
7,196
|
|||||||
|
Furniture
and equipment expense
|
12,316
|
11,418
|
10,290
|
|||||||
|
Depreciation
— leased equipment
|
14,958
|
12,895
|
15,315
|
|||||||
|
Professional
fees
|
3,998
|
3,362
|
6,563
|
|||||||
|
Supplies
and communications
|
5,496
|
5,462
|
5,708
|
|||||||
|
Business
development and marketing expense
|
4,008
|
3,630
|
3,613
|
|||||||
|
Intangible
asset amortization
|
1,910
|
2,663
|
2,631
|
|||||||
|
Loan
and lease collection and repossession expense
|
704
|
(1,094
|
)
|
4,946
|
||||||
|
Other
expense
|
8,724
|
7,587
|
7,746
|
|||||||
|
Total
noninterest expense
|
$
|
126,211
|
$
|
123,439
|
$
|
127,091
|
||||
E-12
In
2006
we experienced an increase in noninterest expense of 2.25% from 2005 compared
to
a decrease of 2.87% in 2005 from 2004. The leading factors contributing to
the
increase in noninterest expense in 2006 were increased depreciation expense
on
leased equipment, lower gains and valuation adjustments on repossessed assets,
and higher professional fees. The increase in 2006 was partially offset by
decreases in salaries and employee benefits, net occupancy expense, and
intangible asset amortization. The decline in noninterest expense in 2005
was
mostly due to
reduced professional fees, decreased depreciation on leased equipment, and
a
decline in loan and lease collection and repossession expenses.
Total
salaries and employee benefits decreased 4.53% in 2006 from 2005, following
a
10.60% increase in 2005 from 2004.
Employee
salaries decreased 5.56% in 2006 compared to an increase of 7.65% in 2005.
The
decrease in salaries in 2006 was primarily due to the first quarter 2006
reversal of previously recognized stock-based compensation expense under
historical accounting methods related to the estimated forfeiture of stock
awards. This one-time expense reversal, combined with the adoption of Statement
of Financial Accounting Standards No. 123(R), Share-based
Payment,
(SFAS
No. 123(R)) estimated forfeiture accounting requirements, resulted in a
reduction in stock-based compensation of $2.07 million, pre-tax, for the
year.
The increase in salaries in 2005 was primarily the result of merit-based
and
market-driven salary increases and increased commissions due to higher insurance
revenues.
Employee
benefits remained relatively stable in 2006, following a 23.70% increase
in
2005. We were able to contain employee benefit costs during 2006 as our group
insurance costs for 2006 were maintained close to 2005 levels.
Occupancy
expense decreased 3.32% in 2006 from 2005, compared to a 7.68% increase in
2005
from 2004. The decrease in 2006 was primarily driven by lower depreciation
expense than that experienced in 2005. The increase in 2005
was
primarily due to higher leasehold improvements and repair of premises
expenses.
Furniture
and equipment expense, including depreciation, increased in 2006 over 2005
by
7.86%, compared to a 10.96% increase in 2005 from 2004. Higher software costs
which were mostly related to implementation of upgrades to our core accounting
and management systems, and higher debit card transaction expense were the
significant factors contributing to the increased costs in 2006. The leading
causes for the increase in 2005 were increased third-party processing charges
and desktop computer upgrades.
Depreciation
on equipment owned under operating leases increased 16.00% in 2006 from 2005,
following a 15.80% decrease in 2005 from 2004. In 2006, depreciation on
equipment owned under operating leases increased in conjunction with the
increase in equipment rental income as some of our clients opted to enter
into
new lease arrangements rather than purchase equipment. Conversely, during
2005,
depreciation on operating leases declined in conjunction with the decline
in
noninterest income from equipment owned under operating leases due to maturities
in the operating lease portfolio and clients who opted to take advantage
of the
tax benefits available for purchases of equipment versus equipment rental
during
2004.
Professional
fees increased
18.92%
in 2006 from 2005, compared to a 48.77% decrease in 2005 from 2004. The majority
of the increase in 2006 was due to higher legal fees and audit and examination
fees which were mainly incurred in the normal course of business. The decrease
in 2005 was mainly due to the settlement, during the fourth quarter of 2004,
of
the lawsuit described in the 2003 Form 10-K Item 3, Legal Proceedings and
a
reduction in the associated legal fees.
Supplies
and communications expense remained relatively unchanged in 2006 as compared
to
2005. Supplies and communications expense decreased 4.31% in 2005 from 2004.
The
decrease in 2005 was primarily due to lower charges for postage and freight
and
telephone service.
Business
development and marketing expense increased 10.41% in 2006 from 2005. The
increase in 2006 was mainly due to robust marketing related to the opening
of
new branches and expansion of our business into the Kalamazoo area. Business
development and marketing expense remained relatively steady for the year
2005
as compared to 2004.
Intangible
asset amortization decreased 28.28% in 2006 from 2005 compared to a 1.22%
increase in 2005 from 2004. The decrease in intangible asset amortization
for
2006 was primarily due to the effects of the complete amortization of
assets associated with acquisitions which occurred during 2001. The increase
in
2005 was due to amortization related to an insurance agency acquisition made
during the year.
Loan
and
lease collection and repossession expenses increased 164.35% (or $1.80 million)
in 2006 as compared to 2005. Loan and lease collection and repossession expenses
decreased 122.12% (or $6.04 million) in 2005 from 2004. The increase in 2006
was
mainly due to lower gains on the disposition of repossessed assets as we
continued to vigorously dispose of our inventory of repossessed assets. In
2005
and 2004, valuation adjustments on repossessed assets continued to decrease
along with a decrease in legal and collection expenses. From 2003 through
2005,
we took back 72 aircraft in repossession and all of those repossessed aircraft
had been disposed of as of December 31, 2006.
Other
expenses increased 14.99% in 2006 as compared to 2005. The increase was largely
due to losses related to an employee defalcation and expenses related to
employee training and education and relocation. A decrease of 2.05% occurred
in
other expenses during 2005, compared to 2004. Lower insurance cost was the
primary factor for the decline for 2005.
E-13
Income
Taxes— 1st Source recognized income tax expense in 2006 of $20.25
million, compared to $15.63 million in 2005, and $9.14 million in 2004. The
effective tax rate in 2006 was 34.00% compared to 31.65% in 2005, and 26.79%
in
2004. The effective tax rate increased in 2006 due to a decrease in tax-exempt
interest in relation to taxable income. For detailed analysis of 1st Source’s
income taxes see Part II, Item 8, Financial Statements and Supplementary
Data —
Note N of the Notes to Consolidated Financial Statements.
FINANCIAL
CONDITION
Loan
and Lease Portfolio— The following table shows 1st Source’s loan and
lease distribution at the end of each of the last five years as of December
31:
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Commercial
and agricultural loans
|
$
|
478,310
|
$
|
453,197
|
$
|
425,018
|
$
|
402,905
|
$
|
428,367
|
||||||
|
Auto,
light truck and environmental equipment
|
317,604
|
310,786
|
263,637
|
269,490
|
247,883
|
|||||||||||
|
Medium
and heavy duty truck
|
341,744
|
302,137
|
267,834
|
221,562
|
197,312
|
|||||||||||
|
Aircraft
financing
|
498,914
|
459,645
|
444,481
|
489,155
|
323,802
|
|||||||||||
|
Construction
equipment financing
|
305,976
|
224,230
|
196,516
|
219,562
|
303,126
|
|||||||||||
|
Loans
secured by real estate
|
632,283
|
601,077
|
583,437
|
533,749
|
567,950
|
|||||||||||
|
Consumer
loans
|
127,706
|
112,359
|
99,245
|
94,577
|
111,012
|
|||||||||||
|
Total
loans and leases
|
$
|
2,702,537
|
$
|
2,463,431
|
$
|
2,280,168
|
$
|
2,231,000
|
$
|
2,179,452
|
||||||
At
December 31, 2006, 16.9% and 12.6% of total loans and leases were concentrated
with borrowers in trucking and truck leasing and construction end users,
respectively.
Average
loans and leases, net of unearned discount, increased 9.26% and 4.85% in
2006
and 2005, respectively. Loans and leases, net of unearned discount, at December
31, 2006, were $2.70 billion and were 70.98% of total assets, compared to
$2.46
billion and 70.16% of total assets at December 31, 2005.
Commercial
and agricultural lending, excluding those loans secured by real estate,
increased 5.54% in 2006 over 2005. Commercial and agricultural lending
outstandings were $478.31 million and $453.20 million at December 31, 2006
and
December 31, 2005, respectively. This increase was mainly due to increased
sales
activity within the commercial loan and small business loan areas coupled
with
improved market conditions and market expansion.
Loans
secured by real estate increased 5.19% during 2006 over 2005. Loans secured
by
real estate outstanding at December 31, 2006, were $632.28 million and $601.08
million at December 31, 2005. The primary focus of this lending area is
commercial
real
estate ($412.52 million at December 31, 2006, the majority of which is owner
occupied) and residential
mortgage lending ($219.76 million at December 31, 2006) in the regional market
area. This
increase was mostly due to business clients' continued investment in real
estate
for expansion or relocation of their commercial facilities and our ability
to
meet those funding needs.
Auto,
light truck, and environmental equipment financing increased 2.19% in 2006
over
2005. At December 31, 2006, auto, light truck, and environmental equipment
financing had outstandings of $317.60 million and $310.79 million at December
31, 2005. Environmental equipment financing increased 21.07% in 2006 over
2005,
most of this increase was in the municipal equipment lease portfolio as a
result
of focused sales activity. Auto and light truck financing decreased 4.93%
at
December 31, 2006 compared to December 31, 2005, mainly due to car rental
companies reducing their inventories during the off-season in order to avoid
higher interest costs.
Medium
and heavy duty truck loans and leases experienced growth of $39.61 million,
or
an increase of 13.11%, in 2006. Medium and heavy duty truck financing at
December 31, 2006 and 2005, had outstandings of $341.74 million and $302.14
million, respectively. Most of the increase at December 31, 2006 from December
31, 2005 can be attributed to clients' making proactive decisions to contain
their future costs by completing purchases of 2007 new tractor needs in 2006.
Most of our clients were affected by a new regulatory standard which mandated
that, effective January 1, 2007, all Class 8 diesel trucks produced have
emission compliant engines. This requirement will increase the cost of each
vehicle approximately $6,000 to $9,000.
Aircraft
financing at year-end 2006 increased 8.54% from year-end 2005. Aircraft
financing at December 31, 2006 and 2005, had outstandings of $498.91 million
and
$459.65 million, respectively. The increase in 2006 was primarily due to
rigorous marketing efforts and a strong focus on sales.
Construction
equipment financing increased 36.46% in 2006 over 2005. Construction equipment
financing at December 31, 2006, had outstandings of $305.98 million, compared
to
outstandings of $224.23 million at December 31, 2005. The
increase at December 31, 2006 from December 31, 2005 was mainly the result
of
continued strong commercial, industrial, and non-residential building
industries, as well as, substantial Federal, state and local funding for
roads,
bridges, and general transportation projects upon which our client base relies
for business. During
2006, we added two new sales territories which further enhanced growth in
this
portfolio.
Consumer
loans increased 13.66% in 2006 over 2005. Consumer loans outstanding at December
31, 2006, were $127.71 million and $112.36 million at December 31, 2005.
Successful marketing to new and established clients was the main factor in
the
increase.
E-14
The
following table shows the maturities of loans and leases in the categories
of
commercial and agriculture, auto, light truck and environmental equipment,
medium and heavy duty truck, aircraft and construction equipment outstanding
as
of December 31, 2006. The amounts due after one year are also classified
according to the sensitivity to changes in interest rates.
|
(Dollars
in thousands)
|
0-1
Year
|
1-5
Years
|
Over
5 Years
|
Total
|
|||||||||
|
Commercial
and agricultural loans
|
$
|
274,867
|
$
|
183,103
|
$
|
20,340
|
$
|
478,310
|
|||||
|
Auto,
light truck and environmental equipment
|
145,567
|
166,002
|
6,035
|
317,604
|
|||||||||
|
Medium
and heavy duty truck
|
100,896
|
231,197
|
9,651
|
341,744
|
|||||||||
|
Aircraft
financing
|
111,769
|
348,080
|
39,065
|
498,914
|
|||||||||
|
Construction
equipment financing
|
89,991
|
212,473
|
3,512
|
305,976
|
|||||||||
|
Total
|
$
|
723,090
|
$
|
1,140,855
|
$
|
78,603
|
$
|
1,942,548
|
|||||
|
Rate
Sensitivity (Dollars
in thousands)
|
Fixed
Rate
|
Variable
Rate
|
Total
|
|||||||
|
1
-
5 Years
|
$
|
840,995
|
$
|
299,860
|
$
|
1,140,855
|
||||
|
Over
5 Years
|
35,752
|
42,851
|
78,603
|
|||||||
|
Total
|
$
|
876,747
|
$
|
342,711
|
$
|
1,219,458
|
||||
Most
of
the Bank's residential mortgages are sold into the secondary market and serviced
by our mortgage subsidiary, Trustcorp Mortgage Company (Trustcorp). Mortgage
loans held for sale were $50.16 million at December 31, 2006 and were $67.22
million at December 31, 2005.
CREDIT
EXPERIENCE
Reserve
for Loan and Lease Losses— Our reserve for loan and lease losses is
provided for by direct charges to operations. Losses on loans and leases
are
charged against the reserve and likewise, recoveries during the period for
prior
losses are credited to the reserve. Our management evaluates the adequacy
of the
reserve quarterly, reviewing all loans and leases over a fixed-dollar amount
($100,000) where the internal credit rating is at or below a predetermined
classification, actual and anticipated loss experience, current economic
events
in specific industries, and other pertinent factors including general economic
conditions. Determination of the reserve is inherently subjective as it requires
significant estimates, including the amounts and timing of expected future
cash
flows or fair value of collateral on collateral-dependent impaired loans
and
leases, estimated losses on pools of homogeneous loans and leases based on
historical loss experience, and consideration of economic trends, all of
which
may be susceptible to significant and unforeseen changes. We review the status
of the loan and lease portfolio to identify borrowers that might develop
financial problems in order to aid borrowers in the handling of their accounts
and to mitigate losses. See Part II, Item 8, Financial Statements and
Supplementary Data — Note A of the Notes to Consolidated Financial Statements
for additional information on management’s evaluation of the adequacy of the
reserve for loan and lease losses.
The
reserve for loan and lease losses at December 31, 2006 totaled $58.80 million
and was 2.18% of loans and leases, compared to $58.70 million or 2.38% of
loans
and leases at December 31, 2005 and $63.67 million or 2.79% of loans and
leases
at December 31, 2004. It
is our
opinion that the reserve for loan and lease losses was adequate to absorb
losses
inherent in the loan and lease portfolio as of December 31, 2006.
The
recovery of provision for loan and lease losses was $2.74 million and $5.86
million for 2006 and 2005, respectively, compared to the provision for loan
and
lease losses of $0.23 million in 2004. The recovery of the provision for
2006
and 2005 was consistent with our improved credit quality of the loan and
lease
portfolio.
E-15
The
following table summarizes our loan and lease loss experience for each of
the
last five years ended December 31:
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Amounts
of loans and leases outstanding
|
||||||||||||||||
|
at
end of period
|
$
|
2,702,537
|
$
|
2,463,431
|
$
|
2,280,168
|
$
|
2,231,000
|
$
|
2,179,452
|
||||||
|
Average
amount of net loans and leases outstanding
|
||||||||||||||||
|
during
period
|
$
|
2,566,217
|
$
|
2,348,690
|
$
|
2,240,055
|
$
|
2,091,004
|
$
|
2,332,992
|
||||||
|
Balance
of reserve for loan and lease losses
|
||||||||||||||||
|
at
beginning of period
|
$
|
58,697
|
$
|
63,672
|
$
|
70,045
|
$
|
59,218
|
$
|
57,624
|
||||||
|
Charge-offs:
|
||||||||||||||||
|
Commercial
and agricultural loans
|
1,038
|
1,478
|
6,104
|
1,187
|
2,376
|
|||||||||||
|
Auto,
light truck and environmental equipment
|
340
|
630
|
2,408
|
2,789
|
6,380
|
|||||||||||
|
Medium
and heavy duty truck
|
-
|
15
|
352
|
69
|
771
|
|||||||||||
|
Aircraft
financing
|
1,126
|
2,424
|
3,585
|
6,877
|
27,401
|
|||||||||||
|
Construction
equipment financing
|
118
|
-
|
686
|
4,712
|
2,326
|
|||||||||||
|
Loans
secured by real estate
|
129
|
167
|
456
|
344
|
340
|
|||||||||||
|
Consumer
loans
|
1,203
|
858
|
1,090
|
1,560
|
2,127
|
|||||||||||
|
Total
charge-offs
|
3,954
|
5,572
|
14,681
|
17,538
|
41,721
|
|||||||||||
|
Recoveries:
|
||||||||||||||||
|
Commercial
and agricultural loans
|
1,594
|
1,308
|
1,312
|
519
|
1,311
|
|||||||||||
|
Auto,
light truck and environmental equipment
|
430
|
1,140
|
1,277
|
1,182
|
616
|
|||||||||||
|
Medium
and heavy duty truck
|
59
|
174
|
14
|
-
|
-
|
|||||||||||
|
Aircraft
financing
|
3,612
|
2,255
|
4,460
|
1,698
|
759
|
|||||||||||
|
Construction
equipment financing
|
753
|
1,065
|
547
|
248
|
465
|
|||||||||||
|
Loans
secured by real estate
|
31
|
89
|
107
|
11
|
26
|
|||||||||||
|
Consumer
loans
|
316
|
421
|
362
|
523
|
481
|
|||||||||||
|
Total
recoveries
|
6,795
|
6,452
|
8,079
|
4,181
|
3,658
|
|||||||||||
|
Net
(recoveries) charge-offs
|
(2,841
|
)
|
(880
|
)
|
6,602
|
13,357
|
38,063
|
|||||||||
|
(Recoveries)
provisions charged to operating expense
|
(2,736
|
)
|
(5,855
|
)
|
229
|
17,361
|
39,657
|
|||||||||
|
Reserves
acquired in acquisitions
|
-
|
-
|
-
|
6,823
|
-
|
|||||||||||
|
Balance
at end of period
|
$
|
58,802
|
$
|
58,697
|
$
|
63,672
|
$
|
70,045
|
$
|
59,218
|
||||||
|
Ratio
of net (recoveries) charge-offs to average net
|
||||||||||||||||
|
loans
and leases outstanding
|
(0.11
|
)%
|
(0.04
|
)%
|
0.29
|
%
|
0.64
|
%
|
1.63
|
%
|
||||||
Net
(recoveries) charge-offs as a percentage of average loans and leases by
portfolio type follow:
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
Commercial
and agricultural loans
|
(0.12)
|
%
|
0.04
|
%
|
1.14
|
%
|
0.16
|
%
|
0.23
|
%
|
|
Auto,
light truck and environmental equipment
|
(0.03)
|
(0.17)
|
0.43
|
0.62
|
2.27
|
|||||
|
Medium
and heavy duty truck
|
(0.02)
|
(0.06)
|
0.14
|
0.03
|
0.47
|
|||||
|
Aircraft
financing
|
(0.54)
|
0.04
|
(0.19)
|
1.73
|
6.40
|
|||||
|
Construction
equipment financing
|
(0.24)
|
(0.51)
|
0.07
|
1.67
|
0.55
|
|||||
|
Loans
secured by real estate
|
0.02
|
0.01
|
0.06
|
0.06
|
0.05
|
|||||
|
Consumer
loans
|
0.74
|
|
0.41
|
|
0.77
|
|
1.04
|
|
1.39
|
|
|
Total
net (recoveries) charge-offs to average portfolio loans and leases
|
(0.11)
|
%
|
(0.04)
|
%
|
0.29
|
%
|
0.64
|
%
|
1.63
|
%
|
E-16
The
reserve for loan and lease losses has been allocated according to the amount
deemed necessary to provide for the estimated probable losses that have
been incurred within the categories of loans and leases set forth in the
table below. The amount of such components of the reserve at December 31
and the
ratio of such loan and lease categories to total outstanding loan and lease
balances, are as follows (for purposes of this analysis, auto, light truck
and
environmental equipment and medium and heavy duty truck loans and leases
have
been consolidated into the category truck and automobile
financing):
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||||||||||||||||||
|
Percent
of
|
Percent
of
|
Percent
of
|
Percent
of
|
Percent
of
|
|||||||||||||||||||||||||||
|
Loans
and
|
Loans
and
|
Loans
and
|
Loans
and
|
Loans
and
|
|||||||||||||||||||||||||||
|
Leases
|
Leases
|
Leases
|
Leases
|
Leases
|
|||||||||||||||||||||||||||
|
in
Each
|
in
Each
|
in
Each
|
in
Each
|
in
Each
|
|||||||||||||||||||||||||||
|
Category
|
Category
|
Category
|
Category
|
Category
|
|||||||||||||||||||||||||||
|
to
Total
|
to
Total
|
to
Total
|
to
Total
|
to
Total
|
|||||||||||||||||||||||||||
|
Reserve
|
Loans
and
|
Reserve
|
Loans
and
|
Reserve
|
Loan
and
|
Reserve
|
Loans
and
|
Reserve
|
Loans
and
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Leases
|
Amount
|
Leases
|
Amount
|
Leases
|
Amount
|
Leases
|
Amount
|
Leases
|
|||||||||||||||||||||
|
Commercial
and agricultural loans
|
$
|
14,547
|
17.70
|
%
|
$
|
15,472
|
18.40
|
%
|
$
|
13,612
|
18.64
|
%
|
$
|
9,589
|
18.06
|
%
|
$
|
11,163
|
19.65
|
%
|
|||||||||||
|
Truck
and automobile financing
|
13,359
|
24.40
|
13,008
|
24.88
|
12,633
|
23.31
|
13,966
|
22.01
|
11,006
|
20.43
|
|||||||||||||||||||||
|
Aircraft
financing
|
18,621
|
18.46
|
19,583
|
18.66
|
26,475
|
19.49
|
31,733
|
21.93
|
21,603
|
14.86
|
|||||||||||||||||||||
|
Construction
equipment financing
|
5,030
|
11.32
|
4,235
|
9.10
|
4,502
|
8.62
|
9,061
|
9.84
|
9,394
|
13.91
|
|||||||||||||||||||||
|
Loans
secured by real estate
|
4,672
|
23.40
|
4,058
|
24.40
|
4,187
|
25.59
|
3,798
|
23.92
|
3,656
|
26.06
|
|||||||||||||||||||||
|
Consumer
loans
|
2,573
|
4.72
|
2,341
|
4.56
|
2,263
|
4.35
|
1,898
|
4.24
|
2,396
|
5.09
|
|||||||||||||||||||||
|
Total
|
$
|
58,802
|
100.00
|
%
|
$
|
58,697
|
100.00
|
%
|
$
|
63,672
|
100.00
|
%
|
$
|
70,045
|
100.00
|
%
|
$
|
59,218
|
100.00
|
%
|
|||||||||||
Nonperforming
Assets— Our policy is to discontinue the accrual of interest on loans
and leases where principal or interest is past due and remains unpaid for
90
days or more, except for mortgage loans, which are placed on nonaccrual at
the
time the loan is placed in foreclosure and consumer loans that are both well
secured and in the process of collection. Nonperforming assets amounted to
$17.67 million at December 31, 2006, compared to $22.04 million at December
31,
2005, and $33.21 million at December 31, 2004. Impaired loans and leases
totaled
$12.32 million, $16.87 million, and $45.39 million at December 31, 2006,
2005,
and 2004, respectively. During 2006, interest income that would have been
recorded on nonaccrual loans and leases under their original terms was $1.90
million, compared to $2.19 million in 2005. Interest income that was recorded
on
nonaccrual loans and leases was $0.62 million and $0.81 million in 2006 and
2005, respectively.
E-17
Nonperforming
assets at December 31, 2006, decreased 19.84% from December 31, 2005. During
2006, decreases in repossessed assets, commercial and agricultural loans,
construction equipment financing, auto, light truck and environmental equipment,
other real estate, and consumer loans were partially offset by increases
in
medium and heavy duty truck, loans secured by real estate, and aircraft
financing.
|
Nonperforming
assets at December 31 (Dollars
in thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Loans
past due over 90 days
|
$
|
116
|
$
|
245
|
$
|
481
|
$
|
212
|
$
|
154
|
||||||
|
Nonaccrual
loans and leases and restructured loans:
|
||||||||||||||||
|
Commercial
and agricultural loans
|
1,768
|
3,701
|
6,928
|
2,795
|
4,819
|
|||||||||||
|
Auto,
light truck and environmental equipment
|
481
|
812
|
2,336
|
2,419
|
4,730
|
|||||||||||
|
Medium
and heavy duty truck
|
1,755
|
17
|
179
|
1,823
|
1,384
|
|||||||||||
|
Aircraft
financing
|
8,219
|
7,641
|
10,132
|
12,900
|
12,281
|
|||||||||||
|
Construction
equipment financing
|
853
|
2,513
|
4,097
|
4,663
|
9,844
|
|||||||||||
|
Loans
secured by real estate
|
2,214
|
1,475
|
1,141
|
1,786
|
2,191
|
|||||||||||
|
Consumer
loans
|
285
|
393
|
440
|
699
|
415
|
|||||||||||
|
Total
nonaccrual loans and leases and restructured loans
|
15,575
|
16,552
|
25,253
|
27,085
|
35,664
|
|||||||||||
|
Total
nonperforming loans and leases
|
15,691
|
16,797
|
25,734
|
27,297
|
35,818
|
|||||||||||
|
Other
real estate
|
800
|
960
|
1,307
|
3,010
|
4,362
|
|||||||||||
|
Repossessions:
|
||||||||||||||||
|
Commercial
and agricultural loans
|
2
|
-
|
-
|
34
|
-
|
|||||||||||
|
Auto,
light truck and environmental equipment
|
178
|
128
|
1,112
|
847
|
1,364
|
|||||||||||
|
Medium
and heavy duty truck
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Aircraft
financing
|
300
|
4,073
|
3,037
|
4,551
|
19,242
|
|||||||||||
|
Construction
equipment financing
|
400
|
-
|
183
|
753
|
681
|
|||||||||||
|
Consumer
loans
|
95
|
83
|
50
|
78
|
56
|
|||||||||||
|
Total
repossessions
|
975
|
4,284
|
4,382
|
6,263
|
21,343
|
|||||||||||
|
Operating
leases
|
201
|
-
|
1,785
|
257
|
2,594
|
|||||||||||
|
Total
nonperforming assets
|
$
|
17,667
|
$
|
22,041
|
$
|
33,208
|
$
|
36,827
|
$
|
64,117
|
||||||
|
Nonperforming
loans and leases to loans and leases,
|
||||||||||||||||
|
net
of unearned discount
|
0.58
|
%
|
0.68
|
%
|
1.13
|
%
|
1.22
|
%
|
1.64
|
%
|
||||||
|
Nonperforming
assets to loans and leases and operating leases,
|
||||||||||||||||
|
net
of unearned discount
|
0.64
|
%
|
0.87
|
%
|
1.42
|
%
|
1.59
|
%
|
2.79
|
%
|
||||||
E-18
Potential
Problem Loans and Leases— At December 31, 2006, the Bank had a $2.95
million standby letter of credit outstanding which supported bond indebtedness
of a customer. If this standby letter of credit is funded, due to the current
financial condition of the customer, the Bank likely will foreclose on the
real
estate securing the customer's reimbursement obligation. This likely will
result
in an increase in other real estate for approximately the same amount as
the
funding.
At
December 31, 2006, our management was not aware of any potential problem
loans
or leases that would have a material effect on loan and lease delinquency
or
loan and lease charge-offs. Loans and leases are subject to continual review
and
are given management’s attention whenever a problem situation appears to be
developing.
INVESTMENT
PORTFOLIO
The
amortized cost of securities at year-end 2006 increased 11.16% from 2005,
following a 19.30% decrease from year-end 2004 to year-end 2005. The amortized
cost of securities at December 31, 2006 was $709.09 million or 18.62% of
total assets, compared to $637.88 million or 18.17% of total assets at December
31, 2005.
The
amortized cost of securities available-for-sale as of December 31 is
summarized as follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
U.S.
Treasury and government agencies, including agency mortgage-backed
securities
|
$
|
466,326
|
$
|
415,793
|
$
|
552,949
|
||||
|
States
and political subdivisions
|
182,356
|
179,797
|
171,338
|
|||||||
|
Other
securities
|
60,409
|
42,288
|
66,117
|
|||||||
|
Total
investment securities available-for-sale
|
$
|
709,091
|
$
|
637,878
|
$
|
790,404
|
||||
Yields
on
tax-exempt obligations are calculated on a fully tax equivalent basis assuming
a
35% tax rate. The following table shows the maturities of securities
available-for-sale at December 31, 2006, at the amortized costs and weighted
average yields of such securities:
|
(Dollars
in thousands)
|
Amount
|
Yield
|
|||||
|
U.S.
Treasury and government agencies, including agency mortgage-backed
securities
|
|||||||
|
Under
1 year
|
$
|
344,393
|
5.36
|
%
|
|||
|
1
-
5 years
|
53,450
|
3.38
|
|||||
|
5
-
10 years
|
6,589
|
5.13
|
|||||
|
Over
10 years
|
61,894
|
5.34
|
|||||
|
Total
U.S. Treasury and government agencies, including agency mortgage-backed
securities
|
466,326
|
5.13
|
|||||
|
States
and political subdivisions
|
|||||||
|
Under
1 year
|
47,658
|
5.27
|
|||||
|
1
-
5 years
|
96,616
|
5.74
|
|||||
|
5
-
10 years
|
38,082
|
7.20
|
|||||
|
Over
10 years
|
-
|
-
|
|||||
|
Total
states and political subdivisions
|
182,356
|
5.92
|
|||||
|
Other
securities
|
|||||||
|
Under
1 year
|
20,170
|
5.34
|
|||||
|
1
-
5 years
|
3,925
|
2.92
|
|||||
|
5
-
10 years
|
75
|
6.55
|
|||||
|
Over
10 years
|
-
|
-
|
|||||
|
Marketable
equity securities
|
36,239
|
5.81
|
|||||
|
Total
other securities
|
60,409
|
5.47
|
|||||
|
Total
investment securities available-for-sale
|
$
|
709,091
|
5.36
|
%
|
|||
E-19
DEPOSITS
The
average daily amounts of deposits and rates paid on such deposits are summarized
as follows:
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||
|
Noninterest
bearing demand deposits
|
$
|
352,204
|
-
|
%
|
$
|
392,475
|
-
|
%
|
$
|
384,157
|
-
|
%
|
|||||||
|
Interest
bearing demand deposits
|
715,242
|
2.51
|
784,366
|
1.78
|
707,168
|
0.88
|
|||||||||||||
|
Savings
deposits
|
190,347
|
0.44
|
210,151
|
0.30
|
228,836
|
0.29
|
|||||||||||||
|
Other
time deposits
|
1,512,755
|
4.38
|
1,223,406
|
3.41
|
1,169,009
|
2.98
|
|||||||||||||
|
Total
|
$
|
2,770,548
|
-
|
$
|
2,610,398
|
- |
$
|
2,489,170
|
- | ||||||||||
The
amount of certificates of deposit of $100,000 or more and other time deposits
of
$100,000 or more outstanding at December 31, 2006, by time remaining until
maturity is as follows:
|
(Dollars
in thousands)
|
|
|||
|
Under
3 months
|
$
|
206,555
|
||
|
4
-
6 months
|
69,420
|
|||
|
7
-
12 months
|
148,966
|
|||
|
Over
12 months
|
195,836
|
|||
|
Total
|
$
|
620,777
|
||
Scheduled
maturities of time deposits, including both private and public funds, at
December 31, 2006 were as follows:
|
(Dollars
in thousands)
|
||||
|
2007
|
$
|
1,161,555
|
||
|
2008
|
324,772
|
|||
|
2009
|
104,491
|
|||
|
2010
|
16,318
|
|||
|
2011
|
8,686
|
|||
|
Thereafter
|
18,176
|
|||
|
Total
|
$
|
1,633,998
|
||
E-20
SHORT-TERM
BORROWINGS
The
following table shows the distribution of our 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.
|
Federal
Funds
|
|||||||||||||
|
Purchased
and
|
|||||||||||||
|
Security
|
Other
|
||||||||||||
|
Repurchase
|
Commercial
|
Short-Term
|
Total
|
||||||||||
| (Dollars in thousands) |
Agreements
|
Paper
|
Borrowings
|
Borrowings
|
|||||||||
|
2006
|
|||||||||||||
|
Balance
at December 31, 2006
|
$
|
195,262
|
$
|
10,907
|
$
|
16,549
|
$
|
222,718
|
|||||
|
Maximum
amount outstanding at any month-end
|
265,362
|
12,922
|
90,689
|
368,973
|
|||||||||
|
Average
amount outstanding
|
211,973
|
7,997
|
45,854
|
265,824
|
|||||||||
|
Weighted
average interest rate during the year
|
3.95
|
%
|
4.99
|
%
|
4.87
|
%
|
4.14
|
%
|
|||||
|
Weighted
average interest rate for outstanding amounts at
|
|||||||||||||
|
December
31,2006
|
3.41
|
%
|
5.08
|
%
|
4.89
|
%
|
3.60
|
%
|
|||||
|
2005
|
|||||||||||||
|
Balance
at December 31, 2005
|
$
|
230,756
|
$
|
4,600
|
$
|
42,113
|
$
|
277,469
|
|||||
|
Maximum
amount outstanding at any month-end
|
273,428
|
5,552
|
122,038
|
401,018
|
|||||||||
|
Average
amount outstanding
|
214,199
|
2,054
|
79,018
|
295,271
|
|||||||||
|
Weighted
average interest rate during the year
|
2.55
|
%
|
3.36
|
%
|
3.91
|
%
|
2.92
|
%
|
|||||
|
Weighted
average interest rate for outstanding amounts at
|
|||||||||||||
|
December
31,2005
|
3.86
|
%
|
3.88
|
%
|
2.76
|
%
|
3.70
|
%
|
|||||
|
2004
|
|||||||||||||
|
Balance
at December 31, 2004
|
$
|
216,751
|
$
|
836
|
$
|
82,075
|
$
|
299,662
|
|||||
|
Maximum
amount outstanding at any month-end
|
411,812
|
1,152
|
113,958
|
526,922
|
|||||||||
|
Average
amount outstanding
|
295,172
|
815
|
109,205
|
405,192
|
|||||||||
|
Weighted
average interest rate during the year
|
1.15
|
%
|
1.23
|
%
|
2.46
|
%
|
1.50
|
%
|
|||||
|
Weighted
average interest rate for outstanding amounts at
|
|||||||||||||
|
December
31, 2004
|
2.09
|
%
|
1.72
|
%
|
2.09
|
%
|
2.09
|
%
|
|||||
E-21
LIQUIDITY
Core
Deposits— Our major source of investable funds is provided by stable
core deposits consisting of all interest bearing and noninterest bearing
deposits, excluding brokered certificates of deposit and certain certificates
of
deposit of $100,000 and over. In 2006, average core deposits equaled 63.27%
of
average total assets, compared to 67.60% in 2005 and 66.97% in 2004. The
effective cost rate of core deposits in 2006 was 2.65%, compared to 1.96%
in
2005 and 1.59% in 2004.
Average
demand deposits (noninterest bearing core deposits) decreased 10.26% in 2006
compared to an increase of 2.17% in 2005. These represented 15.67% of total
core
deposits in 2006, compared to 17.21% in 2005, and 17.13% in 2004.
Purchased
Funds— We use purchased funds to supplement core deposits and include
certain certificates of deposit of $100,000 and over, brokered certificates
of
deposit, Federal funds, securities sold under agreements to repurchase,
commercial paper, and other short-term borrowings. Purchased funds are raised
from customers seeking short-term investments and are used to manage the
Bank’s
interest rate sensitivity. During 2006, our reliance on purchased funds
increased to 22.21% of average total assets from 18.55% in 2005.
Shareholders’
Equity— Average shareholders’ equity equated to 10.07% of average total
assets in 2006 compared to 9.89% in 2005. Shareholders’ equity was 9.69% of
total assets at year-end 2006, compared to 9.84% at year-end 2005. In accordance
with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities,"
we
include unrealized gain (loss) on available-for-sale securities, net of income
taxes, as accumulated other comprehensive income (loss) which is a component
of
shareholders’ equity. While regulatory capital adequacy ratios exclude
unrealized gain (loss), it does impact our equity as reported in the audited
financial statements. The unrealized loss on available-for-sale securities,
net
of income taxes, was $0.26 million and $3.24 million at December 31, 2006
and
2005, respectively.
Liquidity
Risk Management— The Bank’s liquidity is monitored and closely managed
by the Asset/Liability Management Committee (ALCO), whose members are comprised
of the Bank’s senior management. Asset and liability management includes the
management of interest rate sensitivity and the maintenance of an adequate
liquidity position. The purpose of interest rate sensitivity management is
to
stabilize net interest income during periods of changing interest
rates.
Liquidity
management is the process by which the Bank ensures that adequate liquid
funds
are available to meet financial commitments on a timely basis. Financial
institutions must maintain liquidity to meet day-to-day requirements of
depositors and borrowers, take advantage of market opportunities and provide
a
cushion against unforeseen needs.
Liquidity
of the Bank is derived primarily from core deposits, principal payments received
on loans, the sale and maturity of investment securities, net cash provided
by
operating activities, and access to other funding sources. The most stable
source of liability funded liquidity is deposit growth and retention of the
core
deposit base. The principal source of asset-funded liquidity is
available-for-sale investment securities, cash and due from banks, Federal
funds
sold, securities purchased under agreements to resell, and loans and interest
bearing deposits with other banks maturing within one year. Additionally,
liquidity is provided by repurchase agreements, and the ability to borrow
from
the Federal Reserve Bank and Federal Home Loan Bank.
Interest
Rate Risk Management— ALCO monitors and manages the relationship of
earning assets to interest bearing liabilities and the responsiveness of
asset
yields, interest expense, and interest margins to changes in market interest
rates. In the normal course of business, we face ongoing interest rate risks
and
uncertainties. We occasionally utilize interest rate swaps to partially manage
the primary market exposures associated with the interest rate risk related
to
underlying assets, liabilities, and anticipated transactions.
A
hypothetical change in earnings was modeled by calculating an immediate 100
basis point (1.00%) change in interest rates across all maturities. This
analysis presents the hypothetical change in earnings of those rate sensitive
financial instruments and interest rate swaps which we held at December 31,
2006. The aggregate hypothetical decrease in pre-tax earnings was estimated
to
be $0.92 million on an annualized basis on all rate-sensitive financial
instruments, based on a hypothetical increase of a 100 basis point change
in
interest rates. The aggregate hypothetical increase in pre-tax earnings was
estimated to be $0.59 million on an annualized basis on all rate-sensitive
financial instruments based on a hypothetical decrease of a 100 basis point
change in interest rates. The earnings simulation model excludes the earnings
dynamics related to how fee income and noninterest expense may be affected
by
changes in interest rates. Actual results may differ materially from those
projected. The use of this methodology to quantify the market risk of the
balance sheet should not be construed as an endorsement of its accuracy or
the
accuracy of the related assumptions. At December 31, 2006, the impact of
these
hypothetical fluctuations in interest rates on our derivative holdings was
not
significant, and, as such, separate disclosure is not presented.
Due
to
the nature of the mortgage banking business, we manage the earning assets
and
interest-bearing liabilities of Trustcorp on a separate basis. The predominant
assets on Trustcorp’s balance sheet are mortgage loans held for sale, which are
funded by short-term borrowings (normally less than 30 days). These borrowings
are managed on a daily basis. We fund a portion of Trustcorp’s other borrowings
for working capital.
Trustcorp
manages the interest rate risk related to loan commitments by entering into
contracts for future delivery of loans with outside parties. See Part II,
Item
8, Financial Statements and Supplementary Data — Note O of the Notes to
Consolidated Financial Statements.
E-22
OFF-BALANCE
SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
In
the
ordinary course of operations, we enter into certain contractual obligations.
Such obligations include the funding of operations through debt issuances
as
well as leases for premises and equipment. The following table summarizes
our
significant fixed, determinable, and estimated contractual obligations, by
payment date, at December 31, 2006, except for obligations associated with
short-term borrowing arrangements. Payments for borrowings do not include
interest. Further discussion of the nature of each obligation is included
in the
referenced note to the consolidated financial statements.
Contractual
obligations payments by period.
|
Indeterminate
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
Note
|
0
-
1 Year
|
1
-
3 Years
|
3
-
5 Years
|
Over
5 Years
|
maturity
|
Total
|
|||||||||||||||
|
Deposits
without stated maturity
|
-
|
$
|
1,414,287
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
1,414,287
|
|||||||||
|
Certificates
of deposit
|
-
|
1,161,555
|
429,263
|
25,004
|
18,176
|
0
|
1,633,998
|
|||||||||||||||
|
Long-term
debt and mandatorily
|
||||||||||||||||||||||
|
redeemable
securities
|
J
|
10,407
|
25,789
|
481
|
903
|
6,181
|
43,761
|
|||||||||||||||
|
Subordinated
notes
|
L
|
0
|
0
|
0
|
59,022
|
0
|
59,022
|
|||||||||||||||
|
Operating
leases
|
O
|
2,680
|
4,359
|
3,322
|
1,484
|
0
|
11,845
|
|||||||||||||||
|
Purchase
obligations
|
-
|
30,424
|
5,616
|
2,294
|
68
|
0
|
38,402
|
|||||||||||||||
|
Total
contractual obligations
|
$
|
2,619,353
|
$
|
465,027
|
$
|
31,101
|
$
|
79,653
|
$
|
6,181
|
$
|
3,201,315
|
||||||||||
We
routinely enter into contracts for services. These contracts may require
payment
for services to be provided in the future and may also contain penalty clauses
for early termination of the contract. We have made a diligent effort to
account
for such payments and penalties, where applicable. Additionally, where
necessary, we have made reasonable estimates as to certain purchase obligations
as of December 31, 2006. Our management has used the best information available
to make the estimations necessary to value the related purchase obligations.
Our
management is not aware of any additional commitments or contingent liabilities
which may have a material adverse impact on or liquidity or capital
resources.
We
also
enter into derivative contracts under which we are required to either receive
cash from, or pay cash to, counterparties depending on changes in interest
rates. Derivative contracts are carried at fair value on the consolidated
balance sheet with the fair value representing the net present value of expected
future cash receipts or payments based on market interest rates as of the
balance sheet date. The fair value of the contracts change daily as market
interest rates change. Because the derivative liabilities recorded on the
balance sheet at December 31, 2006 do not represent the amounts that may
ultimately be paid under these contracts, these liabilities are not included
in
the table of contractual obligations presented above.
Assets
under management and assets under custody are held in fiduciary or custodial
capacity for our clients. In accordance with U. S. generally accepted accounting
principles, these assets are not included on our balance sheet.
We
are
also party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of our clients. These financial
instruments include commitments to extend credit and standby letters of credit.
Further discussion of these commitments is included in Part II, Item 8,
Financial Statements and Supplementary Data — Note O of the Notes to
Consolidated Financial Statements.
E-23
QUARTERLY
RESULTS OF OPERATIONS
|
Three
Months Ended
(Dollars in thousands, except per share amounts)
|
|
|
|
||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||
|
2006
|
|||||||||||||
|
Interest
income
|
$
|
46,396
|
$
|
50,781
|
$
|
54,379
|
$
|
57,438
|
|||||
|
Interest
expense
|
21,297
|
23,636
|
26,928
|
30,700
|
|||||||||
|
Net
interest income
|
25,099
|
27,145
|
27,451
|
26,738
|
|||||||||
|
(Recovery
of) provision for loan and lease losses
|
(300
|
)
|
(1,671
|
)
|
(667
|
)
|
(98
|
)
|
|||||
|
Investment
securities and other investment gains (losses)
|
2,083
|
150
|
(223
|
)
|
(8
|
)
|
|||||||
|
Income
before income taxes
|
14,998
|
15,497
|
17,117
|
11,931
|
|||||||||
|
Net
income
|
9,933
|
10,277
|
10,964
|
8,123
|
|||||||||
|
Diluted
net income per common share*
|
0.43
|
0.45
|
0.48
|
0.36
|
|||||||||
|
2005
|
|||||||||||||
|
Interest
income
|
$
|
38,796
|
$
|
40,843
|
$
|
43,657
|
$
|
45,236
|
|||||
|
Interest
expense
|
15,192
|
16,641
|
18,358
|
19,913
|
|||||||||
|
Net
interest income
|
23,604
|
24,202
|
25,299
|
25,323
|
|||||||||
|
(Recovery
of) provision for loan and lease losses
|
(421
|
)
|
(3,411
|
)
|
(1,304
|
)
|
(719
|
)
|
|||||
|
Investment
securities and other investment gains (losses)
|
904
|
5
|
(559
|
)
|
-
|
||||||||
|
Income
before income taxes
|
10,046
|
12,385
|
14,186
|
12,760
|
|||||||||
|
Net
income
|
6,944
|
8,227
|
9,481
|
9,099
|
|||||||||
|
Diluted
net income per common share*
|
0.30
|
0.36
|
0.41
|
0.39
|
|||||||||
Per
share
data gives retroactive recognition to a 10% stock dividend declared on July
27,
2006.
Net
income was $8.12 million for the fourth quarter of 2006, down 10.73 percent
compared to the $9.10 million of net income reported for the fourth quarter
of
2005. Diluted net income per common share for the fourth quarter of 2006
amounted to $0.36, compared to $0.39 per common share reported in the fourth
quarter of 2005.
Our
recovery of provision for loan and lease losses was $0.10 million in the
fourth
quarter of 2006 compared to a recovery of provision for loan and lease losses
of
$0.72 million in the fourth quarter of 2005. Net
charge-offs were $0.10 million for the fourth quarter 2006, compared to net
recoveries of $0.87 million a year ago.
Noninterest
income for the fourth quarter of 2006 was $17.69 million, a marginal increase,
as compared to the fourth quarter of 2005. During the fourth quarter of 2006
increases in equipment rental income and trust fees were mostly offset by
a
decline in mortgage banking income.
Noninterest
expense for the fourth quarter of 2006 was $32.60 million an increase of
5.64
percent as compared to the fourth quarter of 2005. The increase in the fourth
quarter of 2006 as compared to the fourth quarter of 2005 was primarily due
to
higher depreciation on leased equipment expense, furniture and equipment
expense, and professional fees
E-24
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUARTER
ENDED MARCH 31,
2007
The
following management’s discussion and analysis is presented to provide
information concerning our financial condition as of March 31, 2007, as
compared
to December 31, 2006, and the results of operations for the three months
ended
March 31, 2007 and 2006. This discussion and analysis should be read in
conjunction with our consolidated financial statements and the financial
and
statistical data appearing elsewhere in this report and our 2006 Annual
Report.
FINANCIAL
CONDITION
Our
total
assets at March 31, 2007, were $3.80 billion, relatively unchanged from
December
31, 2006. Total loans and leases increased 1.81% and total deposits remained
stable over the comparable figures at the end of 2006.
On
February 19, 2007, we announced the agreement and plan of merger with FINA
Bancorp, Inc., the parent company of First National Bank, Valparaiso. Pending
customary closing conditions, including regulatory approval, we expect
the
merger to be complete in the second quarter of 2007. We believe this acquisition
provides us with an opportunity to join two strong local banks with similar
values, history, and legacies. First National Bank, Valparaiso is located
in the
fastest growing area of our retain market and will serve as a platform
for
future expansion.
Nonperforming
assets at March 31, 2007, were $14.02 million, which was a 20.67% improvement
over the $17.67 million reported at December 31, 2006. During the first
quarter
of 2007 nonperforming assets decreased as compared to year-end 2006, across
all
loan and lease portfolios with the exception of loans secured by real estate.
The most significant improvement in 2007 year-to-date nonperforming loans
and
leases was in aircraft financing compared to December 31, 2006. At March
31,
2007, nonperforming assets were 0.50% of net loans and leases compared
to 0.64%
at December 31, 2006.
Accrued
income and other assets were as follows:
|
(Dollars
in Thousands)
|
|
||||||
|
|
|
||||||
|
|
March
31,
|
December
31,
|
|||||
|
|
2007
|
2006
|
|||||
|
Accrued
income and other assets:
|
|||||||
|
Bank
owned life insurance cash surrender value
|
$
|
36,507
|
$
|
36,157
|
|||
|
Accrued
interest receivable
|
17,058
|
17,997
|
|||||
|
Mortgage
servicing assets
|
7,255
|
7,572
|
|||||
|
Other
real estate
|
534
|
800
|
|||||
|
Repossessions
|
1,019
|
975
|
|||||
|
Intangible
assets
|
19,313
|
19,418
|
|||||
|
All
other assets
|
23,285
|
25,084
|
|||||
|
Total
accrued income and other assets
|
$
|
104,971
|
$
|
108,003
|
|||
CAPITAL
As
of
March 31, 2007, total shareholders' equity was $375.06 million, up 1.67%
from
the $368.90 million at December 31, 2006. In addition to net income of
$8.52
million, other significant changes in shareholders’ equity during the first
three months of 2007 included $0.17 million in treasury stock purchases,
and
$3.16 million of dividends paid. The accumulated other comprehensive
income/(loss) component of shareholders’ equity totaled $0.36 million at March
31, 2007, compared to $(0.26) million at December 31, 2006. The improvement
in
accumulated other comprehensive income/(loss) for the first quarter of
2007 over
the same period of 2006 was primarily a result of changes in unrealized
gain/(loss) on securities in the available-for-sale portfolio. Our
equity-to-assets ratio was 9.86% as of March 31, 2007, compared to 9.69%
at
December 31, 2006. Book value per common share rose to $16.66 at March
31, 2007,
up from $16.40 at December 31, 2006.
We
declared and paid dividends per common share of $0.14 during the first
quarter
of 2007. The trailing four quarters dividend payout ratio, representing
dividends per share divided by diluted earnings per share, was 32.95%.
The
dividend payout is continually reviewed by management and the Board of
Directors.
E-25
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. In
addition, banking regulators have established risk-based capital guidelines
for
U.S. banking organizations. The actual capital amounts and ratios of 1st
Source
and our largest subsidiary, the Bank, as of March 31, 2007, are presented
in the
table below:
|
|
|
|
|
|
|
||||||||||||||
|
|
|
|
|
|
To
Be Well
|
||||||||||||||
|
|
|
|
|
|
Capitalized
Under
|
||||||||||||||
|
|
Actual
|
Minimum
Capital
|
Prompt
Corrective
|
||||||||||||||||
|
|
|
|
Adequacy
|
Action
Provisions
|
|||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
Total
Capital (To Risk-Weighted Assets):
|
|
|
|
|
|
|
|||||||||||||
|
1st
Source
|
$
|
454,286
|
14.32
|
%
|
$
|
253,806
|
8.00
|
%
|
$
|
317,258
|
10.00
|
%
|
|||||||
|
Bank
|
433,180
|
13.82
|
250,824
|
8.00
|
313,531
|
10.00
|
|||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets):
|
|||||||||||||||||||
|
1st
Source
|
412,634
|
13.01
|
126,903
|
4.00
|
190,355
|
6.00
|
|||||||||||||
|
Bank
|
392,743
|
12.53
|
125,412
|
4.00
|
188,118
|
6.00
|
|||||||||||||
|
Tier
1 Capital (to Average Assets):
|
|||||||||||||||||||
|
1st
Source
|
412,634
|
11.27
|
146,491
|
4.00
|
183,113
|
5.00
|
|||||||||||||
|
Bank
|
392,743
|
10.90
|
144,103
|
4.00
|
180,129
|
5.00
|
|||||||||||||
|
|
|||||||||||||||||||
LIQUIDITY
AND INTEREST RATE SENSITIVITY
The
Bank’s liquidity is monitored and closely managed by the Asset/Liability
Committee (ALCO), which is comprised of the Bank’s senior management. Asset and
liability management includes the management of interest rate sensitivity
and
the maintenance of an adequate liquidity position. The purpose of interest
rate
sensitivity management is to stabilize net interest income during periods
of
changing interest rates.
Liquidity
management is the process by which the Bank ensures that adequate liquid
funds
are available to meet financial commitments on a timely basis. Financial
institutions must maintain liquidity to meet day-to-day requirements of
depositors and borrowers, take advantage of market opportunities and provide
a
cushion against unforeseen needs.
Liquidity
of the Bank is derived primarily from core deposits, principal payments
received
on loans, the sale and maturity of investment securities, net cash provided
by
operating activities, and access to other funding sources. The most stable
source of liability funded liquidity is deposit growth and retention of
the core
deposit base. The principal sources of asset funded liquidity are
available-for-sale investment securities, cash and due from banks, Federal
funds
sold, securities purchased under agreements to resell, and loans and interest
bearing deposits with other banks maturing within one year. Additionally,
liquidity is provided by bank lines of credit, repurchase agreements, and
the
ability to borrow from the Federal Reserve Bank and Federal Home Loan
Bank.
The
ALCO
monitors and manages the relationship of earning assets to interest bearing
liabilities and the responsiveness of asset yields, interest expense, and
interest margins to changes in market interest rates. At March 31, 2007,
the
consolidated statement of financial condition was rate sensitive by $370.10
million more liabilities than assets scheduled to reprice within one year,
or
approximately 0.85%.
RESULTS OF OPERATIONS
Net
income for the three month period ended March 31, 2007, was $8.52 million,
compared to $9.93 million for the same period in 2006. Diluted net income
per
common share was $0.37 for the three month period ended March 31, 2007,
compared
to $0.43 for the same period in 2006. Return on average common shareholders'
equity was 9.24% for the three months ended March 31, 2007, compared to
11.53%
in 2006. The return on total average assets was 0.94% for the three months
ended
March 31, 2007, compared to 1.18% in 2006.
The
decrease in net income for the three months ended March 31, 2007, over
the first
three months of 2006, was primarily the result of a decrease in total
noninterest income and an increase in total noninterest expense. These
negative
impacts to net income were somewhat offset by an increase in net interest
income
and a decrease in the income tax provision. Details of the changes in the
various components of net income are discussed further below.
NET
INTEREST INCOME
The
taxable equivalent net interest income for the three months ended March
31,
2007, was $26.97 million, an increase of 4.83% over the same period in
2006. The
net interest margin on a fully taxable equivalent basis was 3.17% for the
three
months ended March 31, 2007, compared to 3.29% for the three months ended
March
31, 2006.
During
the first quarter of 2007, average earning assets increased $279.72 million
or
8.82% while average interest-bearing liabilities increased $294.64 million
or
11.19% over the comparable period one year ago. The yield on average earning
assets increased 65 basis points to 6.66% for the first quarter of 2007
from
6.01% for the first quarter of 2006. The rate earned on assets continued
to
experience positive impacts from the increases in short-term market interest
rates from a year ago. Total cost of average interest-bearing liabilities
increased 83 basis points to 4.11% as of March 31, 2007 from 3.28% at March
31,
2006, as liabilities were also affected by short-term market interest rates.
The
result was a decrease of 12 basis points to the net interest margin, or
the
difference between interest income on earning assets and expense on
interest-bearing liabilities.
E-26
The
largest contributor to the increase in the yield on average earning assets
for
the first three months of 2007, on a volume-weighted basis, was the $249.38
million or 10.15% increase in net loans and leases as compared to the first
three months of 2006. Total average investment securities increased 4.97%
for
the three month period over one year ago due mainly to an increase in federal
agency, mortgage-backed, municipal securities, and market valuation adjustments.
Average
mortgages held for sale decreased 25.67% primarily due to a decrease in
demand
resulting in an approximate 29.00% decrease in production volume. Other
investments, which include federal funds sold, time deposits with other
banks
and commercial paper, increased 43.00% for the three month period over
one year
ago as excess funds were invested.
Average
interest-bearing deposits increased $325.18 million or 14.45% for the first
three months of 2007 over the same period in 2006. The effective rate paid
on
average interest-bearing deposits increased 91 basis points to 3.98% as
of March
31, 2007 compared to 3.07% as of March 31, 2006. The increase in the average
cost of interest-bearing deposits during the first three months of 2007
as
compared to the first three months of 2006 was primarily the result of
increases
in interest rates offered on deposit products due to increases in market
interest rates and increased competition for deposits across all markets.
Interest paid on short-term and trust preferred borrowings increased 58
basis
points due to the interest rate increase in adjustable rate borrowings.
Average
long-term debt increased $12.58 million or 40.61% during the first three
months
of 2007 as compared to the first three months of 2006. The majority of
the
increase in long-term debt was made up of Federal Home Loan Bank
borrowings.
Average
demand deposits decreased $49.08 million as of March 31, 2007 from the
same
period one year ago. Much
of
the decline was due to the reclassification of some of our deposit products
from
noninterest bearing to interest bearing and a decrease in escrow deposit
accounts concurrent with the reduction in our mortgage servicing portfolio.
E-27
The
following table provides an analysis of net interest income and illustrates
the
interest earned and interest expense charged for each major component of
interest earning assets and interest bearing liabilities. Yields/rates
are
computed on a tax-equivalent basis, using a 35% rate. Nonaccrual loans
and
leases are included in the average loan and lease balance
outstanding.
|
INTEREST
RATES AND INTEREST DIFFERENTIAL
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
Three
months ended March 31,
|
|||||||||||||||||||
|
2007
|
2006
|
||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||
|
Interest
|
Interest
|
||||||||||||||||||
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
||||||||||||||
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
||||||||||||||
|
ASSETS:
|
|||||||||||||||||||
|
Investment
securities:
|
|
|
|||||||||||||||||
|
Taxable
|
$
|
484,489
|
$
|
5,730
|
4.80
|
%
|
$
|
458,812
|
$
|
3,925
|
3.47
|
%
|
|||||||
|
Tax
exempt
|
180,861
|
2,018
|
4.53
|
%
|
175,027
|
1,827
|
4.23
|
%
|
|||||||||||
|
Mortgages
- held for sale
|
38,969
|
638
|
6.64
|
%
|
52,425
|
827
|
6.40
|
%
|
|||||||||||
|
Net
loans and leases
|
2,706,462
|
47,728
|
7.15
|
%
|
2,457,080
|
40,125
|
6.62
|
%
|
|||||||||||
|
Other
investments
|
40,832
|
532
|
5.28
|
%
|
28,553
|
316
|
4.49
|
%
|
|||||||||||
|
Total
Earning Assets
|
3,451,613
|
56,646
|
6.66
|
%
|
3,171,897
|
47,020
|
6.01
|
%
|
|||||||||||
|
Cash
and due from banks
|
70,166
|
79,943
|
|||||||||||||||||
|
Reserve
for loan and lease losses
|
(58,800
|
)
|
(58,702
|
)
|
|||||||||||||||
|
Other
assets
|
218,817
|
211,914
|
|||||||||||||||||
|
Total
|
$
|
3,681,796
|
$
|
3,405,052
|
|||||||||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY:
|
|||||||||||||||||||
|
Interest-bearing
deposits
|
$
|
2,576,261
|
$
|
25,270
|
3.98
|
%
|
$
|
2,251,083
|
$
|
17,033
|
3.07
|
%
|
|||||||
|
Short-term
borrowings
|
248,871
|
2,690
|
4.38
|
%
|
291,993
|
2,760
|
3.83
|
%
|
|||||||||||
|
Subordinated
notes
|
59,022
|
1,094
|
7.52
|
%
|
59,022
|
1,050
|
7.21
|
%
|
|||||||||||
|
Long-term
debt and
|
|||||||||||||||||||
|
mandatorily
redeemable securities
|
43,575
|
627
|
5.84
|
%
|
30,990
|
454
|
5.94
|
%
|
|||||||||||
|
Total
Interest-Bearing Liabilities
|
2,927,729
|
29,681
|
4.11
|
%
|
2,633,088
|
21,297
|
3.28
|
%
|
|||||||||||
|
Noninterest-bearing
deposits
|
314,124
|
363,201
|
|||||||||||||||||
|
Other
liabilities
|
65,749
|
59,460
|
|||||||||||||||||
|
Shareholders'
equity
|
374,194
|
349,303
|
|||||||||||||||||
|
Total
|
$
|
3,681,796
|
$
|
3,405,052
|
|||||||||||||||
|
Net
Interest Income
|
$
|
26,965
|
$
|
25,723
|
|||||||||||||||
|
Net
Yield on Earning Assets on a Taxable
|
|||||||||||||||||||
|
Equivalent
Basis
|
3.17
|
%
|
3.29
|
%
|
|||||||||||||||
E-28
PROVISION
AND RESERVE FOR LOAN AND LEASE LOSSES
The
recovery of provision for loan and lease losses for the three month periods
ended March 31, 2007 and 2006 was $0.62 million and $0.30 million, respectively.
Net recoveries of $0.52 million
were recorded for the first quarter 2007, compared to net recoveries of
$0.70
million for the same quarter a year ago.
In
the
first quarter 2007, loan and lease delinquencies were 0.25% as compared
to 0.76%
on March 31, 2006, and 0.17% at the end of 2006. For comparative purposes
the
rise and fall in delinquencies for the first quarter of 2007, year-end
2006, and
the first quarter of 2006, were mainly in the turbine aircraft portfolio.
The
reserve for loan and lease losses as a percentage of loans and leases
outstanding at the end of the period was 2.13% as compared to 2.38% one
year ago
and 2.18% at December 31, 2006. A summary of loan and lease loss experience
during the three month periods ended March 31, 2007 and 2006 is provided
below.
|
|
Summary
of Reserve for Loan and Lease Losses
|
||||||
|
|
(Dollars
in Thousands)
|
||||||
|
|
Three
Months Ended
|
||||||
|
|
March
31,
|
||||||
|
|
2007
|
2006
|
|||||
|
|
|
|
|||||
|
|
|
|
|||||
|
|
|
|
|||||
|
Reserve
for loan and lease losses - beginning balance
|
$
|
58,802
|
$
|
58,697
|
|||
|
Charge-offs
|
(1,345
|
)
|
(780
|
)
|
|||
|
Recoveries
|
1,868
|
1,480
|
|||||
|
Net
recoveries
|
523
|
700
|
|||||
|
|
|||||||
|
Recovery
of provision for loan and lease losses
|
(623
|
)
|
(300
|
)
|
|||
|
|
|||||||
|
Reserve
for loan and lease losses - ending balance
|
$
|
58,702
|
$
|
59,097
|
|||
|
|
|||||||
|
Loans
and leases outstanding at end of period
|
$
|
2,751,415
|
$
|
2,479,504
|
|||
|
Average
loans and leases outstanding during period
|
2,706,462
|
2,457,080
|
|||||
|
|
|||||||
|
|
|||||||
|
Reserve
for loan and lease losses as a percentage of
|
|||||||
|
loans
and leases outstanding at end of period
|
2.13
|
%
|
2.38
|
%
|
|||
|
Ratio
of net recoveries during period to
|
|||||||
|
average
loans and leases outstanding
|
(0.08
|
)%
|
(0.12
|
)%
|
|||
|
|
|||||||
NONPERFORMING
ASSETS
Nonperforming
assets were as follows:
|
(Dollars
in thousands)
|
|
|
|
|||||||
|
|
March
31,
|
December
31,
|
March
31,
|
|||||||
|
|
2007
|
2006
|
2006
|
|||||||
|
|
|
|
|
|||||||
|
|
|
|
|
|||||||
|
Loans
and leases past due 90 days or more
|
$
|
75
|
$
|
116
|
$
|
121
|
||||
|
Nonaccrual
and restructured loans and leases
|
12,275
|
15,575
|
15,071
|
|||||||
|
Other
real estate
|
534
|
800
|
1,192
|
|||||||
|
Repossessions
|
1,019
|
975
|
4,640
|
|||||||
|
Equipment
owned under operating leases
|
112
|
201
|
48
|
|||||||
|
|
||||||||||
|
Total
nonperforming assets
|
$
|
14,015
|
$
|
17,667
|
$
|
21,072
|
||||
E-29
Nonperforming
assets totaled $14.02 million at March 31, 2007, a 20.67% improvement over
the
$17.67 million reported at December 31, 2006, and a 33.49% improvement
from the
$21.07 million reported at March 31, 2006. The improvement during the first
quarter 2007 compared to year-end 2006 was primarily related to a decrease
in
nonaccrual loans and leases in all areas, whereas the improvement compared
to
the first quarter of 2006 was primarily related to a decrease in nonaccrual
loans and leases in all areas with the exception of increases in the medium
and
heavy duty truck portfolio, loans secured by real estate, and aircraft
financing. Nonperforming assets as a percentage of total loans and leases
improved to 0.50% at March 31, 2007, from 0.64% at December 31, 2006, and
0.83%
at March 31, 2006.
Repossessions
consisted mainly of aircraft, automobiles, light trucks, and construction
equipment at March 31, 2007. At the time of repossession, the recorded
amount of
the loan or lease is written down, if necessary, to the estimated value
of the
equipment or vehicle by a charge to the reserve for loan and lease losses,
unless the equipment is in the process of immediate sale. Any subsequent
write-downs are included in noninterest expense.
Supplemental
Loan and Lease Information as of March 31, 2007
|
(Dollars
in thousands)
|
|
Nonaccrual
|
Other
real estate
|
Year-to-date
|
|||||||||
|
|
Loans
and leases
|
and
|
owned
and
|
net
credit losses/
|
|||||||||
|
|
outstanding
|
restructured
loans
|
repossessions
|
(recoveries)
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Commercial
and agricultural loans
|
$
|
508,976
|
$
|
866
|
$
|
-
|
$
|
(721
|
)
|
||||
|
Auto,
light truck and environmental equipment
|
308,341
|
426
|
48
|
(39
|
)
|
||||||||
|
Medium
and heavy duty truck
|
336,254
|
1,617
|
-
|
(38
|
)
|
||||||||
|
Aircraft
financing
|
501,838
|
5,119
|
300
|
(323
|
)
|
||||||||
|
Construction
equipment financing
|
326,779
|
523
|
597
|
439
|
|||||||||
|
Loans
secured by real estate
|
644,819
|
3,744
|
534
|
4
|
|||||||||
|
Consumer
loans
|
124,408
|
92
|
74
|
53
|
|||||||||
|
|
|||||||||||||
|
Total
|
$
|
2,751,415
|
$
|
12,387
|
$
|
1,553
|
$
|
(625
|
)
|
||||
|
|
|||||||||||||
For
financial statements purposes, nonaccrual loans and leases are included
in loan
and lease outstandings, whereas repossessions and other real estate are
included
in other assets. Net credit losses include net charge-offs on loans and
leases
and valuation adjustments and gains and losses on disposition of repossessions
and defaulted operating leases.
E-30
NONINTEREST
INCOME
Noninterest
income for the three-month periods ended March 31, 2007 and 2006 was $17.49
million and $19.01 million, respectively. The predominant factor behind
the
decrease in 2007 was a significant decrease in market value adjustments
resulting in lower gains on venture capital investments and a decline in
mortgage banking income, partially offset by an increase in equipment rental
income.
|
(Dollars
in thousands)
|
Three
Months Ended
|
||||||
|
|
March
31,
|
||||||
|
|
2007
|
2006
|
|||||
|
Noninterest
income:
|
|||||||
|
Trust
fees
|
$
|
3,643
|
$
|
3,391
|
|||
|
Service
charges on deposit accounts
|
4,570
|
4,386
|
|||||
|
Mortgage
banking income
|
571
|
1,757
|
|||||
|
Insurance
commissions
|
1,638
|
1,682
|
|||||
|
Equipment
rental income
|
5,098
|
4,220
|
|||||
|
Other
income
|
1,719
|
1,486
|
|||||
|
Investment
securities and other investment gains
|
247
|
2,083
|
|||||
|
|
|||||||
|
Total
noninterest income
|
$
|
17,486
|
$
|
19,005
|
|||
Gains
on
venture partnership investment, due to market value adjustments, totaled
$0.03
million for the first quarter of 2007 compared to gains of $2.05 million
for the
first quarter of 2006. Mortgage banking income decreased in the first quarter
of
2007 as compared to the first quarter of 2006 primarily due a decline in
production volume of approximately 29.00% which resulted in lower gains
on sales
of mortgage servicing assets and a decline in loan servicing fee income
due to a
reduction in the portfolio from servicing sales in the second and third
quarters
of 2006.
Equipment
rental income generated from operating leases increased during the first
quarter
of 2007 as compared to the first quarter of 2006 primarily due to an increase
of
29.00% in the operating lease portfolio from one year ago. Other income
increased from the three-month period ended March 31, 2007 as compared
to the
same period of 2006, mainly due to fees generated from customer related
interest
rate swaps and mutual fund income. Additionally, trust fees and service
charges
on deposit accounts increased during the first quarter of 2007 as compared
to
the first quarter 2006.
E-31
NONINTEREST
EXPENSE
Noninterest
expense for the three-month periods ended March 31, 2007 and 2006 was $31.80
million and $29.41 million, respectively.
|
(Dollars
in thousands)
|
Three
Months Ended
|
||||||
|
|
March
31,
|
||||||
|
|
2007
|
2006
|
|||||
|
Noninterest
expense:
|
|
|
|||||
|
Salaries
and employee benefits
|
$
|
17,566
|
$
|
15,514
|
|||
|
Net
occupancy expense
|
1,936
|
1,867
|
|||||
|
Furniture
and equipment expense
|
3,094
|
3,134
|
|||||
|
Depreciation
- leased equipment
|
4,076
|
3,382
|
|||||
|
Professional
fees
|
900
|
885
|
|||||
|
Supplies
and communication
|
1,272
|
1,363
|
|||||
|
Business
development and marketing expense
|
858
|
642
|
|||||
|
Intangible
asset amortization
|
106
|
666
|
|||||
|
Loan
and lease collection and repossession expense
|
165
|
90
|
|||||
|
Other
expense
|
1,827
|
1,863
|
|||||
|
|
|||||||
|
Total
noninterest expense
|
$
|
31,800
|
$
|
29,406
|
|||
|
|
|||||||
The
leading factor in the overall increase in noninterest expense in the first
quarter of 2007 as compared to 2006 was in salaries and employee benefits.
During the first quarter of 2006 we benefited from the reversal of previously
recognized stock-based compensation expense under historical accounting
methods
related to the estimated forfeiture of stock awards. This one-time expense
reversal,
combined with the adoption of SFAS No. 123(R) estimated forfeiture accounting
requirements, resulted in a reduction in stock-based compensation of
$2.07 million, pre-tax. Leased equipment depreciation expense increased in
conjunction with the increase in equipment rental income from first quarter
of
2006 to first quarter of 2007. Business
development and marketing expense increased for the first three months
of 2007
as compared to the first three months of 2006 due to strong marketing efforts
related to the opening of new branches during 2006 and de novo expansion
into
the Kalamazoo and West Lafayette areas. Additionally, increases were experienced
in loan and lease collection and repossession expense, net occupancy expense,
and professional fees in the first quarter of 2007, as compared to the
first
quarter of 2006.
These
increases in noninterest expense were slightly offset by decreases in intangible
asset amortization (due mainly to the effects of the complete amortization
of
intangible assets associated with acquisitions which occurred during 2001)
supplies and communication, furniture and equipment expense, and other
expense
for the period ending March 31, 2006 from March 31, 2007.
INCOME
TAXES
The
provision for income taxes for the three months ended March 31, 2007, was
$4.06
million, compared to $5.07 million for the same period in 2006. The effective
tax rate was 32.25% for the quarter ended March 31, 2007, compared to 33.77%
for
the same quarter in 2006. The
effective tax rate decreased 152 basis points from March 2006 to March
2007.
This decrease was due to a combination of lower pretax income and higher
tax-exempt income for the first three months of 2007. Both of these changes
have
the impact of lowering the effective tax rate.
The
provision for income taxes for the three months ended March 31, 2007 and
2006,
is at a rate which management believes approximates the effective rate
for the
year.
E-32
The
Board of Directors and Shareholders of 1st
Source Corporation
We
have
audited management’s assessment, included in the accompanying Report of
Management, that 1st
Source
Corporation maintained effective internal control over financial reporting
as of
December 31, 2006, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). 1st
Source
Corporation’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to express
an
opinion on management’s assessment and an opinion on the effectiveness of the
company’s internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that 1st
Source
Corporation maintained effective internal control over financial reporting
as of
December 31, 2006, is fairly stated, in all material respects, based on
the COSO
criteria. Also, in our opinion, 1st
Source
Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2006, based on the
COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statements of financial
condition of 1st Source
Corporation and subsidiaries as of December 31, 2006 and 2005, and the
related
consolidated statements of income, shareholders’ equity, and cash flow for each
of the three years in the period ended December 31, 2006 and our report
dated
February 23, 2007 expressed an unqualified opinion thereon.
/s/
Ernst
& Young LLP
Chicago,
Illinois
February
23, 2007
E-33
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of 1st
Source Corporation
We
have
audited the accompanying consolidated statements of financial condition
of
1st
Source
Corporation and subsidiaries as of December 31, 2006 and 2005, and the
related
consolidated statements of income, shareholders' equity, and cash flow
for each
of the three years in the period ended December 31, 2006. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes 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.
In
our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
1st
Source
Corporation and subsidiaries at December 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the three
years in
the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
As
discussed in Note B to the financial statements, in 2006 the Company changed
its
method of acounting for stock-based compensation.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of 1st
Source
Corporation's internal control over financial reporting as of December
31, 2006,
based on criteria established in Internal Control-Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated February
23, 2007
expressed an
unqualified opinion thereon.
/s/
Ernst
& Young LLP
Chicago,
Illinois
February
23, 2007
E-34
|
December
31 (Dollars
in thousands)
|
2006
|
2005
|
|||||
|
ASSETS
|
|||||||
|
Cash
and due from banks
|
$
|
118,131
|
$
|
124,817
|
|||
|
Federal
funds sold and interest bearing deposits with other banks
|
64,979
|
68,578
|
|||||
|
Investment
securities available-for-sale
|
|||||||
|
(amortized
cost of $709,091 and $637,878 at December 31, 2006 and 2005,
respectively)
|
708,672
|
632,625
|
|||||
|
Mortgages
held for sale
|
50,159
|
67,224
|
|||||
|
Loans
and leases, net of unearned discount:
|
|||||||
|
Commercial
and agricultural loans
|
478,310
|
453,197
|
|||||
|
Auto,
light truck and environmental equipment
|
317,604
|
310,786
|
|||||
|
Medium
and heavy duty truck
|
341,744
|
302,137
|
|||||
|
Aircraft
financing
|
498,914
|
459,645
|
|||||
|
Construction
equipment financing
|
305,976
|
224,230
|
|||||
|
Loans
secured by real estate
|
632,283
|
601,077
|
|||||
|
Consumer
loans
|
127,706
|
112,359
|
|||||
|
Total
loans and leases
|
2,702,537
|
2,463,431
|
|||||
|
Reserve
for loan and lease losses
|
(58,802
|
)
|
(58,697
|
)
|
|||
|
Net
loans and leases
|
2,643,735
|
2,404,734
|
|||||
|
Equipment
owned under operating leases, net
|
76,310
|
58,250
|
|||||
|
Net
premises and equipment
|
37,326
|
37,710
|
|||||
|
Accrued
income and other assets
|
108,003
|
117,339
|
|||||
|
Total
assets
|
$
|
3,807,315
|
$
|
3,511,277
|
|||
|
LIABILITIES
|
|||||||
|
Deposits:
|
|||||||
|
Noninterest
bearing
|
$
|
339,866
|
$
|
393,494
|
|||
|
Interest
bearing
|
2,708,418
|
2,352,093
|
|||||
|
Total
deposits
|
3,048,284
|
2,745,587
|
|||||
|
Short-term
borrowings:
|
|||||||
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
195,262
|
230,756
|
|||||
|
Other
short-term borrowings
|
27,456
|
46,713
|
|||||
|
Total
short-term borrowings
|
222,718
|
277,469
|
|||||
|
Long-term
debt and mandatorily redeemable securities
|
43,761
|
23,237
|
|||||
|
Subordinated
notes
|
59,022
|
59,022
|
|||||
|
Accrued
expenses and other liabilities
|
64,626
|
60,386
|
|||||
|
Total
liabilities
|
3,438,411
|
3,165,701
|
|||||
|
SHAREHOLDERS'
EQUITY
|
|||||||
|
Preferred
stock; no par value
|
|||||||
|
Authorized
10,000,000 shares; none issued or outstanding
|
-
|
-
|
|||||
|
Common
stock; no par value
|
|||||||
|
Authorized
40,000,000 shares; issued 23,781,518 shares in 2006 and 23,778,780
shares
in 2005
|
|||||||
|
less
unearned shares (262,986 -- 2006 and 260,248 -- 2005)*
|
8,336
|
7,578
|
|||||
|
Capital
surplus
|
280,827
|
214,001
|
|||||
|
Retained
earnings
|
99,572
|
139,601
|
|||||
|
Cost
of common stock in treasury (1,022,435 shares -- 2006, and 782,429
shares
-- 2005)*
|
(19,571
|
)
|
(12,364
|
)
|
|||
|
Accumulated
other comprehensive loss
|
(260
|
)
|
(3,240
|
)
|
|||
|
Total
shareholders' equity
|
368,904
|
345,576
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
3,807,315
|
$
|
3,511,277
|
|||
|
*Per
share data gives retroactive recognition to a 10% stock dividend
declared
on July 27, 2006.
|
|||||||
|
The
accompanying notes are a part of the consolidated financial
statements.
|
|||||||
E-35
|
CONSOLIDATED
STATEMENTS
OF INCOME
|
||||||||||
|
Year
Ended December 31 (Dollars
in thousands, except per share data)
|
2006
|
2005
|
2004
|
|||||||
|
Interest
income:
|
||||||||||
|
Loans
and leases
|
$
|
181,363
|
$
|
147,814
|
$
|
129,059
|
||||
|
Investment
securities, taxable
|
19,816
|
14,777
|
16,361
|
|||||||
|
Investment
securities, tax-exempt
|
5,183
|
5,275
|
5,065
|
|||||||
|
Other
|
2,632
|
666
|
952
|
|||||||
|
Total
interest income
|
208,994
|
168,532
|
151,437
|
|||||||
|
Interest
expense:
|
||||||||||
|
Deposits
|
85,067
|
56,341
|
41,698
|
|||||||
|
Short-term
borrowings
|
11,011
|
8,628
|
6,079
|
|||||||
|
Subordinated
notes
|
4,320
|
4,008
|
3,863
|
|||||||
|
Long-term
debt and mandatorily redeemable securities
|
2,163
|
1,127
|
1,109
|
|||||||
|
Total
interest expense
|
102,561
|
70,104
|
52,749
|
|||||||
|
Net
interest income
|
106,433
|
98,428
|
98,688
|
|||||||
|
(Recovery
of) provision for loan and lease losses
|
(2,736
|
)
|
(5,855
|
)
|
229
|
|||||
|
Net
interest income after (recovery of) provision for loan and lease
losses
|
109,169
|
104,283
|
98,459
|
|||||||
|
Noninterest
income:
|
||||||||||
|
Trust
fees
|
13,806
|
12,877
|
12,361
|
|||||||
|
Service
charges on deposit accounts
|
19,040
|
17,775
|
16,228
|
|||||||
|
Mortgage
banking income
|
11,637
|
10,868
|
9,553
|
|||||||
|
Insurance
commissions
|
4,574
|
4,133
|
3,695
|
|||||||
|
Equipment
rental income
|
18,972
|
16,067
|
18,856
|
|||||||
|
Other
income
|
6,554
|
6,463
|
6,759
|
|||||||
|
Investment
securities and other investment gains (losses)
|
2,002
|
350
|
(4,719
|
)
|
||||||
|
Total
noninterest income
|
76,585
|
68,533
|
62,733
|
|||||||
|
Noninterest
expense:
|
||||||||||
|
Salaries
and employee benefits
|
66,605
|
69,767
|
63,083
|
|||||||
|
Net
occupancy expense
|
7,492
|
7,749
|
7,196
|
|||||||
|
Furniture
and equipment expense
|
12,316
|
11,418
|
10,290
|
|||||||
|
Depreciation
- leased equipment
|
14,958
|
12,895
|
15,315
|
|||||||
|
Professional
fees
|
3,998
|
3,362
|
6,563
|
|||||||
|
Supplies
and communications
|
5,496
|
5,462
|
5,708
|
|||||||
|
Business
development and marketing expense
|
4,008
|
3,630
|
3,613
|
|||||||
|
Loan
and lease collection and repossession expense
|
704
|
(1,094
|
)
|
4,946
|
||||||
|
Other
expense
|
10,634
|
10,250
|
10,377
|
|||||||
|
Total
noninterest expense
|
126,211
|
123,439
|
127,091
|
|||||||
|
Income
before income taxes
|
59,543
|
49,377
|
34,101
|
|||||||
|
Income
taxes
|
20,246
|
15,626
|
9,136
|
|||||||
|
Net
income
|
$
|
39,297
|
$
|
33,751
|
$
|
24,965
|
||||
|
Basic
net income per common share*
|
$
|
1.74
|
$
|
1.48
|
$
|
1.10
|
||||
|
Diluted
net income per common share*
|
$
|
1.72
|
$
|
1.46
|
$
|
1.08
|
||||
| *Per share data gives retroactive recognition to a 10% stock dividend declared on July 27, 2006. | ||||||||||
|
The
accompanying notes are a part of the consolidated financial
statements.
|
||||||||||
E-36
|
CONSOLIDATED
STATEMENTS
OF SHAREHOLDERS'
EQUITY
|
|||||||||||||||||||
|
Cost
of
|
Accumulated
|
||||||||||||||||||
|
Common
|
Other
|
||||||||||||||||||
|
Common
|
Capital
|
Retained
|
Stock
|
Comprehensive
|
|||||||||||||||
|
(Dollars
in thousands, except per share data)
|
Total
|
Stock
|
Surplus
|
Earnings
|
in
Treasury
|
Income
(Loss),Net
|
|||||||||||||
|
Balance
at January 1, 2004
|
$
|
314,691
|
$
|
7,578
|
$
|
214,001
|
$
|
100,534
|
$
|
(9,777
|
)
|
$
|
2,355
|
||||||
|
Comprehensive
income, net of tax:
|
|||||||||||||||||||
|
Net
income
|
24,965
|
-
|
-
|
24,965
|
-
|
-
|
|||||||||||||
|
Change
in unrealized gains of
|
|||||||||||||||||||
|
available-for-sale
securities, net of tax
|
(2,652
|
)
|
-
|
-
|
-
|
-
|
(2,652
|
)
|
|||||||||||
|
Total
comprehensive income
|
22,313
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Issuance
of 227,231 common shares per
|
|||||||||||||||||||
|
stock
based compensation awards, including
|
|||||||||||||||||||
|
related
tax effects
|
3,253
|
-
|
-
|
(970
|
)
|
4,223
|
-
|
||||||||||||
|
Cost
of 214,295 shares of common
|
|||||||||||||||||||
|
stock
acquired for treasury
|
(4,958
|
)
|
-
|
-
|
-
|
(4,958
|
)
|
-
|
|||||||||||
|
Cash
dividend ($.382 per share)*
|
(8,699
|
)
|
(8,699
|
)
|
-
|
-
|
|||||||||||||
|
Balance
at December 31, 2004
|
$
|
326,600
|
$
|
7,578
|
$
|
214,001
|
$
|
115,830
|
$
|
(10,512
|
)
|
$
|
(297
|
)
|
|||||
|
Comprehensive
income, net of tax:
|
|||||||||||||||||||
|
Net
income
|
33,751
|
-
|
-
|
33,751
|
-
|
-
|
|||||||||||||
|
Change
in unrealized losses of
|
|||||||||||||||||||
|
available-for-sale
securities, net of tax
|
(2,943
|
)
|
-
|
-
|
-
|
-
|
(2,943
|
)
|
|||||||||||
|
Total
comprehensive income
|
30,808
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Issuance
of 51,433 common shares per
|
|||||||||||||||||||
|
stock
based compensation awards, including
|
|||||||||||||||||||
|
related
tax effects
|
528
|
-
|
-
|
159
|
369
|
-
|
|||||||||||||
|
Cost
of 111,475 shares of common
|
|||||||||||||||||||
|
stock
acquired for treasury
|
(2,221
|
)
|
-
|
-
|
-
|
(2,221
|
)
|
-
|
|||||||||||
|
Cash
dividend ($.445 per share)*
|
(10,139
|
)
|
-
|
-
|
(10,139
|
)
|
-
|
-
|
|||||||||||
|
Balance
at December 31, 2005
|
$
|
345,576
|
$
|
7,578
|
$
|
214,001
|
$
|
139,601
|
$
|
(12,364
|
)
|
$
|
(3,240
|
)
|
|||||
|
Comprehensive
income, net of tax:
|
|||||||||||||||||||
|
Net
income
|
39,297
|
-
|
-
|
39,297
|
-
|
-
|
|||||||||||||
|
Change
in unrealized losses of
|
|||||||||||||||||||
|
available-for-sale
securities, net of tax
|
2,980
|
-
|
-
|
-
|
-
|
2,980
|
|||||||||||||
|
Total
comprehensive income
|
42,277
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Issuance
of 95,032 common shares per
|
|||||||||||||||||||
|
stock
based compensation awards, including
|
|||||||||||||||||||
|
related
tax effects
|
814
|
-
|
-
|
364
|
450
|
-
|
|||||||||||||
|
Cost
of 335,038 shares of common
|
|||||||||||||||||||
|
stock
acquired for treasury
|
(7,657
|
)
|
-
|
-
|
-
|
(7,657
|
)
|
-
|
|||||||||||
|
Cash
dividend ($.534 per share)*
|
(12,094
|
)
|
-
|
-
|
(12,094
|
)
|
-
|
-
|
|||||||||||
|
10%
common stock dividend
|
|||||||||||||||||||
|
($12
cash paid in lieu of fractional shares)
|
(12
|
)
|
758
|
66,826
|
(67,596
|
)
|
-
|
-
|
|||||||||||
|
Balance
at December 31, 2006
|
$
|
368,904
|
$
|
8,336
|
$
|
280,827
|
$
|
99,572
|
(19,571
|
)
|
$
|
(260
|
)
|
||||||
|
*Per
share data gives retroactive recognition to a 10% stock dividend
declared
on July 27, 2006.
|
|||||||||||||||||||
|
The
accompanying notes are a part of the consolidated financial
statements.
|
|||||||||||||||||||
E-37
|
CONSOLIDATED
STATEMENTS OF CASH FLOW
|
||||||||||
|
Year
Ended December 31 (Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Operating
activities:
|
||||||||||
|
Net
income
|
$
|
39,297
|
$
|
33,751
|
$
|
24,965
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
(Recovery
of) provision for loan and lease losses
|
(2,736
|
)
|
(5,855
|
)
|
229
|
|||||
|
Depreciation
of premises and equipment
|
4,797
|
5,002
|
4,813
|
|||||||
|
Depreciation
of equipment owned and leased to others
|
14,958
|
12,895
|
15,315
|
|||||||
|
Amortization
of investment security premiums and accretion of discounts,
net
|
(259
|
)
|
4,471
|
6,553
|
||||||
|
Amortization
of mortgage servicing rights
|
4,587
|
6,782
|
7,384
|
|||||||
|
Mortgage
servicing asset impairment recoveries
|
(12
|
)
|
(2,271
|
)
|
(275
|
)
|
||||
|
Deferred
income taxes
|
(3,921
|
)
|
(2,908
|
)
|
5,346
|
|||||
|
Realized
investment securities (losses) gains
|
(2,002
|
)
|
(350
|
)
|
4,719
|
|||||
|
Change
in mortgages held for sale
|
17,065
|
(11,513
|
)
|
4,504
|
||||||
|
Change
in interest receivable
|
(3,616
|
)
|
(1,876
|
)
|
1,036
|
|||||
|
Change
in interest payable
|
10,577
|
3,265
|
490
|
|||||||
|
Change
in other assets
|
8,378
|
(1,347
|
)
|
(1,431
|
)
|
|||||
|
Change
in other liabilities
|
(4,270
|
)
|
8,391
|
(8,871
|
)
|
|||||
|
Other
|
1,253
|
827
|
233
|
|||||||
|
Net
change in operating activities
|
84,096
|
49,264
|
65,010
|
|||||||
|
Investing
activities:
|
||||||||||
|
Proceeds
from sales of investment securities
|
65,682
|
28,806
|
21,683
|
|||||||
|
Proceeds
from maturities of investment securities
|
322,073
|
315,660
|
211,562
|
|||||||
|
Purchases
of investment securities
|
(456,706
|
)
|
(196,061
|
)
|
(274,976
|
)
|
||||
|
Net
change in short-term investments
|
3,599
|
151,552
|
(218,776
|
)
|
||||||
|
Loans
sold or participated to others
|
-
|
286
|
(557
|
)
|
||||||
|
Net
change in loans and leases
|
(236,266
|
)
|
(182,668
|
)
|
(35,908
|
)
|
||||
|
Net
change in equipment owned under operating leases
|
(33,015
|
)
|
(23,887
|
)
|
7,732
|
|||||
|
Purchases
of premises and equipment
|
(5,553
|
)
|
(5,858
|
)
|
(3,736
|
)
|
||||
|
Net
change in investing activities
|
(340,186
|
)
|
87,830
|
(292,976
|
)
|
|||||
|
Financing
activities:
|
||||||||||
|
Net
change in demand deposits, NOW accounts and savings
accounts
|
(101,390
|
)
|
(132,699
|
)
|
309,534
|
|||||
|
Net
change in certificates of deposit
|
404,087
|
71,284
|
10,254
|
|||||||
|
Net
change in short-term borrowings
|
(54,751
|
)
|
(22,193
|
)
|
(110,497
|
)
|
||||
|
Proceeds
from issuance of long-term debt
|
21,922
|
5,368
|
1,357
|
|||||||
|
Proceeds
from issuance of subordinated notes
|
-
|
-
|
30,929
|
|||||||
|
Payments
on subordinated notes
|
-
|
-
|
(28,351
|
)
|
||||||
|
Payments
on long-term debt
|
(1,306
|
)
|
(274
|
)
|
(6,224
|
)
|
||||
|
Net
proceeds from issuance of treasury stock
|
814
|
528
|
3,253
|
|||||||
|
Acquisition
of treasury stock
|
(7,657
|
)
|
(2,221
|
)
|
(4,958
|
)
|
||||
|
Cash
dividends
|
(12,315
|
)
|
(10,325
|
)
|
(8,863
|
)
|
||||
|
Net
change in financing activities
|
249,404
|
(90,532
|
)
|
196,434
|
||||||
|
Net
change in cash and cash equivalents
|
(6,686
|
)
|
46,562
|
(31,532
|
)
|
|||||
|
Cash
and cash equivalents, beginning of year
|
124,817
|
78,255
|
109,787
|
|||||||
|
Cash
and cash equivalents, end of year
|
$
|
118,131
|
$
|
124,817
|
$
|
78,255
|
||||
|
Supplemental
Information:
|
||||||||||
|
Cash
paid for:
|
||||||||||
|
Interest
|
$
|
91,985
|
$
|
66,839
|
$
|
52,259
|
||||
|
Income
taxes
|
29,364
|
12,002
|
6,216
|
|||||||
|
The
accompanying notes are a part of the consolidated financial
statements.
|
||||||||||
E-38
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
A — Accounting Policies
The
principal line of business of 1st Source and our subsidiaries is banking
and
closely related activities. The following is a summary of significant accounting
policies followed in the preparation of the consolidated financial
statements.
Principles
of Consolidation—
The
financial statements consolidate 1st Source and our subsidiaries (principally
the Bank and Trustcorp). All significant intercompany balances and transactions
have been eliminated. For purposes of the parent company only financial
information presented in Note T, investments in subsidiaries are carried
at
equity in our underlying net assets.
Use
of Estimates in the Preparation of Financial Statements—
Financial statements prepared in accordance with U. S. generally accepted
accounting principles require our management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of income and expenses during the reporting period.
Actual
results could differ from those estimates.
Cash
Flow—
For
purposes of the consolidated and parent company only statements of cash flows,
we consider cash and due from banks as cash and cash equivalents.
Securities—
Securities that we have the ability and positive intent to hold to maturity
are
classified as investment securities held-to-maturity. Held-to-maturity
investment securities, when present, are carried at amortized cost. We currently
hold no securities classified as held-to-maturity. Securities that may be
sold
in response to, or in anticipation of, changes in interest rates and resulting
prepayment risk, or for other factors, are classified as available-for-sale
and
are carried at fair value. Unrealized gains and losses on these securities
are
reported net of applicable taxes, as a separate component of accumulated
other
comprehensive income (loss) in shareholders’ equity.
The
fair
value is determined based on quoted market prices. If quoted market prices
are
not available, fair value is determined based on quoted prices of similar
instruments. Available-for-sale and held-to-maturity securities are reviewed
quarterly for possible other-than-temporary impairment. The review includes
an
analysis of the facts and circumstances of each individual investment such
as
length of time the fair value has been below cost, the expectation for that
security's performance, the credit worthiness of the issuer, and our intent
and
ability to hold the security for a time necessary to recover the amortized
cost.
A decline in value that is determined to be other-than-temporary is recorded
as
a loss in the Consolidated Statements of Income.
Debt
and
equity securities that are purchased and held principally for the purpose
of
selling them in the near term are classified as trading account securities
and
are carried at fair value with unrealized gains and losses reported in earnings.
At December 31, 2006, we did not have any securities classified as trading
securities. Realized gains and losses on the sales of all securities are
reported in earnings and computed using the specific identification cost
basis.
Loans
and Leases—
Loans
are stated at the principal amount outstanding, net of unamortized deferred
loan
origination fees and costs and net of unearned income. Interest income is
accrued as earned based on unpaid principal balances. Origination fees and
direct loan and lease origination costs are deferred and the net amount
amortized to interest income over the estimated life of the related loan
or
lease. Loan commitment fees are deferred and amortized into other income
over
the commitment period.
Direct
financing leases are carried at the aggregate of lease payments plus estimated
residual value of the leased property, less unearned income. Interest income
on
direct financing leases is recognized over the term of the lease to achieve
a
constant periodic rate of return on the outstanding investment.
The
accrual of interest on loans and leases is discontinued when a loan or lease
becomes contractually delinquent for 90 days, except for residential mortgage
loans and consumer loans that are well secured and in the process of collection.
Residential mortgage loans are placed in nonaccrual at the time the loan
is
placed in foreclosure. When interest accruals are discontinued, interest
credited to income in the current year is reversed and interest accrued in
the
prior year is charged to the reserve for loan and lease losses. However,
in some
cases, management may elect to continue the accrual of interest when the
net
realizable value of collateral is sufficient to cover the principal and accrued
interest. When a loan or lease is classified as nonaccrual and the future
collectibility of the recorded loan or lease balance is doubtful, collections
on
interest and principal are applied as a reduction to principal
outstanding.
E-39
A
loan or
lease is considered impaired, based on current information and events, if
it is
probable that we will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan or lease
agreement. Interest on impaired loans and leases, which are not classified
as
nonaccrual, is recognized on the accrual basis. Beginning January 1, 2006,
we
began evaluating only those loans and leases exceeding $100,000 for impairment
in accordance with the provisions of Statement of Financial Accounting Standards
No. 114, "Accounting
by Creditors for Impairment of a Loan,"
(SFAS
No. 114) which requires an allowance to be established as a component of
the
allowance for loan and lease losses when it is probable all amounts due will
not
be collected pursuant to the contractual terms of the loan and lease and
the
recorded investment in the loan or lease exceeds its fair value. Prior to
January 1, 2006, we did not have a minimum threshold in place for the purpose
of
evaluating impairment.
1st
Source, through our subsidiary Trustcorp, sells mortgage loans to the Government
National Mortgage Association (GNMA) in the normal course of business and
retains the servicing rights. The GNMA programs under which the loans are
sold
allow us to repurchase individual delinquent loans that meet certain criteria
from the securitized loan pool. At our option, and without GNMA's prior
authorization, we may repurchase a delinquent loan for an amount equal to
100%
of the remaining principal balance on the loan. Under SFAS No. 140, once
we have
the unconditional ability to repurchase a delinquent loan, we are deemed
to have
regained effective control over the loan and we are required to recognize
the
loan on our balance sheet and record an offsetting liability, regardless
of our
intent to repurchase the loan. At December 31, 2006 and 2005, residential
real
estate portfolio loans included $2.42 million and $18.09 million, respectively,
of loans available for repurchase under the GNMA optional repurchase programs
with the offsetting liability recorded within other short-term borrowings.
Mortgage
Banking Activities—
Loans
held for sale are primarily composed of performing one-to-four family
residential mortgage loans originated for resale and carried at the lower
of
cost or fair value as determined on an aggregate basis. Fair value is determined
using available secondary market prices for loans with similar coupons,
maturities, and credit quality.
We
recognize the rights to service mortgage loans for others as separate assets,
whether the servicing rights are acquired through a separate purchase or
through
the sale of originated loans with servicing rights retained. We allocate
a
portion of the total cost of a mortgage loan to servicing rights based on
the
relative fair value. The fair value of the servicing rights is based on market
prices, when available, or is determined by estimating the present value
of
future net servicing income, taking into consideration market loan prepayment
speeds and discount rates. These assets are amortized as reductions of mortgage
servicing fee income over the estimated servicing period in proportion to
the
estimated servicing income to be received. Gains and losses on the sale of
mortgage servicing rights are recognized as noninterest income in the period
in
which such rights are sold.
Mortgage
servicing assets are evaluated for impairment in accordance with SFAS No.
140.
For purposes of impairment measurement, mortgage servicing assets are stratified
based on the predominant risk characteristics of the underlying servicing,
principally by loan type and interest rate. The fair value of each tranche
of
the servicing portfolio is estimated by calculating the present value of
estimated future net servicing cash flows, taking into consideration actual
and
expected mortgage loan prepayment rates, discount rates, servicing costs,
and
other economic factors. If temporary impairment exists within a tranche,
a
valuation allowance is established through a charge to income equal to the
amount by which the carrying value exceeds the fair value. If it is later
determined all or a portion of the temporary impairment no longer exists
for a
particular tranche, the valuation allowance is reduced through a recovery
of
income.
Mortgage
servicing assets are also reviewed for other-than-temporary impairment.
Other-than-temporary impairment exists when recoverability of a recorded
valuation allowance is determined to be remote considering historical and
projected interest rates, prepayments, and loan pay-off activity. When this
situation occurs, the unrecoverable portion of the valuation allowance is
applied as a direct write-down to the carrying value of the mortgage servicing
asset. Unlike a valuation allowance, a direct write-down permanently reduces
the
carrying value of the mortgage servicing asset and the valuation allowance,
precluding subsequent recoveries.
As
part
of mortgage banking operations, we enter into commitments to purchase or
originate loans whereby the interest rate on these loans is determined prior
to
funding ("rate lock commitments"). Similar to loans held for sale, the fair
value of rate lock commitments is subject to change primarily due to changes
in
interest rates. Under our risk management policy, these fair values are hedged
primarily by selling forward contracts on agency securities. The rate lock
commitments on mortgage loans intended to be sold and the related hedging
instruments are recorded at fair value with changes in fair value recorded
in
current earnings. The fair value of rate lock commitments is determined using
current secondary market prices for underlying loans with similar coupons,
maturity and credit quality, subject to the anticipated loan funding
probability, or fallout factor. The benefit of servicing rights inherent
in the
loans underlying the rate lock commitments is not recognized until these
loans
are funded and sold.
E-40
Reserve
for Loan and Lease Losses—
The
reserve for loan and lease losses is maintained at a level believed to be
adequate by management to absorb probable losses inherent in the loan and
lease
portfolio. The determination of the reserve requires significant judgment
reflecting management’s best estimate of probable loan and lease losses related
to specifically identified loans and leases as well as probable losses in
the
remainder of the various loan and lease portfolios. The methodology for
assessing the appropriateness of the reserve consists of several key elements,
which include: specific reserves for identified special attention loans and
leases (classified loans and leases and internal watch list credits), percentage
allocations for special attention loans and leases without specific reserves,
formula reserves for each business lending division portfolio including a
higher
percentage reserve allocation for special attention loans and leases without
a
specific reserve and reserves for pooled homogenous loans and leases.
Management’s evaluation is based upon a continuing review of these portfolios,
estimates of future customer performance, collateral values and disposition
and
forecasts of economic and geopolitical events, all of which are subject to
judgment and will change.
Specific
reserves are established for certain business and specialty finance credits
based on a regular analysis of special attention loans and leases. This analysis
is performed by the Credit Policy Committee, the Loan Review Department,
Credit
Administration, and the Loan Workout Departments. The specific reserves are
based on an analysis of underlying collateral values, cash flow considerations
and, if applicable, guarantor capacity.
The
formula reserves determined for each business lending division portfolio
are
calculated quarterly by applying loss factors to outstanding loans and leases
and certain unfunded commitments based upon a review of historical loss
experience and qualitative factors, which include but are not limited to,
economic trends, current market risk assessment by industry, recent loss
experience in particular segments of the portfolios, movement in equipment
values collateralizing specialized industry portfolios, concentrations of
credit, delinquencies, trends in volume, experience and depth of relationship
managers and division management, and the effects of changes in lending policies
and practices, including changes in quality of the loan and lease origination,
servicing and risk management processes. Special attention loans and leases
without specific reserves receive a higher percentage allocation ratio than
credits not considered special attention.
Pooled
loans and leases are smaller credits and are homogenous in nature, such as
consumer credits and residential mortgages. Pooled loan and lease loss reserves
are based on historical net charge-offs, adjusted for delinquencies, the
effects
of lending practices and programs and current economic conditions, and projected
trends in the geographic markets which we serve.
A
comprehensive analysis of the reserve is performed by management on a quarterly
basis. Although management determines the amount of each element of the reserve
separately and relies on this process as an important credit management tool,
the entire reserve is available for the entire loan and lease portfolio.
The
actual amount of losses incurred can vary significantly from the estimated
amounts both positively and negatively. Management’s methodology includes
several factors intended to minimize the difference between estimated and
actual
losses. These factors allow management to adjust our estimate of losses based
on
the most recent information available.
Loans
and
leases, which are deemed uncollectible, are charged off and deducted from
the
reserve, while recoveries of amounts previously charged off are credited
to the
reserve. A (recovery of) provision for loan and lease losses is credited
or
charged to operations based on management’s periodic evaluation of the factors
previously mentioned, as well as other pertinent factors.
Equipment
Owned Under Operating Leases—
We
finance various types of construction equipment, medium and heavy duty trucks,
and automobiles under leases classified as operating leases. Revenue consists
of
the contractual lease payments and is recognized on a straight-line basis
over
the lease term. Lease terms range from three to seven years. Leased assets
are
being depreciated on a straight-line method over the lease term to the estimate
of the equipment’s fair market value at lease termination, also referred to as
"residual" value. These residual values are reviewed periodically to ensure
the
recorded amount does not exceed the fair market value at the lease
termination.
Other
Real Estate—
Other
real estate acquired through partial or total satisfaction of nonperforming
loans is included in other assets and recorded at the estimated fair value
less
anticipated selling costs based upon the property’s appraised value at the date
of transfer, with any difference between the fair value of the
property less cost to sell, and the carrying value of the loan charged to
the reserve for loan losses. Subsequent changes in value are reported as
adjustments to the carrying amount and are recorded in noninterest expense
on
the income statement. Gains or losses not previously recognized resulting
from
the sale of other real estate are recognized on the date of sale. As of December
31, 2006 and 2005, other real estate had carrying values of $0.80 million
and
$0.96 million, respectively.
E-41
Repossessed
Assets—
Repossessed assets may include fixtures and equipment, inventory and
receivables, and aircraft, construction equipment, and vehicles acquired
through
foreclosure or in lieu of foreclosure from our business banking activities
and
our specialty finance activities. Repossessed assets are included in other
assets at the lower of cost or fair value of the equipment or vehicle. We
estimate fair value based on the best estimate of an orderly liquidation
value.
Valuation resources typically include vehicle and equipment dealers, valuation
guides, and other third parties, including appraisers. At the time of
foreclosure, the recorded amount of the loan or lease is written down, if
necessary, to the fair value of the equipment or vehicle by a charge to the
reserve for loan and lease losses. Subsequent write-downs are included in
noninterest expense. Gains or losses not previously recognized resulting
from
the sale of repossessed assets are recognized on the date of sale. Repossessed
assets totaled $0.97 million and $4.28 million, as of December 31, 2006 and
2005, respectively.
Premises
and Equipment—
Premises and equipment are stated at cost, less accumulated depreciation
and
amortization. The provision for depreciation is computed by the straight-line
method, primarily with useful lives ranging from three to 31.5 years.
Maintenance and repairs are charged to expense as incurred, while improvements,
which extend the useful life, are capitalized and depreciated over the estimated
remaining life.
Long-lived
depreciable assets are evaluated periodically for impairment when events
or
changes in circumstances indicate the carrying amount may not be recoverable.
Impairment exists when the expected undiscounted future cash flows of a
long-lived asset are less than its carrying value. In that event, we recognize
a
loss in the amount of the difference between the carrying amount and the
estimated fair value of the asset based on a quoted market price, if applicable,
or a discounted cash flow analysis. Impairment losses are recorded in other
noninterest expense in the income statement.
Goodwill
and Intangibles—
Goodwill represents the excess of the cost of an acquisition over the fair
value
of the net assets acquired. Other intangible assets represent purchased assets
that also lack physical substance but can be distinguished from goodwill
because
of contractual or other legal rights or because the asset is capable of being
sold or exchanged either on its own or in combination with a related contract,
asset, or liability. Goodwill is reviewed at least annually for impairment.
Intangible assets that have finite lives continue to be amortized over their
estimated useful lives and also continue to be subject to impairment testing.
All of our other intangible assets have finite lives and are amortized on
a
straight-line basis over varying periods not exceeding seven years. We performed
the required annual impairment test of goodwill during the first quarter
of 2006
and determined that no impairment exists.
Venture
Capital Investment—
We
account for our investments in venture capital partnerships on the equity
method
based upon the guidance included in EITF D-46. The venture capital partnerships
which we have investments in, account for their investments at fair value
pursuant to the guidance in the AICPA Investment Company Guide. As a result,
our
investments in these venture capital partnerships reflect the underlying
fair
value of the partnerships’ investments. We account for our investments in
venture capital partnerships that are owned three percent and greater under
this
method. We account for our investments in venture capital partnerships that
are
owned less than three percent at the lower of cost or market. Venture
capital investments in partnerships are included in other assets on the balance
sheet. The balances as of December 31, 2006 and 2005 were $2.31 million and
$2.72 million, respectively.
Short-Term
Borrowings—
Our
short-term borrowings consist of Federal funds purchased, securities sold
under
agreement to repurchase, commercial paper, U.S. Treasury demand notes, Federal
Home Loan Bank notes, and borrowings from non-affiliated banks. Federal funds
purchased, securities sold under agreements to repurchase, and other short-term
borrowings mature within one to 365 days of the transaction date. Commercial
paper matures within seven to 270 days. Other short-term borrowings on the
balance sheet include our liability related to mortgage loans available for
repurchase under GNMA optional repurchase programs.
Securities
purchased under agreements to resell and securities sold under agreements
to
repurchase are treated as collateralized financing transactions and are recorded
at the amounts at which the securities were acquired or sold plus accrued
interest. The fair value of collateral either received from or provided to
a
third party is continually monitored and additional collateral obtained or
requested to be returned to us as deemed appropriate.
Trust
Fees—
Trust
fees are recognized on the accrual basis.
Income
Taxes—
1st Source and our subsidiaries file a consolidated Federal income
tax
return. The provision for incomes taxes is based upon income in the financial
statements, rather than amounts reported on our income tax return.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred
tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized as income or expense in the period that
includes the enactment date.
Net
Income Per Common Share—
Net
income per common share is computed in accordance with SFAS No. 128,
"Earnings
per Share." Basic
earnings per share is computed by dividing net income by the weighted-average
number of shares of common stock outstanding, which were as follows (in
thousands): 2006, 22,537; 2005, 22,755; and 2004, 22,780. Diluted earnings
per
share is computed by dividing net income by the weighted-average number of
shares of common stock outstanding, plus the dilutive effect of outstanding
stock options. The weighted-average number of common shares, increased for
the
dilutive effect of stock options, used in the computation of diluted earnings
per share were as follows (in thousands): 2006, 22,830; 2005, 23,053; and
2004,
23,083.
E-42
Stock-Based
Employee Compensation— Prior to January 1, 2006, employee compensation
expense under stock option plans was reported only if options were granted
below
market price at grant date in accordance with the intrinsic value method
of
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting
for Stock Issued to Employees,"
and
related interpretations. We
generally would have recognized compensation expense for stock options
only if
we granted options with a discounted exercise price or modified the terms
of
previously issued options, and would have recognized the related compensation
expense ratably over the associated service period, which was generally
the
option vesting term. Because
the exercise price of the employee stock options granted always equaled
the
market price of the underlying stock on the date of grant, no compensation
expense was recognized on options granted.
We
adopted the provisions of SFAS
No. 123(R) on January 1, 2006. SFAS No. 123(R) eliminates the ability
to account for stock-based compensation using APB No. 25 and requires that
such
transactions be recognized as compensation cost in the income statement
based on
their fair values on the measurement date, which, for our purposes, is
the date
of grant. We transitioned to fair-value based accounting for stock-based
compensation using the modified prospective application and, therefore,
have not
restated results for prior periods. This transition method applies to new
awards
for service periods beginning on or after January 1, 2006, and to awards
modified, repurchased, or cancelled after January 1, 2006. Additionally,
compensation cost for the portion of awards for which the requisite service
has
not been rendered (generally referring to non-vested award) which were
granted
prior to January 1, 2006 will be recognized as the remaining requisite
service
is rendered during the period of and/or the periods after the adoption
of SFAS
No. 123(R).
SFAS
No.
123(R), requires pro forma disclosures of net income and earnings per share
for
all periods prior to the adoption of the fair value accounting method for
stock-based employee compensation. The pro forma disclosures presented
in Note K
- Employee Stock Benefit Plans use the fair value method of SFAS 123 to
measure
compensation expense for stock-based employee compensation plans for years
prior
to 2006.
Segment
Information—
In
our
management's opinion, 1st Source has two principal business segments, namely:
commercial banking (conducted through its wholly-owned subsidiary, 1st Source
Bank) and mortgage banking (conducted through its wholly-owned subsidiary,
Trustcorp). While our chief decision makers monitor the revenue streams of
various products and services, the identifiable segments' operations are
managed
and financial performance is evaluated on a company-wide basis. Accordingly,
all
of our financial service operations are considered by management to be
aggregated in one reportable operating segment.
Derivative
Financial Instruments—
We
occasionally enter into derivative financial instruments as part of our interest
rate risk management strategies. These derivative financial instruments consist
primarily of interest rate swaps. Under the guidance of SFAS No. 133,
"Accounting
for Derivative Instruments and Hedging Activities,"
as
amended, all derivative instruments are recorded on the balance sheet, as
either
an asset or liability, at their fair value. The accounting for the gain or
loss
resulting from the change in fair value depends on the intended use of the
derivative. For a derivative used to hedge changes in fair value of a recognized
asset or liability, or an unrecognized firm commitment, the gain or loss
on the
derivative will be recognized in earnings together with the offsetting loss
or
gain on the hedged item. This results in an earnings impact only to the extent
that the hedge is ineffective in achieving offsetting changes in fair value.
If
it is determined that the derivative instrument is not highly effective as
a
hedge, hedge accounting is discontinued and the adjustment to fair value
of the
derivative instrument is recorded in earnings. For a derivative used to hedge
changes in cash flows associated with forecasted transactions, the gain or
loss
on the effective portion of the derivative will be deferred, and reported
as
accumulated other comprehensive income, a component of shareholders’ equity,
until such time the hedged transaction affects earnings. For derivative
instruments not accounted for as hedges, changes in fair value are recognized
in
noninterest income/expense. Deferred gains and losses from derivatives that
are
terminated are amortized over the shorter of the original remaining term
of the
derivative or the remaining life of the underlying asset or liability.
Note
B —
Recent
Accounting Pronouncements
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements:
In September 2006, the U.S. Securities and Exchange Commission (SEC) staff
issued Staff Accounting Bulletin No. 108 (SAB No. 108), "Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements."
SAB
No. 108 eliminates the diversity of practice surrounding how public companies
quantify financial statement misstatements. It establishes an approach that
requires quantification of financial statement misstatements based on the
effects of the misstatements on each of the company's financial statements
and
the related financial statement disclosures. SAB No. 108 must be applied
to
annual financial statements for their first fiscal year ending after November
15, 2006. SAB No. 108 did not have a material impact on our financial
condition or results of operations.
Fair
Value Measurements:
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, “Fair
Value Measurements”
(SFAS
No. 157). This standard clarifies the principle that fair value should be
based on the assumptions that market participants would use when pricing
an
asset or liability. Additionally, it establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. We have not
yet
determined the impact that the implementation of SFAS No. 157 will have on
our results of operations or financial condition. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007.
E-43
Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans:
In September 2006, the FASB issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans an
amendment of FASB Statements No. 87, 88, 106, and 132(R).”
This standard requires employers to recognize the underfunded or overfunded
status of a defined benefit postretirement plan as an asset or liability
in its
statement of financial position and to recognize changes in the funded status
in
the year in which the changes occur through accumulated other comprehensive
income. Additionally, SFAS No. 158 requires employers to measure the funded
status of a plan as of the date of its year-end statement of financial position.
The new reporting requirements and related new footnote disclosure rules
of SFAS No. 158 are effective for fiscal years ending after December 15,
2006.
SFAS
No.
158 did not have a material impact on our financial condition or results
of
operation. Our accrued postretirement benefit cost was not material at December
31, 2006, 2005, and 2004; therefore, additional disclosure is not
provided. The new measurement date requirement applies for fiscal years
ending after December 15, 2008. We do not expect the measurement date of
this
statement to have a material impact on our financial condition or results
of
operations.
Accounting
for Uncertainty in Income Taxes:
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN No. 48), “Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109”
which
clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires
that we recognize in our financial statements, the impact of a tax position,
if
that position is more likely than not of being sustained on audit, based
on the
technical merits of the position. The provisions of FIN No. 48 are effective
as
of the beginning of our 2007 fiscal year, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained
earnings. We do not expect the provisions of this interpretation to have
a
material impact on our financial condition or results of
operations.
Share-Based
Payment:
SFAS No. 123(R),"Share-Based
Payment,"
establishes standards for the accounting for transactions in which an entity
(i)
exchanges its equity instruments for goods or services, or (ii) incurs
liabilities in exchange for goods or services that are based on the fair
value
of the entity’s equity instruments or that may be settled by the issuance of the
equity instruments. SFAS No. 123(R) eliminates the ability to account for
stock-based compensation using APB No. 25 and requires that such transactions
be
recognized as compensation cost in the income statement based on their
fair
values on the measurement date, which is generally the date of the grant.
We
adopted the provisions SFAS No.123(R) on January 1, 2006. Details related
to the adoption of SFAS No.123(R) and the impact on our financial
statements is more fully discussed in Note K - Employee Stock Benefit
Plans.
Accounting
for Servicing of Financial Assets:
In March 2006, the FASB issued SFAS No. 156, “Accounting
for Servicing of Financial Assets - an amendment of FASB Statement No.
140.”
SFAS
No.156 requires an entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by entering
into a servicing contract in specific situations. Additionally, the servicing
asset or servicing liability shall be initially measured at fair value; however,
an entity may elect the “amortization method” or “fair value method” for
subsequent balance sheet reporting periods. SFAS No.156 is effective as of
an
entity’s first fiscal year beginning after September 15, 2006. Early adoption is
permitted as of the beginning of an entity’s fiscal year, provided the entity
has not yet issued financial statements, including interim financial statements,
for any period of that fiscal year. Our adoption of this statement in 2006
did not have a material impact on our financial condition, results of
operations, or cash flows.
Accounting
for Certain Hybrid Financial Instruments:
In February 2006, the FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Financial Instruments an amendment of FASB Statements
No. 133
and 140.” SFAS
No.
155 simplifies
accounting for certain hybrid instruments currently governed by SFAS No.
133 ,
“Accounting
for Derivative Instruments and Hedging Activities,”
by
allowing fair value remeasurement of hybrid instruments that contain an embedded
derivative that otherwise would require bifurcation. SFAS
No.
155 also eliminates the guidance in SFAS No.133 Implementation Issue No.
D1,
“Application
of Statement 133 to Beneficial Interests in Securitized Financial
Assets,”
which
provides such beneficial interests are not subject to SFAS No.133. SFAS
No.
155 amends SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a Replacement of FASB Statement No. 125,”
by
eliminating the restriction on passive derivative instruments that a qualifying
special-purpose entity may hold. This statement is effective for financial
instruments acquired or issued after the beginning of our fiscal year 2007.
We
do not expect the adoption of this statement to have a material impact on
our
financial condition, results of operations or cash flows.
Reclassifications—
Certain amounts in the prior period consolidated financial statements have
been
reclassified to conform with the current year presentation. These
reclassifications had no effect on total assets, shareholders’ equity or net
income as previously reported. We declared a 10% stock dividend on July 27,
2006; therefore, all share and per share information has been adjusted
accordingly.
E-44
Note
C — Investment Securities
Investment
securities available-for-sale were as follows:
|
Amortized
|
Gross
|
Gross
|
|||||||||||
|
(Dollars
in thousands)
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
|||||||||
|
December
31, 2006
|
|||||||||||||
|
U.S.
Treasury and government agencies securities
|
$
|
386,678
|
$
|
67
|
$
|
(2,442
|
)
|
$
|
384,303
|
||||
|
States
and political subdivisions
|
182,356
|
266
|
(1,882
|
)
|
180,740
|
||||||||
|
Mortgage-backed
securities
|
79,648
|
490
|
(960
|
)
|
79,178
|
||||||||
|
Other
securities
|
60,409
|
4,328
|
(286
|
)
|
64,451
|
||||||||
|
Total
investment securities available-for-sale
|
$
|
709,091
|
$
|
5,151
|
$
|
(5,570
|
)
|
$
|
708,672
|
||||
|
December
31, 2005
|
|||||||||||||
|
U.S.
Treasury and government agencies securities
|
$
|
357,754
|
$
|
-
|
$
|
(5,543
|
)
|
$
|
352,211
|
||||
|
States
and political subdivisions
|
179,797
|
80
|
(2,144
|
)
|
177,733
|
||||||||
|
Mortgage-backed
securities
|
58,039
|
162
|
(849
|
)
|
57,352
|
||||||||
|
Other
securities
|
42,288
|
3,307
|
(266
|
)
|
45,329
|
||||||||
|
Total
investment securities available-for-sale
|
$
|
637,878
|
$
|
3,549
|
$
|
(8,802
|
)
|
$
|
632,625
|
||||
The
contractual maturities of investments in securities available-for-sale at
December 31, 2006, are shown below. Expected maturities will differ from
contractual maturities, because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
Amortized
|
|||||||
|
(Dollars
in thousands)
|
Cost
|
Fair
Value
|
|||||
|
Due
in one year or less
|
$
|
401,078
|
$
|
399,631
|
|||
|
Due
after one year through five years
|
153,970
|
151,137
|
|||||
|
Due
after five years through ten years
|
38,156
|
38,308
|
|||||
|
Due
after ten years
|
-
|
-
|
|||||
|
Mortgage-backed
securities
|
79,648
|
79,178
|
|||||
|
Equity
securities
|
36,239
|
40,418
|
|||||
|
Total
investment securities available for sale
|
$
|
709,091
|
$
|
708,672
|
|||
At
December 31, 2006, the mortgage-backed securities we held consisted primarily
of
FNMA and FHLMC pass-through certificates which are guaranteed by those
respective agencies of the United States government. At December 31, 2006,
other
securities we held consisted primarily of commercial paper, other equity
investments, FNMA and FHLMC preferred securities, and FHLB
securities.
Gross
realized losses of $0.45 million, $0.64 million, and $4.62 million and gross
gains of $0.61 million, $0.17 million, and $0.15 million were recognized
on
investment securities available-for-sale, in 2006, 2005, and 2004, respectively.
We did not record any gross losses for other-than-temporary impairment on
any
securities for 2006. We recorded gross losses of $0.61 million in
other-than-temporary impairment on preferred stock issued by the FNMA and
the
FHLMC in 2005. There
were no trading securities outstanding at December 31, 2006 or 2005. We recorded
$0.04
million for realized and unrealized losses on trading securities in 2004.
E-45
The
following tables summarize our gross unrealized losses and fair value by
investment category and age:
|
Less
than 12 Months
|
12
months or Longer
|
Total
|
|||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||
|
(Dollars
in thousands)
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||
|
December
31, 2006
|
|||||||||||||||||||
|
U.S.
Treasury and government agencies securities
|
$
|
139,532
|
$
|
(58
|
)
|
$
|
137,416
|
$
|
(2,384
|
)
|
$
|
276,948
|
$
|
(2,442
|
)
|
||||
|
States
and political subdivisions
|
21,702
|
(65
|
)
|
112,493
|
(1,817
|
)
|
134,195
|
(1,882
|
)
|
||||||||||
|
Mortgage-backed
securities
|
17,585
|
(105
|
)
|
27,013
|
(855
|
)
|
44,598
|
(960
|
)
|
||||||||||
|
Other
securities
|
2,236
|
(56
|
)
|
6,302
|
(230
|
)
|
8,538
|
(286
|
)
|
||||||||||
|
Total
temporarily impaired securities
|
$
|
181,055
|
$
|
(284
|
)
|
$
|
283,224
|
$
|
(5,286
|
)
|
$
|
464,279
|
$
|
(5,570
|
)
|
||||
|
December
31, 2005
|
|||||||||||||||||||
|
U.S.
Treasury and government agencies securities
|
$
|
76,363
|
$
|
(153
|
)
|
$
|
255,799
|
$
|
(5,390
|
)
|
$
|
332,162
|
$
|
(5,543
|
)
|
||||
|
States
and political subdivisions
|
99,320
|
(1,105
|
)
|
48,301
|
(1,039
|
)
|
147,621
|
(2,144
|
)
|
||||||||||
|
Mortgage-backed
securities
|
22,175
|
(344
|
)
|
15,766
|
(505
|
)
|
37,941
|
(849
|
)
|
||||||||||
|
Other
securities
|
3,409
|
(84
|
)
|
3,369
|
(182
|
)
|
6,778
|
(266
|
)
|
||||||||||
|
Total
temporarily impaired securities
|
$
|
201,267
|
$
|
(1,686
|
)
|
$
|
323,235
|
$
|
(7,116
|
)
|
$
|
524,502
|
$
|
(8,802
|
)
|
||||
At
December 31, 2006, we
did
not believe any individual unrealized loss represented other-than-temporary
impairment. The unrealized losses were primarily attributable to changes
in
interest rates. We have both the intent and the ability to hold these securities
for a time necessary to recover the amortized cost.
At
December 31, 2006 and 2005, investment securities with carrying values of
$286.60 million and $318.51 million, respectively, were pledged as collateral
to
secure government deposits, security repurchase agreements, and for other
purposes.
Note
D — Loans and Lease Financings
Total
loans and leases outstanding were recorded net of unearned income and deferred
loan fees and costs at December 31, 2006 and 2005, and totaled $2.70 billion
and
$2.46 billion, respectively. At December 31, 2006 and 2005, net deferred
loan
and lease costs were $6.46 million and $5.66 million, respectively.
The
loan
and lease portfolio includes direct financing leases, which are included
in
auto, light truck and environmental equipment, medium and heavy duty truck,
aircraft financing, and construction equipment financing on the consolidated
balance sheet.
A
summary
of the gross investment in lease financing and the components of the investment
in lease financing at December 31, 2006 and 2005, follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Direct
finance leases:
|
|||||||
|
Rentals
receivable
|
$
|
153,058
|
$
|
104,918
|
|||
|
Estimated
residual value of leased assets
|
54,060
|
56,437
|
|||||
|
Gross
investment in lease financing
|
207,118
|
161,355
|
|||||
|
Unearned
income
|
(31,773
|
)
|
(18,444
|
)
|
|||
|
Net
investment in lease financing
|
$
|
175,345
|
$
|
142,911
|
|||
E-46
At
December 31, 2006, the minimum future lease payments receivable for each
of the
years 2007 through 2011 were $42.52 million, $34.24 million, $26.92 million,
$19.43 million, and $11.17 million, respectively.
We
and
our subsidiaries have extended, and expect to extend in the future, loans
to
officers, directors, and principal holders of equity securities of 1st Source
and our subsidiaries and to our associates. In the opinion of management,
these
loans are made on substantially the same terms, including interest rates
and
collateral, as those prevailing at the time for comparable transactions with
other parties and are consistent with sound banking practices and within
applicable regulatory and lending limitations. The aggregate dollar amounts
of
these loans were $8.99 million and $17.48 million at December 31, 2006 and
2005,
respectively. During 2006, $9.89 million of new loans were made and repayments
and other reductions totaled $18.38 million.
Note
E — Reserve for Loan and Lease Losses
Changes
in the reserve for loan and lease losses for each of the three years ended
December 31 are shown below.
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Balance,
beginning of year
|
$
|
58,697
|
$
|
63,672
|
$
|
70,045
|
||||
|
(Recovery
of) provision for loan and lease losses
|
(2,736
|
)
|
(5,855
|
)
|
229
|
|||||
|
Charge-offs
|
(3,954
|
)
|
(5,572
|
)
|
(14,681
|
)
|
||||
|
Recoveries
|
6,795
|
6,452
|
8,079
|
|||||||
|
Balance,
end of year
|
$
|
58,802
|
$
|
58,697
|
$
|
63,672
|
||||
At
December 31, 2006 and 2005, nonaccrual and restructured loans and leases,
substantially all of which are collateralized, were $15.58 million and $16.55
million, respectively. Interest income for the years ended December 31, 2006,
2005, and 2004, would have increased by approximately $1.28 million, $1.38
million, and $2.27 million, respectively, if these loans and leases had earned
interest at their full contract rate.
As
of
December 31, 2006 and 2005, impaired loans and leases totaled $12.32 million
and
$16.87 million, respectively, of which $3.73 million and $3.07 million had
corresponding specific reserves for loan and lease losses totaling $0.49
million
and $2.52 million, respectively.
The
remaining balances of impaired loans and leases had no specific reserves
for
loan and lease losses associated with them. As of December 31, 2006, a total
of
$10.72 million of the impaired loans and leases were nonaccrual loans and
leases. For 2006, 2005, and 2004 the average recorded investment in impaired
loans and leases was $11.39 million, $27.65 million and $51.14 million,
respectively, and interest income recognized on impaired loans and leases
totaled $0.56 million, $1.01 million, and $2.55 million,
respectively.
E-47
Note
F — Operating Leases
We
finance various types of construction equipment, medium and heavy duty trucks,
automobiles, and miscellaneous production equipment under leases principally
classified as operating leases. These operating leases are reported at cost,
net
of accumulated depreciation. These operating lease arrangements require the
lessee to make a fixed monthly rental payment over a specified lease term,
typically from three to seven years. These operating lease assets are recorded
net of accumulated depreciation in the consolidated balance sheet. Rental
income
is earned on the operating lease assets and reported as noninterest income.
These operating lease assets are depreciated over the term of the lease to
the
estimated fair value of the asset at the end of the lease. The depreciation
of
these operating lease assets is reported as a component of noninterest expense.
At the end of the lease, the operating lease asset is either purchased by
the
lessee or returned to us.
Operating
lease equipment at December 31, 2006 and 2005, was $76.31 million and $58.25
million, respectively, net of accumulated depreciation of $27.76 million
and
$29.79 million, respectively. Depreciable lives for operating lease equipment
generally range from three to seven years.
The
minimum future lease rental payments due from clients on operating lease
equipment at December 31, 2006, totaled $62.50 million, of which $18.47 million
is due in 2007, $16.41 million in 2008, $12.67 million in 2009, $8.76 million
in
2010, $4.28 million in 2011, $1.62 million in 2012, and $0.29 million in
2013.
Depreciation expense related to operating lease equipment for the year ended
December 31, 2006 was $14.96 million.
Note
G — Premises and Equipment
Premises
and equipment as of December 31 consisted of the following:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Land
|
$
|
7,063
|
$
|
6,884
|
|||
|
Buildings
and improvements
|
43,111
|
42,616
|
|||||
|
Furniture
and equipment
|
32,948
|
33,205
|
|||||
|
Total
premises and equipment
|
83,122
|
82,705
|
|||||
|
Accumulated
depreciation and amortization
|
(45,796
|
)
|
(44,995
|
)
|
|||
|
Net
premises and equipment
|
$
|
37,326
|
$
|
37,710
|
|||
Depreciation
and amortization of properties and equipment totaled $4.80 million in 2006,
$5.00 million in 2005, and $4.81 million in 2004.
Note
H - Mortgage Servicing Assets
The
unpaid principal balance of residential mortgage loans serviced for third
parties was $0.65 billion at December 31, 2006, compared to $1.54 billion
at
December 31, 2005, and $1.91 billion at December 31, 2004.
Changes
in the carrying value of mortgage servicing assets and the associated valuation
allowance follow:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Mortgage
servicing assets:
|
|||||||
|
Balance
at beginning of period
|
$
|
19,393
|
$
|
23,715
|
|||
|
Additions
|
8,023
|
10,012
|
|||||
|
Amortization
|
(4,411
|
)
|
(6,782
|
)
|
|||
|
Sales
|
(15,415
|
)
|
(7,552
|
)
|
|||
|
Carrying
value before valuation allowance at end of period
|
7,590
|
19,393
|
|||||
|
Valuation
allowance:
|
|||||||
|
Balance
at beginning of period
|
(30
|
)
|
(2,301
|
)
|
|||
|
Impairment
recoveries
|
12
|
2,271
|
|||||
|
Balance
at end of period
|
$
|
(18
|
)
|
$
|
(30
|
)
|
|
|
Net
carrying value of mortgage servicing assets at end of period
|
$
|
7,572
|
$
|
19,363
|
|||
|
Fair
value of mortgage servicing assets at end of period
|
$
|
10,624
|
$
|
23,967
|
|||
Mortgage
servicing assets are evaluated for impairment and a valuation allowance is
established through a charge to income when the carrying value of the mortgage
servicing assets exceeds the fair value and the impairment is determined
to be
temporary. Other-than-temporary impairment is recognized when the recoverability
of a recorded valuation allowance is determined to be remote taking into
consideration historical and projected interest rates and loan pay-off activity.
When this situation occurs, the unrecoverable portion of the valuation allowance
is applied as a direct write-down to the carrying value of the mortgage
servicing asset. Unlike a valuation allowance, a direct write-down permanently
reduces the carrying value of the mortgage servicing asset and the valuation
allowance, precluding subsequent recoveries. During 2006, management determined
that it was not necessary to permanently write-down any previously established
valuation allowance. At December 31, 2006, the fair value of mortgage servicing
assets exceeded the carrying value reported in the consolidated balance sheet
by
$3.05 million. This difference represents increases in the fair value of
certain
mortgage servicing assets accounted for under SFAS No. 140 that could not
be
recorded above cost basis.
E-48
The
key
economic assumptions used to estimate the value of the mortgage servicing
rights
as of December 31 follow:
|
|
2006
|
|
2005
|
|
|
Expected
weighted-average life (in years)
|
3.06
|
3.01
|
||
|
Weighted-average
constant prepayment rate (CPR)
|
12.24
|
%
|
12.66
|
%
|
|
Weighted-average
discount rate
|
8.37
|
%
|
8.71
|
%
|
Funds
held in trust at 1st Source for the payment of principal, interest, taxes
and
insurance premiums applicable to mortgage loans being serviced for others,
were
approximately $7.67 million and $21.08 million at December 31, 2006 and December
31, 2005, respectively.
Note
I — Intangible Assets and Goodwill
At
December 31, 2006, intangible assets consisted of goodwill of $18.85 million
and
other intangible assets of $0.57 million, net of accumulated amortization
of
$12.34 million. At December 31, 2005, intangible assets consisted of goodwill
of
$18.85 million and other intangible assets of $2.53 million, net of accumulated
amortization of $10.43 million. Intangible asset amortization was $1.91 million,
$2.66 million, and $2.63 million for 2006, 2005, and 2004, respectively.
Amortization on other intangible assets is expected to total $0.20 million,
$0.10 million, $0.10 million, $0.09 million, and $0.07 million in 2007, 2008,
2009, 2010, and 2011, respectively.
A
summary
of core deposit intangible and other intangible assets as of December 31
follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Core
deposit intangibles:
|
|||||||
|
Gross
carrying amount
|
$
|
5,710
|
$
|
5,762
|
|||
|
Less:
accumulated amortization
|
(5,143
|
)
|
(4,260
|
)
|
|||
|
Net
carrying amount
|
$
|
567
|
$
|
1,502
|
|||
|
Other
intangibles:
|
|||||||
|
Gross
carrying amount
|
$
|
7,201
|
$
|
7,201
|
|||
|
Less:
accumulated amortization
|
(7,201
|
)
|
(6,174
|
)
|
|||
|
Net
carrying amount
|
$
|
-
|
$
|
1,027
|
|||
Note
J — Long-Term Debt and Mandatorily Redeemable Securities
Details
of long-term debt and mandatorily redeemable securities as of December 31,
2006
and 2005, are as follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Term
loan
|
$
|
10,000
|
$
|
10,000
|
|||
|
Federal
Home Loan Bank borrowings (4.73%-6.54%)
|
26,028
|
5,989
|
|||||
|
Mandatorily
redeemable securities
|
6,181
|
6,273
|
|||||
|
Other
long-term debt
|
1,552
|
975
|
|||||
|
Total
long-term debt and mandatorily redeemable securities
|
$
|
43,761
|
$
|
23,237
|
|||
Annual
maturities of long-term debt outstanding at December 31, 2006, for the next
five
years beginning in 2007, are as follows (in thousands): $10,407; $15,394;
$10,396; $280; and $201.
At
December 31, 2006, the $10.00 million term loan bore a fixed interest rate
of
4.76%. Interest is payable quarterly with principal due at the October 31,
2007,
maturity. The Term Loan Agreement contains, among other provisions, certain
covenants relating to existence and mergers, capital structure, and financial
requirements.
At
December 31, 2006, the Federal Home Loan Bank borrowings represented a source
of
funding for certain residential mortgage activities and consisted of eight
fixed
rate notes with maturities ranging from 2008 to 2022. These notes were
collateralized by $35.14 million of certain real estate loans.
Mandatorily
redeemable securities as of December 31, 2006, of $6.18 million reflected
the
"book value" shares under the 1st Source Executive Incentive Plan. See Note
K -
Employee Stock Benefit Plans for additional information. Dividends paid
on these shares and increases in book value per share are recorded as other
interest expense. Total interest expense recorded for 2006, 2005, and 2004
was
$0.66 million, $0.54 million, and $0.38 million, respectively.
E-49
Note
K — Employee Stock Benefit Plans
As
of
December 31, 2006, we had five stock-based employee compensation plans.
These
plans include two stock option plans, namely, the 1992 Stock Option
Plan, and
the 2001 Stock Option Plan; two executive stock award plans, namely,
the
Executive Incentive Plan, and the Restricted Stock Award Plan; and
the Employee
Stock Purchase Plan. These stock-based employee compensation plans
were
established to help retain and motivate key employees. All of the plans
have
been approved by the shareholders of 1st Source Corporation. The Executive
Compensation and Human Resources Committee (the "Committee") of the
1st Source
Corporation Board of Directors has sole authority to select the employees,
establish the awards to be issued, and approve the terms and conditions
of each
award under the stock-based compensation plans.
A
combined summary of activity regarding our active stock option plans
and
executive stock award plans is presented in the following
table.
|
Non-Vested
Stock
|
||||||||||||||||
|
Awards
Outstanding
|
Stock
Options Outstanding
|
|||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||
|
Shares
|
Number
of
|
Average
|
Average
|
|||||||||||||
|
Available
|
Shares
|
Grant-Date
|
Number
of
|
Exercise
|
||||||||||||
|
for
Grant
|
|
Fair
Value
|
Shares
|
Price
|
||||||||||||
|
Balance,
January 1, 2004
|
2,414,159
|
317,858
|
$
|
12.77
|
849,560
|
$
|
19.30
|
|||||||||
|
Shares
authorized --2004 EIP
|
35,174
|
-
|
-
|
-
|
-
|
|||||||||||
|
Granted
|
(37,374
|
)
|
37,374
|
14.11
|
-
|
|
7.63
|
|||||||||
|
Stock
options exercised
|
-
|
-
|
-
|
(228,532
|
) |
-
|
||||||||||
|
Stock
awards vested
|
-
|
(16,235
|
)
|
15.61
|
-
|
-
|
||||||||||
|
Forfeited
|
1,440
|
(10,377
|
)
|
9.66
|
(3,330
|
)
|
21.82
|
|||||||||
|
Canceled
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Balance,
December 31, 2004
|
2,413,399
|
328,620
|
12.88
|
617,698
|
23.61
|
|||||||||||
|
Shares
authorized --2005 EIP
|
71,963
|
-
|
-
|
-
|
-
|
|||||||||||
|
Granted
|
(83,974
|
)
|
83,974
|
15.16
|
-
|
-
|
||||||||||
|
Stock
options exercised
|
-
|
-
|
-
|
(29,721
|
)
|
11.31
|
||||||||||
|
Stock
awards vested
|
-
|
(14,892
|
)
|
15.39
|
-
|
-
|
||||||||||
|
Forfeited
|
9,570
|
(24,653
|
)
|
12.08
|
(7,129
|
)
|
27.21
|
|||||||||
|
Canceled
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Balance,
December 31, 2005
|
2,410,958
|
373,049
|
13.35
|
580,848
|
24.19
|
|||||||||||
|
Shares
authorized --2006 EIP
|
76,442
|
-
|
-
|
-
|
-
|
|||||||||||
|
Granted
|
(97,123
|
)
|
94,264
|
16.65
|
2,859
|
29.46
|
||||||||||
|
Stock
options exercised
|
-
|
-
|
-
|
(71,062
|
)
|
12.54
|
||||||||||
|
Stock
awards vested
|
-
|
(37,269
|
)
|
15.57
|
-
|
-
|
||||||||||
|
Forfeited
|
17,382
|
(19,896
|
)
|
13.46
|
(23,170
|
)
|
20.74
|
|||||||||
|
Canceled
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Balance,
December 31, 2006
|
2,407,659
|
410,148
|
$
|
13.90
|
489,475
|
$
|
26.04
|
|||||||||
Stock
Option Plans—
Our incentive stock option plans include the 1992 Stock Option Plan (the
"1992
Plan") and the 2001 Stock Option Plan (the "2001 Plan"). As of December
31,
2006, there were 421,936 stock options remaining exercisable under the
1992
Plan, all of which will expire in January 2011. We have not issued any
awards
from the 1992 Plan since 2001, as the 1992 Plan was terminated, except
for
outstanding options, after the 2001 Plan was approved by the shareholders.
Options under the 2001 Plan vest in one to eight years from date of grant.
As of
December 31, 2006, there were 67,539 stock options available for issuance
upon
exercise and 2,122,618 available for issuance under the 2001 Plan.
Each
award from all plans is evidenced by an award agreement that specifies
the
option price, the duration of the option, the number of shares to which
the
option pertains, and such other provisions as the Committee determines.
The
option price is equal to the fair market value of a share of 1st Source
Corporation's common stock on the date of grant. Options granted expire
at such
time as the Committee determines at the date of grant and in no event
does the
exercise period exceed a maximum of ten years, except for reload options
under
the 2001 Plan, which are given the remaining term of the original grant.
Upon
merger, consolidation, or other corporate consolidation in which 1st
Source
Corporation is not the surviving corporation, as defined in the plans,
all
outstanding options immediately vest.
E-50
Proceeds
from stock option exercises totaled $0.91 million in 2006, $0.34 million
in
2005, and $1.74 million in 2004. During 2006, 71,062 shares were issued
in
connection with stock option exercises from available treasury shares.
All
shares issued in connection with stock option exercises and non-vested
stock
awards are issued from available treasury stock.
The
total
intrinsic value of outstanding stock options and outstanding exercisable
stock
options was $2.98 million and $2.64 million at December 31, 2006. The
total
intrinsic value of stock options exercised was $0.96 million in 2006,
$0.29
million in 2005, and $3.36 million in 2004. The total fair value of share
awards
vested was $0.67 million during 2006 $0.46 million in 2005, and $0.31
million in
2004.
Other
information regarding stock options outstanding and exercisable as of
December
31, 2006, is as follows:
|
Options
Outstanding
|
Options
Exercisable
|
|||||
|
Weighted-Average
|
|
|||||
|
Number
of
|
Remaining
Contractual
|
Weighted-Average
|
Number
of
|
Weighted-Average
|
||
|
Range
of Exercise Prices
|
Shares
|
Life
(Years)
|
Exercise
Price
|
|
Shares
|
Exercise
Price
|
|
$
12.04 to $ 17.99
|
46,162
|
4.01
|
$13.89
|
32,412
|
$14.67
|
|
|
$
18.00 to $ 26.99
|
59,587
|
3.89
|
20.93
|
55,003
|
20.93
|
|
|
$
27.00 to $ 29.46
|
383,726
|
1.61
|
28.30
|
|
380,867
|
28.29
|
As
stated
in Note A - Accounting Policies, effective January 1, 2006, we adopted
the fair
value recognition provisions of SFAS No. 123(R). SFAS 123(R) requires
that
stock-based compensation to employees be recognized as compensation cost
in the
income statement based on their fair values on the measurement date,
which, for
1st Source, is the date of grant. Stock-based compensation expense is
recognized
ratably over the requisite service period for all awards. As a result
of
applying the provisions of SFAS 123(R) during 2006, we recognized additional
stock-based compensation expense related to stock options of $61,606
(not
subject to tax). The increase in stock-based compensation expense related
to
stock options had an immaterial impact on basic or diluted earnings per
share
during 2006. Cash flows from financing activities for 2006 were not affected
by
stock option exercises during 2006.
The
fair
value of each option on the date of grant was estimated using the Black-Scholes
option pricing model. Expected volatility is based on the historical
volatility
estimated over a period of at least equal to the estimated term of the
options.
In estimating the fair value of stock options under the Black-Scholes
valuation
model, separate groups of employees that have similar historical exercise
behavior are considered separately. The expected term of the options
granted is
derived based on past experience and represents the period of time that
options
granted are expected to be outstanding. The following weighted-average
assumptions were used in the option pricing model for options granted
in 2006
(no options were granted in 2004 or 2005): a risk-free interest rate
of 4.87%;
an expected dividend yield of 2.02%; an expected volatility factor of
35.73%;
and an expected option life of 5.23 years. The weighted-average grant
date per
share fair value of options granted in 2006 was $9.75.
The
following pro forma information presents net income and earnings per
share for
2005 and 2004 as if the fair value method of SFAS No. 123 had been used
to
measure compensation cost for the stock option plans.
|
Year
Ended December 31 (Dollars
in thousands, except per share data)
|
2005
|
2004
|
|
Net
income, as reported
|
$
33,751
|
$
24,965
|
|
Add:
|
||
|
Stock-based
employee compensation expense included in reported net income,
|
||
|
net
of related tax effects
|
2,875
|
1,392
|
|
Deduct:
|
||
|
Stock-based
employee compensation expense determined under fair value based
|
||
|
method
for all awards, net of related tax effects
|
(2,998)
|
(1,586)
|
|
Pro
forma net income
|
$
33,628
|
$
24,771
|
|
Earnings
per share:
|
||
|
Basic
— as reported *
|
$
1.48
|
$
1.10
|
|
Basic
— pro forma *
|
$
1.48
|
$
1.09
|
|
Diluted
— as reported *
|
$
1.46
|
$
1.08
|
|
Diluted
— pro forma *
|
$
1.46
|
$
1.07
|
*Per
share data gives retroactive recognition to a 10% stock dividend declared
on
July 27, 2006.
E-51
Stock
Award Plans—
Our incentive stock award plans include the Executive Incentive Plan
(EIP) and
the Restricted
Stock Award Plan (RSAP).
The EIP
is also administered by the Committee. Awards under the EIP include "book
value"
shares and "market value" shares of common stock. These shares are awarded
annually based on weighted performance criteria and generally vest over
a period
of five years. The EIP book value shares may only be sold to 1st Source
and such
sale is mandatory in the event of death, retirement, disability, or termination
of employment. The RSAP is designed for key employees. Awards under the
RSAP are
made to employees recommended by the Chief Executive Officer and approved
by the
Committee. Shares granted under the RSAP vest over a five to ten-year
period and
vesting is based upon meeting certain various criteria, including continued
employment with 1st Source.
Stock-based
compensation expense totaled $0.41 million in 2006, $4.66 million in
2005, and
$2.26 million in 2004. The total income tax benefit recognized in the
accompanying consolidated statements of income related to stock-based
compensation was $0.16 million in 2006, $1.79 million in 2005, and $0.86
million
in 2004. Unrecognized stock-based compensation expense related to stock
options
totaled $88,345 at December 31, 2006. At such date, the weighted-average
period
over which this unrecognized expense was expected to be recognized was
2.8
years. Unrecognized stock-based compensation expense related to non-vested
stock
awards was $276,970 at December 31, 2006. At such date, the weighted-average
period over which this unrecognized expense was expected to be recognized
was
5.34 years.
The
fair
value of non-vested stock awards for the purposes of recognizing stock-based
compensation expense is market price of the stock on the measurement
date,
which, for our purposes is the date of the award.
Employee
Stock Purchase Plan— We offer an Employee Stock
Purchase Plan (ESPP) for substantially all employees with at least two
years of
service on the effective date of an offering under the plan. Eligible
employees
may elect to purchase any dollar amount of stock, so long as such amount
does
not exceed 25% of their base rate of pay and the aggregate stock accrual
rate
for all offerings does not exceed $25,000 in any calendar year. The purchase
price for shares offered is the lower of the closing market bid price
for the
offering date or the average market bid price for the five business days
preceding the offering date. The purchase price and discount to the actual
market closing price on the offering date for the 2006, 2005, and 2004
offerings
were $25.70 (3.45%), $21.84 (2.02%), and $22.38 (3.69%), respectively.
Payment
for the stock is made through payroll deductions over the offering period,
and
employees may discontinue the deductions at any time and exercise the
option or
take the funds out of the program. The most recent offering began June
1, 2006
and runs through June 2, 2008, with $282,136 in stock value to be purchased
at
$25.70 per share. The fair value of the employees’ purchase rights for the 2006,
2005, and 2004 offerings was estimated using the Black-Scholes model.
The
following assumptions were used in the model in each of the last three
years: a
risk-free interest rate of 5.04% for 2006; 3.40% for 2005; and 2.52%
for 2004;
an expected dividend yield of 2.02% for 2006; 2.17% for 2005; and 1.66%
for
2004; an expected volatility factor of 18.77% for 2006; 27.49% for 2005;
and
44.20% for 2004; and an expected life of 2.0 years for 2006, 2005, and
2004. The
fair value for shares offered in 2006, 2005, and 2004 was $4.28, $3.44,
and
$5.81, respectively.
Note
L — Subordinated Notes
As
of
December 31, 2006, we sponsored three trusts, 1st Source Capital Trust II,
III
and IV (Capital Trusts) of which 100% of the common equity is owned by 1st
Source. The Capital Trusts were formed for the purpose of issuing
corporation-obligated mandatorily redeemable capital securities (the capital
securities) to third-party investors and investing the proceeds from the
sale of
the capital securities solely in junior subordinated debt securities of 1st
Source (the subordinated notes). The subordinated notes held by each Capital
Trust are the sole assets of that Capital Trust.
Distributions
on the capital securities issued by Capital Trust II, III and IV are payable
quarterly at a rate per annum equal to the interest rate being earned by
the
Capital Trust on the subordinated notes held by that Capital Trust. The capital
securities are subject to mandatory redemption, in whole or in part, upon
repayment of the subordinated notes. We have entered into agreements which,
taken collectively, fully and unconditionally guarantee the capital securities
subject to the terms of each of the guarantees.
The
capital securities held by the Capital Trusts qualify as Tier 1 capital under
Federal Reserve Board guidelines. On March 1, 2005, the Federal Reserve issued
rules that retain Tier 1 capital treatment for trust preferred securities
but
with stricter limits. Under the final rules, after a five-year transition
period, the aggregate amount of trust preferred securities and certain other
capital elements will retain its current limit of 25% of Tier 1 capital
elements, net of goodwill. The amount of trust preferred securities and certain
other elements in excess of the limit could be included in Tier 2 capital,
subject to restrictions. These new rules have no impact on our Tier 1 capital.
E-52
The
subordinated notes are summarized as follows, at December 31, 2006:
|
Amount
of
|
|||||
|
Subordinated
|
Interest
|
Maturity
|
|||
|
(Dollars
in thousands)
|
|
Notes
|
Rate
|
|
Date
|
|
March
1997 issuance-floating rate
|
$
|
17,784
|
7.25
|
%
|
03/31/27
|
|
November
2002 issuance-floating rate
|
10,310
|
6.95
|
%
|
11/15/32
|
|
|
September
2004 issuance-fixed rate
|
30,928
|
7.66
|
%
|
12/15/34
|
|
|
Total
|
$
|
59,022
|
|
|
|
The
March
1997 floating rate issuance interest rate is equal to the sum of the three-month
Treasury adjusted to a constant maturity, plus 2.25%. The November 2002 issuance
interest rate is fixed at 6.95% until November 15, 2007, at which time it
will
become floating at an interest rate equal to LIBOR, plus 3.35%.
Effective
October 1, 2006, we amended the 1st Source Corporation Employees’ Profit Sharing
Plan and Trust, which was renamed the 1st Source Corporation Employee Stock
Ownership and Profit Sharing Plan (as amended, the “Plan”). The Plan includes an
employee stock ownership component, which is designed to invest in and hold
1st
Source common stock, and a 401(k) plan component, which holds all Plan assets
not invested in 1st Source common stock. The Plan now also includes a number
of
new features that encourage diversification of investments with more
opportunities to change investment elections and contribution
levels.
Employees
are eligible to participate in the Plan on the first day of employment. After
one year and 1,000 hours of service worked, we are required under the 401(k)
component of the Plan to match dollar for dollar participant contributions
up to
4% of compensation, plus 50 cents per dollar of the next 2% deferrals. We
will
also contribute to the Plan an amount designated as a fixed profit sharing
contribution. The amount of fixed profit sharing contribution is equal to
two
percent of compensation. Additionally, each year we may, in our sole discretion,
make additional contributions to the 401(k) component of the Plan. As
of
December 31, 2006, there were 1,312,203 shares of 1st Source Corporation
common
stock held in relation to employee benefit plans.
Our
contribution is allocated among the participants on the basis of compensation.
Each participant’s account is credited with cash or shares of 1st Source common
stock based on that participant’s compensation earned during the year. After
completing five years of service in which they worked at least 1,000 hours
per
year, a participant will be completely vested in their Plan account. Plan
participants are entitled to receive distributions from their Plan accounts
only
upon termination of service, which includes retirement or death.
Contribution
expense for the years ended December 31, 2006, 2005, and 2004, amounted to
$2.39
million, $2.32 million, and $1.66 million, respectively.
Contributions
to the defined contribution money purchase pension plan are based on 2% of
participants’ eligible compensation. For the years ended December 31, 2006,
2005, and 2004, total pension expense for this plan amounted to $0.85 million,
$0.91 million, and $0.72 million, respectively.
Trustcorp
contributes to a defined contribution plan for all of its employees who meet
the
general eligibility requirements of the plan. Contribution expense for this
plan
for the years ended December 31, 2006, 2005, and 2004, amounted to $0.09
million, $0.14 million, and $0.13 million, respectively.
In
addition to the 1st Source Corporation Employee Stock Ownership and Profit
Sharing Plan, we provide certain health care and life insurance benefits
for
substantially all of our retired employees. All of our full-time employees
become eligible for these retiree benefits upon reaching age 55 with 20 years
of
credited service. The medical plan pays a stated percentage of eligible medical
expenses reduced for any deductibles and payments made by government programs
and other group coverage. The lifetime maximum benefit payable under the
medical
plan is $15,000 and for life insurance is $3,000.
Our
net
periodic postretirement benefit cost recognized in the consolidated financial
statements for the years ended December 31, 2006, 2005, and 2004 amounted
to
$0.12 million, $0.33 million, and $0.10 million, respectively. Our accrued
postretirement benefit cost was not material at December 31, 2006, 2005,
and
2004.
E-53
Note
N — Income Taxes
Income
tax expense was comprised of the following:
|
Year
Ended December 31 (Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
22,350
|
$
|
16,625
|
$
|
2,920
|
||||
|
State
|
1,781
|
1,909
|
870
|
|||||||
|
Total
current
|
24,131
|
18,534
|
3,790
|
|||||||
|
Deferred:
|
||||||||||
|
Federal
|
(3,434
|
)
|
(2,644
|
)
|
4,610
|
|||||
|
State
|
(451
|
)
|
(264
|
)
|
736
|
|||||
|
Total
deferred
|
(3,885
|
)
|
(2,908
|
)
|
5,346
|
|||||
|
Total
provision
|
$
|
20,246
|
$
|
15,626
|
$
|
9,136
|
||||
The
reasons for the difference between income tax expense and the amount computed
by
applying the statutory federal income tax rate (35%) to income before income
taxes are as follows:
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
Percent
of
|
Percent
of
|
Percent
of
|
|||||||||||||||||
|
Pretax
|
Pretax
|
Pretax
|
|||||||||||||||||
|
Year
Ended December 31 (Dollars
in thousands)
|
Amount
|
Income
|
Amount
|
Income
|
Amount
|
Income
|
|||||||||||||
|
Statutory
federal income tax
|
$
|
20,840
|
35.0
|
%
|
$
|
17,282
|
35.0
|
%
|
$
|
11,935
|
35.0
|
%
|
|||||||
|
(Decrease)
increase in income taxes resulting from:
|
|||||||||||||||||||
|
Tax-exempt
interest income
|
(1,669
|
)
|
(2.8
|
)
|
(1,749
|
)
|
(3.5
|
)
|
(1,782
|
)
|
(5.2
|
)
|
|||||||
|
State
taxes, net of federal income tax benefit
|
865
|
1.5
|
1,069
|
2.2
|
1,044
|
3.1
|
|||||||||||||
|
Dividends
received deduction
|
(270
|
)
|
(0.5
|
)
|
(188
|
)
|
(0.4
|
)
|
(1,607
|
)
|
(4.7
|
)
|
|||||||
|
Other
|
480
|
0.8
|
(788
|
)
|
(1.6
|
)
|
(454
|
)
|
(1.4
|
)
|
|||||||||
|
Total
|
$
|
20,246
|
34.0
|
% |
$
|
15,626
|
31.7
|
%
|
$
|
9,136
|
26.8
|
%
|
|||||||
|
The
tax expense (benefit) applicable to securities gains and losses
for the
years 2006, 2005, and 2004 was $1,758,000, $134,000, and $(1,808,000),
respectively.
|
|||||||||||||||||||
|
Deferred
tax assets and liabilities as of December 31, 2006 and 2005 consisted
of
the following:
|
|||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Reserve
for loan and lease losses
|
$
|
22,551
|
$
|
23,060
|
|||
|
Accruals
for employee benefits
|
3,827
|
5,120
|
|||||
|
Net
unrealized losses on securities available-for-sale
|
159
|
2,013
|
|||||
|
Securities
valuation reserve
|
1,319
|
1,150
|
|||||
|
Other
|
1,403
|
1,010
|
|||||
|
Total
deferred tax assets
|
|
29,259
|
|
32,353
|
|||
|
Deferred
tax liabilities:
|
|||||||
|
Differing
depreciable bases in premises and leased equipment
|
32,108
|
34,433
|
|||||
|
Mortgage
servicing
|
3,394
|
7,534
|
|||||
|
Capitalized
loan costs
|
2,307
|
2,168
|
|||||
|
Differing
bases in assets related to acquisitions
|
433
|
728
|
|||||
|
Other
|
2,060
|
564
|
|||||
|
Total
deferred tax liabilities
|
40,302
|
45,427
|
|||||
|
Net
deferred tax liability
|
$
|
11,043
|
$
|
13,074
|
|||
E-54
Note
O — Contingent Liabilities, Commitments, and Financial Instruments with
Off-Balance-Sheet Risk
Contingent
Liabilities —1st
Source and our subsidiaries are defendants in various legal proceedings arising
in the normal course of business. In the opinion of management, based upon
present information including the advice of legal counsel, the ultimate
resolution of these proceedings will not have a material effect on our
consolidated financial position or results of operation.
Commitments
— 1st Source and our subsidiaries are obligated under operating leases
for certain office premises and equipment. In 1982, we sold the headquarters
building and entered into a leaseback agreement with the purchaser. At December
31, 2006, the remaining term of the lease was five years with options to
renew
for up to 15 additional years. Approximately 30% of the facility is subleased
to
other tenants.
Future
minimum rental commitments for all noncancellable operating leases total
approximately, $2.68 million in 2007, $2.31 million in 2008, $2.05 million
in
2009, $1.72 million in 2010, $1.60 million in 2011, and $1.48 million,
thereafter. As of December 31, 2006, future minimum rentals to be received
under
noncancellable subleases totaled $3.03 million.
Rental
expense of office premises and equipment and related sublease income were
as
follows:
|
Year
Ended December 31 (Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Gross
rental expense
|
$
|
3,250
|
$
|
3,574
|
$
|
3,075
|
||||
|
Sublease
rental income
|
(1,626
|
)
|
(1,809
|
)
|
(1,558
|
)
|
||||
|
Net
rental expense
|
$
|
1,624
|
$
|
1,765
|
$
|
1,517
|
||||
Financial
Instruments with Off-Balance-Sheet Risk —To meet the financing needs of
our clients, 1st Source and our subsidiaries are parties to financial
instruments with off-balance-sheet risk in the normal course of business.
These
off-balance-sheet financial instruments include commitments to originate,
purchase and sell loans, and standby letters of credit. The instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of
the
amount recognized in the consolidated statements of financial
condition.
Our
exposure to credit loss in the event of nonperformance by the other party
to the
financial instruments for loan commitments and standby letters of credit
is
represented by the dollar amount of those instruments. We use the same credit
policies and collateral requirements in making commitments and conditional
obligations as we do for on-balance-sheet instruments.
Loan
commitments have fixed expiration dates or other termination clauses and
may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Trustcorp
and the Bank grant mortgage loan commitments to borrowers, subject to normal
loan underwriting standards. The interest rate risk associated with these
loan
commitments is managed by entering into contracts for future deliveries of
loans.
Letters
of credit are conditional commitments issued to guarantee the performance
of a
client to a third party. The credit risk involved and collateral obtained
in
issuing letters of credit are essentially the same as those involved in
extending loan commitments to clients.
As
of
December 31, 2006 and 2005, 1st Source and our subsidiaries had commitments
outstanding to originate and purchase mortgage loans aggregating $113.25
million
and $130.73 million, respectively. Outstanding commitments to sell loans
aggregated $73.87 million at December 31, 2006, and $98.39 million at December
31, 2005. Standby letters of credit totaled $83.15 million and $76.43 million
at
December 31, 2006 and 2005, respectively. Standby letters of credit have
terms
ranging from six months to one year.
Note
P — Derivative Financial Instruments
We
have
certain interest rate derivative positions that are not designated as hedging
instruments. These derivative positions relate to transactions in which we
enter
into an interest rate swap with a client while at the same time entering
into an
offsetting interest rate swap with another financial institution. In connection
with each transaction, we agree to pay interest to the client on a notional
amount at a variable interest rate and receive interest from the client on
a
same notional amount at a fixed interest rate. At the same time, we agree
to pay
another financial institution the same fixed interest rate on the same notional
amount and receive the same variable interest rate on the same notional amount.
The transaction allows our client to effectively convert a variable rate
loan to
a fixed rate. Because we act as an intermediary for our client, changes in
the
fair value of the underlying derivative contracts offset each other and do
not
impact our results of operations. At December 31, 2006, the notional amount
of
non-hedging interest rate swaps was $14.55 million.
E-55
Note
Q — Regulatory Matters
We
are
subject to various regulatory capital requirements administered by the Federal
banking agencies. Failure to meet minimum capital requirements can result
in
certain mandatory and possible additional discretionary actions by regulators
that, if undertaken, could have a material effect on our financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, we must meet specific capital guidelines that involve
quantitative measures of our assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Our capital amounts
and classification are subject to qualitative judgments by the regulators
about
components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require us
to
maintain minimum amounts and ratios of total capital and Tier I capital to
risk-weighted assets and of Tier I capital to average assets. We believe
that we
meet all capital adequacy requirements to which we are subject.
The
most recent notification from the Federal bank regulators categorized the
Bank,
the largest of our subsidiaries, as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized"
we must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table below. There are no conditions
or
events since that notification that we believe will have changed the
institution’s category.
As
discussed in Note L, the capital securities held by the Capital Trusts qualify
as Tier 1 capital under Federal Reserve Board guidelines.
The
actual and required capital amounts and ratios for 1st Source Corporation
and
1st Source Bank, as of December 31, 2006, are presented in the table below:
|
To
Be Well
|
|||||||||||||||||||
|
Capitalized
Under
|
|||||||||||||||||||
|
Minimum
Capital
|
Prompt
Corrective
|
||||||||||||||||||
|
Actual
|
Adequacy
|
Action
Provisions
|
|||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
Total
Capital (to Risk-Weighted Assets):
|
|||||||||||||||||||
|
Consolidated
|
$
|
448,496
|
14.23
|
%
|
$
|
252,194
|
8.00
|
%
|
$
|
315,242
|
10.00
|
%
|
|||||||
|
1st
Source Bank
|
426,858
|
13.73
|
%
|
248,691
|
8.00
|
%
|
310,864
|
10.00
|
%
|
||||||||||
|
Tier
I Capital (to Risk-Weighted Assets):
|
|||||||||||||||||||
|
Consolidated
|
406,996
|
12.91
|
%
|
126,097
|
4.00
|
%
|
189,145
|
6.00
|
%
|
||||||||||
|
1st
Source Bank
|
387,145
|
12.45
|
%
|
124,346
|
4.00
|
%
|
186,518
|
6.00
|
%
|
||||||||||
|
Tier
I Capital (to Average Assets):
|
|||||||||||||||||||
|
Consolidated
|
406,996
|
10.93
|
%
|
148,928
|
4.00
|
%
|
186,160
|
5.00
|
%
|
||||||||||
|
1st
Source Bank
|
387,145
|
10.56
|
%
|
146,581
|
4.00
|
%
|
183,226
|
5.00
|
%
|
||||||||||
The
Bank
is required to maintain noninterest bearing cash balances with the Federal
Reserve Bank. The average balance of these deposits for the years ended December
31, 2006 and 2005, were approximately $6.23 million and $8.45 million,
respectively.
Dividends
that may be paid by a subsidiary bank to the parent company are subject to
certain legal and regulatory limitations and also may be affected by capital
needs, as well as other factors. Without regulatory approval, the Bank can
pay
dividends in 2007 of up to $67.14 million, plus an additional amount equal
to
its net profits for 2007, as defined by statute, up to the date of any such
dividend declaration.
Our
mortgage subsidiary, Trustcorp, is required to maintain minimum net worth
capital requirements established by various governmental agencies. Trustcorp's
net worth requirements are governed by the Department of Housing and Urban
Development and GNMA. As of December 31, 2006, Trustcorp
met its minimum net worth capital requirements.
E-56
Note
R — Fair Values of Financial Instruments
The
fair
values of our financial instruments as of December 31, 2006 and 2005 are
summarized in the table below.
|
2006
|
2005
|
||||||||||||
|
Carrying
or
|
Carrying
or
|
||||||||||||
|
(Dollars
in thousands)
|
Contract
Value
|
Fair
Value
|
Contract
Value
|
Fair
Value
|
|||||||||
|
Assets:
|
|||||||||||||
|
Cash
and due from banks
|
$
|
118,131
|
$
|
118,131
|
$
|
124,817
|
$
|
124,817
|
|||||
|
Federal
funds sold and interest bearing deposits with other banks
|
64,979
|
64,979
|
68,578
|
68,578
|
|||||||||
|
Investment
securities, available-for-sale
|
708,672
|
708,672
|
632,625
|
632,625
|
|||||||||
|
Mortgages
held for sale
|
50,159
|
50,159
|
67,224
|
67,448
|
|||||||||
|
Loans
and leases, net of reserve for loan and lease losses
|
2,643,735
|
2,608,909
|
2,404,734
|
2,380,891
|
|||||||||
|
Interest
rate swaps
|
122
|
122
|
65
|
65
|
|||||||||
|
Liabilities:
|
|||||||||||||
|
Deposits
|
$
|
3,048,284
|
$
|
3,048,971
|
$
|
2,745,587
|
$
|
2,750,212
|
|||||
|
Short-term
borrowings
|
222,718
|
222,718
|
277,469
|
277,469
|
|||||||||
|
Long-term
debt and mandatorily redeemable securities
|
43,761
|
43,502
|
23,237
|
23,065
|
|||||||||
|
Subordinated
notes
|
59,022
|
60,768
|
59,022
|
58,619
|
|||||||||
|
Interest
rate swaps
|
122
|
122
|
65
|
65
|
|||||||||
|
Off-balance-sheet
instruments *
|
-
|
(346
|
)
|
-
|
(431
|
)
|
|||||||
|
*
Represents estimated cash outflows required to currently settle
the
obligations at current market rates.
|
|||||||||||||
E-57
We
used
the following methods and assumptions in estimating the fair value of our
financial instruments:
Cash
and Cash Equivalents—
The
carrying values reported in the consolidated statements of financial condition
for cash and due from banks, Federal funds sold and interest bearing deposits
with other banks approximate fair values for these assets.
Investment
Securities—
Fair
values for securities are based on quoted market prices, where available.
If
quoted market prices are not available, fair values are estimated based on
quoted market prices of comparable investments.
Loans
and Leases— For variable rate loans and leases that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair values for certain real estate loans (e.g., one-to-four
single
family residential mortgage loans) are based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair values of all other loans and
leases are estimated using discounted cash flow analyses which use interest
rates currently being offered for loans and leases with similar terms to
borrowers of similar credit quality.
Mortgages
Held for Sale— The fair value of loans held for sale is determined
based upon the market sales price of similar loans.
Deposits—
The
fair values for all deposits other than time deposits are equal to the amounts
payable on demand (the carrying value). Fair values of variable rate time
deposits are equal to their carrying values. Fair values for fixed rate time
deposits are estimated using discounted cash flow analyses using interest
rates
currently being offered for deposits with similar remaining
maturities.
Short-Term
Borrowings—
The
carrying values of Federal funds purchased, securities sold under repurchase
agreements, and other short-term borrowings, including our liability related
to
mortgage loans available for repurchase under GNMA optional repurchase programs,
approximate their fair values.
Long-Term
Debt and Mandatorily Redeemable Securities—
The
fair values of long-term debt are estimated using discounted cash flow analyses,
based on our current estimated incremental borrowing rates for similar types
of
borrowing arrangements. The carrying values of mandatorily redeemable securities
are based on approximate fair values.
Subordinated
Notes—
Fair
values are based on quoted market prices, where available. If quoted market
prices are not available, fair values are estimated based on calculated market
prices of comparable securities.
Interest
Rate Swaps—
The
carrying value of interest rate swaps is equal to the fair value. The fair
value
is based on the estimated amount we would receive or pay to terminate the
contract, taking into account the current interest rate.
Off-Balance-Sheet
Instruments— Contract and fair values for certain of our
off-balance-sheet financial instruments (guarantees and loan commitments)
are
estimated based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties’ credit standing.
Limitations—
Fair
value estimates are made at a specific point in time based on relevant market
information and information about the financial instruments. Because no market
exists for a significant portion of our financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other such factors.
These
estimates do not reflect any premium or discount that could result from offering
for sale at one time our entire holdings of a particular financial instrument.
These estimates are subjective in nature and require considerable judgment
to
interpret market data. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts we could realize in a current market
exchange, nor are they intended to represent the fair value of 1st Source
as a
whole. The use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts. The fair
value
estimates presented herein are based on pertinent information available to
management as of the respective balance sheet date. Although management is
not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued since the
presentation dates, and therefore, estimates of fair value after the balance
sheet date may differ significantly from the amounts presented
herein.
Other
significant assets, such as mortgage banking operation, premises and equipment,
other assets, and liabilities not defined as financial instruments, are not
included in the above disclosures. In addition, for investment and
mortgage-backed securities, the income tax ramifications related to the
realization of unrealized gains and losses can have a significant effect
on fair
value estimates and have not been considered in many of the estimates. Also,
the
fair value estimates for deposits do not include the benefit that results
from
the low-cost funding provided by the deposit liabilities compared to the
cost of
borrowing funds in the market.
E-58
Note
S — Subsequent Event
On
February 19, 2007, we entered into a definitive agreement of merger with
FINA
Bancorp, Inc. (FINA), in which 1st Source will acquire FINA in an exchange
of
cash and stock. FINA headquartered in Valparaiso, Indiana, owns First National
Bank, Valparaiso, a full service bank with approximately $620.00 million
in
assets. The
merger, approved by the directors of both companies, is valued at approximately
$135.00 million, or $3,206.57 per FINA share. The price represents approximately
196% of book value and 41.5 times 2006 earnings before securities losses.
1st
Source will pay a minimum of 40% and a maximum of 42% of the purchase price
in
shares of 1st Source common stock, and the remainder of the purchase price
will
be paid in cash. The precise exchange ratio will be established at closing
based
on 1st Source’s stock price prior to the completion of the merger. FINA
shareholders will be able to choose whether to receive 1st Source common
stock
or cash pursuant to election procedures described in the definitive agreement,
subject to 1st Source’s ability to reallocate elections on a proportionate
basis.
The
merger is subject to customary closing conditions, including regulatory
approval
and is expected to be completed in the second quarter of 2007. We believe
the
purchase of FINA is a natural extension of our service area and is consistent
with our growth market expansion initiatives.
Note
T — 1st Source Corporation (Parent Company Only) Financial
Information
|
STATEMENTS
OF FINANCIAL CONDITION
|
|||||||
|
December
31 (Dollars
in thousands)
|
2006
|
2005
|
|||||
|
ASSETS
|
|||||||
|
Cash
|
$
|
1
|
$
|
1
|
|||
|
Short-term
investments with bank subsidiary
|
14,442
|
11,562
|
|||||
|
Investment
securities, available-for-sale
|
|||||||
|
(amortized
cost of $17,112 and $12,893 at December 31, 2006 and 2005, respectively)
|
19,697
|
15,282
|
|||||
|
Investments
in:
|
|||||||
|
Bank
subsidiaries
|
402,805
|
376,538
|
|||||
|
Non-bank
subsidiaries
|
10,202
|
9,544
|
|||||
|
Loan
receivables:
|
|||||||
|
Non-bank
subsidiaries
|
3,030
|
6,000
|
|||||
|
Premises
and equipment, net
|
2,143
|
2,143
|
|||||
|
Other
assets
|
7,660
|
8,074
|
|||||
|
Total
assets
|
$
|
459,980
|
$
|
429,144
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Commercial
paper borrowings
|
$
|
11,472
|
$
|
4,800
|
|||
|
Other
liabilities
|
3,209
|
3,033
|
|||||
|
Long-term
debt and mandatorily redeemable securities
|
76,395
|
75,735
|
|||||
|
Total
liabilities
|
91,076
|
83,568
|
|||||
|
Shareholders’
equity
|
368,904
|
345,576
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
459,980
|
$
|
429,144
|
|||
E-59
|
STATEMENTS
OF INCOME
|
||||||||||
|
Year
Ended December 31 (Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Income:
|
||||||||||
|
Dividends
from bank and non-bank subsidiaries
|
$
|
15,045
|
$
|
11,552
|
$
|
9,749
|
||||
|
Rental
income from subsidiaries
|
2,542
|
2,472
|
829
|
|||||||
|
Other
|
4,134
|
3,286
|
2,721
|
|||||||
|
Total
income
|
21,721
|
17,310
|
13,299
|
|||||||
|
Expenses:
|
||||||||||
|
Interest
on long-term debt and mandatorily redeemable securities
|
5,495
|
5,040
|
4,869
|
|||||||
|
Interest
on commercial paper and other short-term borrowings
|
418
|
73
|
10
|
|||||||
|
Rent
expense
|
1,059
|
1,059
|
1,059
|
|||||||
|
Other
|
1,148
|
2,352
|
2,705
|
|||||||
|
Total
expenses
|
8,120
|
8,524
|
8,643
|
|||||||
|
Income
before income tax benefit and equity in undistributed income
of
subsidiaries
|
13,601
|
8,786
|
4,656
|
|||||||
|
Income
tax benefit
|
220
|
897
|
2,269
|
|||||||
|
Income
before equity in undistributed income of subsidiaries
|
13,821
|
9,683
|
6,925
|
|||||||
|
Equity
in undistributed income of subsidiaries:
|
||||||||||
|
Bank
subsidiaries
|
23,448
|
24,057
|
19,832
|
|||||||
|
Non-bank
subsidiaries
|
2,028
|
11
|
(1,792
|
)
|
||||||
|
Net
income
|
$
|
39,297
|
$
|
33,751
|
$
|
24,965
|
||||
E-60
|
STATEMENTS
OF CASH FLOW
|
||||||||||
|
Year
Ended December 31 (Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Operating
activities:
|
||||||||||
|
Net
income
|
$
|
39,297
|
$
|
33,751
|
$
|
24,965
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
||||||||||
|
Equity
in undistributed income of subsidiaries
|
(25,476
|
)
|
(24,068
|
)
|
(18,040
|
)
|
||||
|
Depreciation
of premises and equipment
|
289
|
305
|
283
|
|||||||
|
Realized
and unrealized investment securities (gains) losses
|
(517
|
)
|
(72
|
)
|
851
|
|||||
|
Other
|
(1,124
|
)
|
(218
|
)
|
523
|
|||||
|
Net
change in operating activities
|
12,469
|
9,698
|
8,582
|
|||||||
|
Investing
activities:
|
||||||||||
|
Proceeds
from sales and maturities of investment securities
|
1,817
|
15,356
|
6,645
|
|||||||
|
Purchases
of investment securities
|
(3,754
|
)
|
(10,361
|
)
|
-
|
|||||
|
Net
change in premises and equipment
|
(288
|
)
|
(118
|
)
|
(264
|
)
|
||||
|
Change
in short-term investments with bank subsidiary
|
(2,880
|
)
|
(6,329
|
)
|
(2,080
|
)
|
||||
|
Change
in loans made to subsidiaries, net
|
2,970
|
1,000
|
(285
|
)
|
||||||
|
Capital
contributions to subsidiaries
|
1,400
|
(1,460
|
)
|
-
|
||||||
|
Return
of capital from subsidiaries
|
-
|
-
|
500
|
|||||||
|
Net
change in investing activities
|
(735
|
)
|
(1,912
|
)
|
4,516
|
|||||
|
Financing
activities:
|
||||||||||
|
Net
change in commercial paper and other short-term borrowings
|
6,673
|
3,964
|
(146
|
)
|
||||||
|
Proceeds
from issuance of subordinated notes
|
-
|
-
|
30,929
|
|||||||
|
Payments
on subordinated notes
|
-
|
-
|
(28,351
|
)
|
||||||
|
Proceeds
from issuance of long-term debt
|
874
|
311
|
18
|
|||||||
|
Payments
on long-term debt
|
(123
|
)
|
(44
|
)
|
(5,048
|
)
|
||||
|
Net
proceeds from issuance of treasury stock
|
814
|
528
|
3,253
|
|||||||
|
Acquisition
of treasury stock
|
(7,657
|
)
|
(2,221
|
)
|
(4,958
|
)
|
||||
|
Cash
dividends
|
(12,315
|
)
|
(10,325
|
)
|
(8,863
|
)
|
||||
|
Net
change in financing activities
|
(11,734
|
)
|
(7,787
|
)
|
(13,166
|
)
|
||||
|
Net
change in cash and cash equivalents
|
-
|
(1
|
)
|
(68
|
)
|
|||||
|
Cash
and cash equivalents, beginning of year
|
1
|
2
|
70
|
|||||||
|
Cash
and cash equivalents, end of year
|
$
|
1
|
$
|
1
|
$
|
2
|
||||
E-61
UNAUDITED
INTERIM FINANCIAL STATEMENTS MARCH 31, 2007
|
|
|||||||
|
|
|||||||
|
(Unaudited
- Dollars in thousands)
|
|
||||||
|
March
31,
|
December
31,
|
||||||
|
2007
|
2006
|
||||||
|
ASSETS
|
|
|
|||||
|
Cash
and due from banks
|
$
|
70,962
|
$
|
118,131
|
|||
|
Federal
funds sold and
|
|||||||
|
interest
bearing deposits with other banks
|
136,409
|
64,979
|
|||||
|
Investment
securities available-for-sale
|
|||||||
|
(amortized
cost of $643,334 and $709,091
|
|||||||
|
at
March 31, 2007 and December 31, 2006, respectively)
|
643,915
|
708,672
|
|||||
|
Mortgages
held for sale
|
41,649
|
50,159
|
|||||
|
Loans
and leases - net of unearned discount:
|
|||||||
|
Commercial
and agricultural loans
|
508,976
|
478,310
|
|||||
|
Auto,
light truck and environmental equipment
|
308,341
|
317,604
|
|||||
|
Medium
and heavy duty truck
|
336,254
|
341,744
|
|||||
|
Aircraft
financing
|
501,838
|
498,914
|
|||||
|
Construction
equipment financing
|
326,779
|
305,976
|
|||||
|
Loans
secured by real estate
|
644,819
|
632,283
|
|||||
|
Consumer
loans
|
124,408
|
127,706
|
|||||
|
Total
loans and leases
|
2,751,415
|
2,702,537
|
|||||
|
Reserve
for loan and lease losses
|
(58,702
|
)
|
(58,802
|
)
|
|||
|
Net
loans and leases
|
2,692,713
|
2,643,735
|
|||||
|
Equipment
owned under operating leases, net
|
75,541
|
76,310
|
|||||
|
Net
premises and equipment
|
36,925
|
37,326
|
|||||
|
Accrued
income and other assets
|
104,971
|
108,003
|
|||||
|
Total
assets
|
$
|
3,803,085
|
$
|
3,807,315
|
|||
|
LIABILITIES
|
|||||||
|
Deposits:
|
|||||||
|
Noninterest
bearing
|
$
|
404,350
|
$
|
339,866
|
|||
|
Interest
bearing
|
2,629,081
|
2,708,418
|
|||||
|
Total
deposits
|
3,033,431
|
3,048,284
|
|||||
|
Federal
funds purchased and securities
|
|||||||
|
sold
under agreements to repurchase
|
204,389
|
195,262
|
|||||
|
Other
short-term borrowings
|
18,085
|
27,456
|
|||||
|
Long-term
debt and mandatorily redeemable securities
|
43,604
|
43,761
|
|||||
|
Subordinated
notes
|
59,022
|
59,022
|
|||||
|
Accrued
expenses and other liabilities
|
69,496
|
64,626
|
|||||
|
Total
liabilities
|
3,428,027
|
3,438,411
|
|||||
|
SHAREHOLDERS'
EQUITY
|
|||||||
|
Preferred
stock; no par value
|
|||||||
|
Authorized
10,000,000 shares; none issued or outstanding
|
-
|
-
|
|||||
|
Common
stock; no par value
|
|||||||
|
Authorized
40,000,000 shares; issued 23,791,790 at March 31, 2007
|
|||||||
|
and
23,781,518 at December 31, 2006, less unearned shares
|
|||||||
|
(273,258
at March 31, 2007 and 262,986 at December 31, 2006)
|
8,336
|
8,336
|
|||||
|
Capital
surplus
|
280,827
|
280,827
|
|||||
|
Retained
earnings
|
105,231
|
99,572
|
|||||
|
Cost
of common stock in treasury (1,008,838 shares at March 31, 2007,
and
|
|||||||
|
1,022,435
shares at December 31, 2006)
|
(19,697
|
)
|
(19,571
|
)
|
|||
|
Accumulated
other comprehensive income (loss)
|
361
|
(260
|
)
|
||||
|
Total
shareholders' equity
|
375,058
|
368,904
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
3,803,085
|
$
|
3,807,315
|
|||
|
The
accompanying notes are a part of the consolidated financial
statements.
|
|||||||
E-62
|
|
|||||||
|
|
|||||||
|
(Unaudited
- Dollars in thousands, except per share amounts)
|
|
||||||
|
Three
Months Ended
|
|||||||
|
March
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Interest
income:
|
|
|
|||||
|
Loans
and leases
|
$
|
48,274
|
$
|
40,888
|
|||
|
Investment
securities, taxable
|
5,730
|
3,925
|
|||||
|
Investment
securities, tax-exempt
|
1,417
|
1,267
|
|||||
|
Other
|
532
|
316
|
|||||
|
Total
interest income
|
55,953
|
46,396
|
|||||
|
Interest
expense:
|
|||||||
|
Deposits
|
25,270
|
17,033
|
|||||
|
Short-term
borrowings
|
2,690
|
2,760
|
|||||
|
Subordinated
notes
|
1,094
|
1,050
|
|||||
|
Long-term
debt and mandatorily redeemable securities
|
627
|
454
|
|||||
|
Total
interest expense
|
29,681
|
21,297
|
|||||
|
Net
interest income
|
26,272
|
25,099
|
|||||
|
Recovery
of provision for loan and lease losses
|
(623
|
)
|
(300
|
)
|
|||
|
Net
interest income after
|
|||||||
|
recovery
of provision for loan and lease losses
|
26,895
|
25,399
|
|||||
|
Noninterest
income:
|
|||||||
|
Trust
fees
|
3,643
|
3,391
|
|||||
|
Service
charges on deposit accounts
|
4,570
|
4,386
|
|||||
|
Mortgage
banking income
|
571
|
1,757
|
|||||
|
Insurance
commissions
|
1,638
|
1,682
|
|||||
|
Equipment
rental income
|
5,098
|
4,220
|
|||||
|
Other
income
|
1,719
|
1,486
|
|||||
|
Investment
securities and other investment gains
|
247
|
2,083
|
|||||
|
Total
noninterest income
|
17,486
|
19,005
|
|||||
|
Noninterest
expense:
|
|||||||
|
Salaries
and employee benefits
|
17,566
|
15,514
|
|||||
|
Net
occupancy expense
|
1,936
|
1,867
|
|||||
|
Furniture
and equipment expense
|
3,094
|
3,134
|
|||||
|
Depreciation
- leased equipment
|
4,076
|
3,382
|
|||||
|
Supplies
and communication
|
1,272
|
1,363
|
|||||
|
Other
expense
|
3,856
|
4,146
|
|||||
|
Total
noninterest expense
|
31,800
|
29,406
|
|||||
|
Income
before income taxes
|
12,581
|
14,998
|
|||||
|
Income
tax expense
|
4,058
|
5,065
|
|||||
|
Net
income
|
$
|
8,523
|
$
|
9,933
|
|||
|
Per
common share*:
|
|||||||
|
Basic
net income per common share
|
$
|
0.38
|
$
|
0.44
|
|||
|
Diluted
net income per common share
|
$
|
0.37
|
$
|
0.43
|
|||
|
Dividends
|
$
|
0.140
|
$
|
0.127
|
|||
|
Basic
weighted average common shares outstanding*
|
22,504,799
|
22,647,585
|
|||||
|
Diluted
weighted average common shares outstanding*
|
22,797,557
|
22,960,502
|
|||||
|
*
The computation of per share data and shares outstanding gives
retroactive
recognition to a 10% stock dividend declared on July 27,
2006.
|
|||||||
|
The
accompanying notes are a part of the consolidated financial
statements.
|
|
|
|||||
E-63
|
(Unaudited
- Dollars in thousands, except per share amounts)
|
|
|
|
||||||||||||||||
|
Net
|
|||||||||||||||||||
|
Unrealized
|
|||||||||||||||||||
|
Appreciation
|
|||||||||||||||||||
|
Cost
of
|
(Depreciation)
|
||||||||||||||||||
|
Common
|
of
Securities
|
||||||||||||||||||
|
Common
|
Capital
|
Retained
|
Stock
|
Available-
|
|||||||||||||||
|
|
Total
|
Stock
|
Surplus
|
Earnings
|
in
Treasury
|
For-Sale
|
|||||||||||||
|
Balance
at January 1, 2006
|
$
|
345,576
|
$
|
7,578
|
$
|
214,001
|
$
|
139,601
|
($12,364
|
)
|
($3,240
|
)
|
|||||||
|
Comprehensive
Income, net of tax:
|
|||||||||||||||||||
|
Net
Income
|
9,933
|
-
|
-
|
9,933
|
-
|
-
|
|||||||||||||
|
Change
in unrealized depreciation
|
|||||||||||||||||||
|
of
available-for-sale securities, net of tax
|
190
|
-
|
-
|
-
|
-
|
190
|
|||||||||||||
|
Total
Comprehensive Income
|
10,123
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Issuance
of 37,107 common shares
|
|||||||||||||||||||
|
under
stock based compensation plans,
|
|||||||||||||||||||
|
including
related tax effects
|
402
|
-
|
-
|
163
|
239
|
-
|
|||||||||||||
|
Cost
of 229,269 shares of common
|
|||||||||||||||||||
|
stock
acquired for treasury
|
(5,857
|
)
|
-
|
-
|
-
|
(5,857
|
)
|
-
|
|||||||||||
|
Cash
dividend ($0.127 per share)*
|
(2,894
|
)
|
-
|
-
|
(2,894
|
)
|
-
|
-
|
|||||||||||
|
Balance
at March 31, 2006
|
$
|
347,350
|
$
|
7,578
|
$
|
214,001
|
$
|
146,803
|
($17,982
|
)
|
($3,050
|
)
|
|||||||
|
Balance
at January 1, 2007
|
$
|
368,904
|
$
|
8,336
|
$
|
280,827
|
$
|
99,572
|
($19,571
|
)
|
($260
|
)
|
|||||||
|
Comprehensive
Income, net of tax:
|
|||||||||||||||||||
|
Net
Income
|
8,523
|
-
|
-
|
8,523
|
-
|
-
|
|||||||||||||
|
Change
in unrealized appreciation
|
|||||||||||||||||||
|
of
available-for-sale securities, net of tax
|
621
|
-
|
-
|
-
|
-
|
621
|
|||||||||||||
|
Total
Comprehensive Income
|
9,144
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Issuance
of 30,355 common shares
|
|||||||||||||||||||
|
under
stock based compensation plans,
|
|||||||||||||||||||
|
including
related tax effects
|
340
|
-
|
-
|
292
|
48
|
-
|
|||||||||||||
|
Cost
of 16,758 shares of common
|
|||||||||||||||||||
|
stock
acquired for treasury
|
(174
|
)
|
-
|
-
|
-
|
(174
|
)
|
-
|
|||||||||||
|
Cash
dividend ($0.14 per share)
|
(3,156
|
)
|
-
|
-
|
(3,156
|
)
|
-
|
-
|
|||||||||||
|
Balance
at March 31, 2007
|
$
|
375,058
|
$
|
8,336
|
$
|
280,827
|
$
|
105,231
|
($19,697
|
)
|
$
|
361
|
|||||||
|
*Per
share data gives retroactive recognition to a 10% stock dividend
declared
on July 27, 2006.
|
|||||||||||||||||||
|
The
accompanying notes are a part of the consolidated financial
statements.
|
|||||||||||||||||||
E-64
|
(Unaudited
- Dollars in thousands)
|
|||||||
|
Three
Months Ended March 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Operating
activities:
|
|
|
|||||
|
Net
income
|
$
|
8,523
|
$
|
9,933
|
|||
|
Adjustments
to reconcile net income to net cash
|
|||||||
|
from/(used
in) operating activities:
|
|||||||
|
Recovery
of provision for loan and lease losses
|
(623
|
)
|
(300
|
)
|
|||
|
Depreciation
of premises and equipment
|
1,215
|
1,263
|
|||||
|
Depreciation
of equipment owned and leased to others
|
4,076
|
3,382
|
|||||
|
Change
in investment security premiums
|
|||||||
|
and
discounts, net
|
(64
|
)
|
358
|
||||
|
Amortization
of mortgage servicing rights
|
639
|
1,576
|
|||||
|
Mortgage
servicing asset impairment recoveries
|
(1
|
)
|
(9
|
)
|
|||
|
Change
in deferred income taxes
|
(1,354
|
)
|
(815
|
)
|
|||
|
Realized
investment securities gains
|
(247
|
)
|
(2,083
|
)
|
|||
|
Change
in mortgages held for sale
|
8,510
|
862
|
|||||
|
Change
in interest receivable
|
938
|
1,055
|
|||||
|
Change
in interest payable
|
1,162
|
2,041
|
|||||
|
Change
in other assets
|
1,455
|
(1,066
|
)
|
||||
|
Change
in other liabilities
|
4,683
|
(962
|
)
|
||||
|
Other
|
177
|
361
|
|||||
|
Net
change in operating activities
|
29,089
|
15,596
|
|||||
|
Investing
activities:
|
|||||||
|
Proceeds
from sales of investment securities
|
-
|
516
|
|||||
|
Proceeds
from maturities of investment securities
|
154,101
|
64,567
|
|||||
|
Purchases
of investment securities
|
(88,034
|
)
|
(77,682
|
)
|
|||
|
Net
change in short-term investments
|
(71,429
|
)
|
41,577
|
||||
|
Loans
sold or participated to others
|
-
|
508
|
|||||
|
Net
change in loans and leases
|
(48,354
|
)
|
(15,881
|
)
|
|||
|
Net
change in equipment owned under operating leases
|
(3,307
|
)
|
(4,540
|
)
|
|||
|
Purchases
of premises and equipment
|
(839
|
)
|
(1,159
|
)
|
|||
|
Net
change in investing activities
|
(57,862
|
)
|
7,906
|
||||
|
Financing
activities:
|
|||||||
|
Net
change in demand deposits, NOW
|
|||||||
|
accounts
and savings accounts
|
(17,684
|
)
|
(251,123
|
)
|
|||
|
Net
change in certificates of deposit
|
2,830
|
183,957
|
|||||
|
Net
change in short-term borrowings
|
(244
|
)
|
3,380
|
||||
|
Proceeds
from issuance of long-term debt
|
-
|
10,273
|
|||||
|
Payments
on long-term debt
|
(255
|
)
|
(194
|
)
|
|||
|
Net
proceeds from issuance of treasury stock
|
340
|
402
|
|||||
|
Acquisition
of treasury stock
|
(174
|
)
|
(5,856
|
)
|
|||
|
Cash
dividends
|
(3,209
|
)
|
(2,946
|
)
|
|||
|
Net
change in financing activities
|
(18,396
|
)
|
(62,107
|
)
|
|||
|
Net
change in cash and cash equivalents
|
(47,169
|
)
|
(38,605
|
)
|
|||
|
Cash
and cash equivalents, beginning of year
|
118,131
|
124,817
|
|||||
|
Cash
and cash equivalents, end of period
|
$
|
70,962
|
$
|
86,212
|
|||
|
The
accompanying notes are a part of the consolidated financial
statements.
|
|||||||
E-65
Note
1. Basis
of
Presentation
The
accompanying unaudited consolidated financial statements reflect 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 consolidated financial
position, the results of operations, changes in shareholders’ equity, and cash
flows for the periods presented. These unaudited consolidated financial
statements have been prepared according to the rules and regulations of
the
Securities and Exchange Commission (SEC) and, therefore, certain information
and
footnote disclosures normally included in financial statements prepared
in
accordance with U. S. generally accepted accounting principles have been
omitted. The Notes to the Consolidated Financial Statements appearing in
1st
Source Corporation’s Annual Report on Form 10-K (2006 Annual Report), which
include descriptions of significant accounting policies, should be read
in
conjunction with these interim financial statements. The balance sheet
at
December 31, 2006 has been derived from the audited financial statements
at that
date but does not include all of the information and footnotes required
by U. S.
generally accepted accounting principles for complete financial statements.
Certain amounts in the prior period consolidated financial statements have
been
reclassified to conform with the current year presentation.
Note
2. Recent
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
Amendment of FASB No. 115” (SFAS
No.
159). This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. The fair value option
permits
companies to choose to measure eligible items at fair value at specified
election dates. Companies will report unrealized gains and losses on items
for
which the fair value option has been elected in earnings after adoption.
SFAS
No. 159 requires additional disclosures related to the fair value measurements
included in the companies financial statements. This statement is effective
for
financial statements issued for fiscal years beginning after November 15,
2007.
Early adoption is permitted; however, we will adopt SFAS No. 159 on January
1,
2008. We are evaluating the impact of SFAS No. 159 on the consolidated
financial
statements.
In
July
2006, the FASB issued FASB Interpretation No. 48 (FIN No. 48), “Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109”
which
clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires
that we recognize in our financial statements, the impact of a tax position,
if
that position is more likely than not of being sustained on audit, based
on the
technical merits of the position. The provisions of FIN No. 48 are effective
as
of the beginning of our 2007 fiscal year, with the cumulative effect of
the
change in accounting principle recorded as an adjustment to opening retained
earnings. We
adopted the provisions FIN No. 48 on January 1, 2007. Details related to
the
adoption of FIN No. 48 and the impact on our financial statements are more
fully
discussed in Note 6 - Uncertainty in Income Taxes.
SFAS No.
123(R),"Share-Based
Payment,"
establishes standards for the accounting for transactions in which an entity
(i)
exchanges its equity instruments for goods or services, or (ii) incurs
liabilities in exchange for goods or services that are based on the fair
value
of the entity’s equity instruments or that may be settled by the issuance of the
equity instruments. SFAS No. 123(R) eliminates the ability to account for
stock-based compensation using APB No. 25 and requires that such transactions
be
recognized as compensation cost in the income statement based on their
fair
values on the measurement date, which is generally the date of the grant.
We
adopted the provisions SFAS No.123(R) on January 1, 2006. Details related
to the adoption of SFAS No.123(R) and the impact on our financial
statements is more fully discussed in our 2006 Annual Report on Form 10-K
in
Note K - Employee Stock Benefit Plans.
Reclassifications—
Certain
amounts in the prior period consolidated financial statements have been
reclassified to conform with the current year presentation. These
reclassifications had no effect on total assets, shareholders’ equity or net
income as previously reported. We declared a 10% stock dividend on July 27,
2006; therefore, all share and per share information has been adjusted
accordingly.
Note
3.
Reserve for Loan and Lease Losses
The
reserve for loan and lease losses is maintained at a level believed to
be
adequate by management to absorb probable losses inherent in the loan and
lease
portfolio. The determination of the reserve requires significant judgment
reflecting management’s best estimate of probable loan and lease losses related
to specifically identified loans and leases as well as probable losses
in the
remainder of the various loan and lease portfolios. The methodology for
assessing the appropriateness of the reserve consists of several key elements,
which include: specific reserves for identified special attention loans
and
leases (classified loans and leases and internal watch list credits), percentage
allocations for special attention loans and leases without specific reserves,
formula reserves for each business lending division portfolio, including
a
higher percentage reserve allocation for special attention loans and leases
without a specific reserve, and reserves for pooled homogeneous loans and
leases. Management’s evaluation is based upon a continuing review of these
portfolios, estimates of future customer performance, collateral values
and
dispositions and forecasts of future economic and geopolitical events,
all of
which are subject to judgment and will change.
E-66
Note
4.
Financial Instruments with Off-Balance-Sheet Risk
To
meet
the financing needs of our customers, 1st Source Corporation and its
subsidiaries are parties to financial instruments with off-balance-sheet
risk in
the normal course of business. These off-balance-sheet financial instruments
include commitments to originate, purchase and sell loans and standby letters
of
credit. The instruments involve, to varying degrees, elements of credit
and
interest rate risk in excess of the amount recognized in the consolidated
statements of financial condition. Our exposure to credit loss in the event
of
nonperformance by the other party to the financial instruments for loan
commitments and standby letters of credit is represented by the dollar
amount of
those instruments. We use the same credit policies and collateral requirements
in making commitments and conditional obligations as we do for on-balance-sheet
instruments.
We
occasionally enter
into derivative financial instruments as part of our interest rate risk
management strategies. These derivative financial instruments consist
of
interest rate swaps. As of March 31, 2007, the notional amount of non-hedging
interest rate swaps was $60.00 million.
Trustcorp
Mortgage Company and 1st Source Bank (Bank), subsidiaries of 1st Source
Corporation, grant mortgage loan commitments to borrowers, subject to normal
loan underwriting standards. The interest rate risk associated with these
loan
commitments is managed by entering into contracts for future deliveries
of
loans. Loan commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.
We
issue
letters of credit which are conditional commitments that guarantee the
performance of a customer to a third party. The credit risk involved and
collateral obtained in issuing letters of credit is essentially the same
as that
involved in extending loan commitments to customers.
As
of
March 31, 2007 and December 31, 2006, 1st Source had commitments outstanding
to
originate and purchase mortgage loans aggregating $141.16 million and $113.25
million, respectively. Outstanding commitments to sell mortgage loans aggregated
$87.84 million at March 31, 2007, and $73.87 million at December 31, 2006.
Standby letters of credit totaled $83.38 million and $83.15 million at
March 31,
2007, and December 31, 2006, respectively. Standby letters of credit have
terms
ranging from six months to one year.
Note
5.
Stock-Based Compensation
As
of
March 31, 2007, we had five stock-based employee compensation plans, which
are
more fully described in Note K of the Consolidated Financial Statements
in 1st
Source’s Annual Report on Form 10-K for the year ended December 31, 2006. These
plans include two stock option plans, the Employee Stock Purchase Plan,
the
Executive Incentive Plan, and the Restricted Stock Award Plan.
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS
No. 123(R), using the modified prospective transition method and,
therefore, have not restated results for prior periods. Under this transition
method, stock-based compensation expense for the first quarter of 2006
included
compensation expense for all stock-based compensation awards granted prior
to,
but that remained unvested as of, January 1, 2006. Compensation expense
was
based on the grant date fair value estimated in accordance with the original
provision of SFAS No. 123.
Prior
to
January 1, 2006, we accounted for stock-based compensation under
the
recognition, measurement and pro forma disclosure provisions of APB No.
25, the
original provisions of SFAS No. 123, and SFAS No. 148, “Accounting for
Stock-Based Compensation-Transition and Disclosure” (SFAS 148). In accordance
with APB No. 25, we generally would have recognized compensation expense
for
stock awards on the grant date and we generally would have recognized
compensation expense for stock options only when we granted options with
a
discounted exercise price or modified the terms of previously issued options,
and would have recognized the related compensation expense ratably over
the
associated service period, which was generally the option vesting
term.
Stock-based
compensation expense for all stock-based compensation awards granted after
January 1, 2006, is based on the grant-date fair value. For all awards
except
stock option awards, the grant date fair value is either the fair market
value
per share or book value per share (corresponding to the type of stock awarded)
as of the grant date. For stock option awards, the grant date fair value
is
estimated using the Black-Scholes option pricing model. For all awards
we
recognize these compensation costs only for those shares expected to vest
on a
straight-line basis over the requisite service period of the award, for
which we
use the related vesting term. We estimate forfeiture rates based on historical
employee option exercise and employee termination experience. We have identified
separate groups of awardees that exhibit similar option exercise behavior
and
employee termination experience and have considered them as separate groups
in
the valuation models and expense estimates.
As
a
result of our January 1, 2006, adoption of SFAS No.123(R), the impact to
the Consolidated Financial Statements on income before income taxes and
on net
income were additions of $1.15 million and $0.71 million at March 31, 2006,
respectively. The
cumulative effect of the change in accounting for the three months ended
March
31, 2006 was $0.66 million before income taxes and $0.40 million, after
income
taxes. The
impact on both basic and diluted earnings per share for the three months
ended
March 31, 2006 was $0.02 per share. In addition, prior to the adoption
of SFAS
No. 123(R), we presented the tax benefit of stock option exercises as
operating cash flows. Upon the adoption of SFAS No. 123(R), tax benefits
resulting from tax deductions in excess of the compensation cost recognized
for
those options are classified as financing cash flows.
E-67
The
stock-based compensation expense recognized in the condensed consolidated
statement of operations for the three months ended March 31, 2007 and 2006
was
based on awards ultimately expected to vest, and accordingly has been adjusted
by the amount of estimated forfeitures. SFAS No. 123(R) requires forfeitures
to
be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Forfeitures
were
estimated based partially on historical experience.
The
aggregate intrinsic value in the table below represents the total pretax
intrinsic value (the difference between 1st Source’s closing stock price on the
last trading day of the first quarter of 2007 (March 31, 2007) and the
exercise
price, multiplied by the number of in-the-money options) that would have
been
received by the option holders had all option holders exercised their options
on
March 31, 2007, this amount changes based on the fair market value of 1st
Source’s stock. Total intrinsic value of options exercised for the three months
ended March 31, 2007 was $267 thousand. Total fair value of options vested
and
expensed was $21 thousand, net of tax, for the three months ended March
31,
2007.
|
|
|
|
|
|
|||||||||
|
|
March
31, 2007
|
|
|
||||||||||
|
|
|
|
Average
|
||||||||||
|
|
|
Weighted
|
Remaining
|
Total
|
|||||||||
|
|
|
Average
|
Contractual
|
Intrinsic
|
|||||||||
|
|
Number
of
|
Grant-date
|
Term
|
Value
|
|||||||||
|
|
Shares
|
Fair
Value
|
(in
years)
|
(in
000's)
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Options
outstanding, beginning of quarter
|
489,475
|
$
|
26.04
|
||||||||||
|
Granted
|
2,696
|
28.40
|
|||||||||||
|
Exercised
|
(20,654
|
)
|
15.63
|
||||||||||
|
Forfeited
|
-
|
-
|
|||||||||||
|
Options
outstanding, end of quarter
|
471,517
|
$
|
26.51
|
1.93
|
$
|
662
|
|||||||
|
|
|||||||||||||
|
Vested
and expected to vest at March 31, 2007
|
471,517
|
$
|
26.51
|
1.93
|
$
|
662
|
|||||||
|
Exercisable
at March 31, 2007
|
447,628
|
$
|
26.99
|
1.69
|
$
|
443
|
|||||||
The
following weighted-average assumptions were used to estimate the fair value
of
options granted during the three months ended March 31, 2007:
|
Risk-free
interest rate
|
4.10%
|
|
Expected
dividend yield
|
1.94%
|
|
Expected
volatility factor
|
30.46%
|
|
Expected
option life
|
4.67
years
|
No
options were granted during the three months ended March 31, 2006.
As
of
March 31, 2007, there was $611,412 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements. That cost is
expected to be recognized over a weighted-average period of 7.89
years.
The
following table summarizes information about stock options outstanding
at March
31, 2007:
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
Weighted
|
|
Weighted
|
|
Range
of
|
Number
|
Remaining
|
Average
|
Number
|
Average
|
|
Exercise
|
of
shares
|
Contractual
|
Exercise
|
of
shares
|
Exercise
|
|
Prices
|
Outstanding
|
Life
|
Price
|
Exercisable
|
Price
|
|
$11.31
to $17.99
|
29,508
|
5.49
|
$13.38
|
15,758
|
$14.55
|
|
$18.00
to $26.99
|
55,587
|
3.58
|
21.06
|
51,003
|
21.07
|
|
$27.00
to $28.40
|
386,422
|
1.43
|
28.30
|
380,867
|
28.29
|
E-68
The
fair
value of each stock option was estimated on the date of grant using the
Black-Scholes option-pricing model with the weighed average assumptions
included
on the table above, under the header “Stock Based Option Valuation and Expense
Information under SFAS No.123(R).”
Note
6.
Uncertainty in Income Taxes
We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, on January 1, 2007. As a result of the implementation
of FIN
No. 48, we recognized no change in the liability for unrecognized tax
benefits.
The
total
amount of unrecognized tax benefits at January 1, 2007, was $5.79 million.
Of
that amount, $3.33 million would affect the effective tax rate if recognized.
We
recognize interest and penalties through the income tax provision.
The total
amount of interest and penalties on the date of adoption was $0.87 million.
Tax
years
that remain open and subject to audit include federal 2003-2006 years and
Indiana 2002-2006 years. Additionally, we have an open tax examination
with the
Indiana Department of Revenue for the tax years 2002-2004. Indiana is currently
proposing adjustments for certain apportionment issues. We are appealing
these
adjustments.
Note
7.
Subsequent Events
Definitive
Agreement of Merger with FINA Bancorp, Inc.
On
February 19, 2007, we entered into a definitive agreement of merger with
FINA
Bancorp, Inc. (FINA), in which 1st Source will acquire FINA in an exchange
of
cash and stock. FINA headquartered in Valparaiso, Indiana, owns First National
Bank, Valparaiso, a full service bank with approximately $620.00 million
in
assets. The merger, approved by the directors of both companies, is valued
at
approximately $135.00 million, or $3,206.57 per FINA share. The price represents
approximately 196% of book value and 41.5 times 2006 earnings before securities
losses. 1st Source will pay a minimum of 40% and a maximum of 42% of the
purchase price in shares of 1st Source common stock, and the remainder
of the
purchase price will be paid in cash. The precise exchange ratio will be
established at closing based on 1st Source’s stock price prior to the completion
of the merger. FINA shareholders will be able to choose whether to receive
1st
Source common stock or cash pursuant to election procedures described in
the
definitive agreement, subject to 1st Source’s ability to reallocate elections on
a proportionate basis. The merger is subject to customary closing conditions,
including regulatory approval. The
Federal Reserve Board of Governors has indicated that as a condition to
its
approval of the merger, we may be required to divest one or more branches
located in Starke County, Indiana so that our market share in Starke County
after the merger does not exceed set limits. We do not expect that this
condition will have a material impact on the merger transaction which is
expected to be completed in the second quarter of 2007. We believe the
purchase
of FINA is a natural extension of our service area and is consistent with
our
growth market expansion initiatives.
Trustcorp
Mortgage Company
During
the first quarter of 2007 we determined that 1st Source Bank would acquire
the
business of Trustcorp Mortgage Company; both are wholly owned subsidiaries
of
1st Source Corporation. We believe that this will allow us to focus our
home
mortgage efforts in the Bank’s retail footprint in Indiana and Michigan and
provide a foundation for broadening direct relationships with our clients.
1st
Source Bank and Trustcorp Mortgage Company presently hold a strong mortgage
origination market share within the Bank’s traditional 15 county market of
Northern Indiana and Southwestern Michigan. This market will continue
to be the
focus of the Bank’s home mortgage business. The acquisition is expected to be
completed in the second quarter of 2007.
E-69
ITEM
7. SHAREHOLDER AND MANAGEMENT INFORMATION
Voting
Securities and Principal Holders Thereof
Beneficial
owners of more than 5% of the Common Stock outstanding at February 20,
2007:
|
Name
and Address
|
Type
of Ownership
|
|
Amount
|
|
%
of Class
|
|
Ernestine
M. Raclin(1)
|
Direct
|
226,575
|
0.97%
|
||
|
100
North Michigan Street
|
Indirect
(2)
|
6,039,523
|
25.98%
|
||
|
South
Bend, IN 46601
|
Total
|
6,266,098
|
26.95%
|
||
|
Christopher
J. Murphy III
|
Direct
|
834,195
|
3.59%
|
||
|
100
North Michigan Street
|
Indirect
(3)
|
2,241,611
|
9.64%
|
||
|
South
Bend, IN 46601
|
Total
|
3,075,806
|
13.23%
|
||
|
Dimensional
Fund Advisors, Inc.
|
Direct
(4)
|
1,704,234
|
7.33%
|
||
|
1299
Ocean Avenue, 11th Floor
|
|||||
|
Santa
Monica, CA 90401
|
|||||
|
1st
Source Bank as Trustee for the 1st Source
|
Direct
|
1,306,832
|
5.62%
|
||
|
Corporation
Employee Stock Ownership and Profit Sharing Plan Trust
|
|||||
(1)Mrs.
Raclin is the mother-in-law of Mr. Murphy.
(2)Owned
indirectly by Mrs. Raclin who disclaims beneficial ownership thereof.
Most of
these securities are held in trusts, of which 1st Source Bank is the
trustee and
has sole voting power. While Mrs. Raclin is an income beneficiary of
many of
these trusts, the ultimate benefit and ownership will reside in her children
and
grandchildren.
(3)Owned
indirectly by Mr. Murphy who disclaims beneficial ownership thereof.
The
securities are held by Mr. Murphy’s wife and children, or in trust or limited
partnerships for the benefit of his wife and children. Mr. Murphy is
not a
current income beneficiary of most of the trusts. Due to the structure
of
various trusts and limited partnerships, 731,839 shares are shown both
in Mr.
Murphy’s and Mrs. Raclin’s ownership.
(4)As
reported in Form 13G filed February 9, 2007, Dimensional Fund Advisors,
Inc., in
its role as investment advisors for various clients, had sole dispositive
and/or
voting power of the of shares.
E-70
Directors
The
Board
of Directors is divided into three (3) groups of directors whose terms
expire at
different times. At the 2007 Annual Meeting, four (4) directors
were elected for terms expiring in 2008 or 2010, or until the qualification
and election of a successor.
The
following information is submitted for each director and each non-director
executive officer.
|
Beneficial
Ownership
|
||||||
|
of
Equity Securities(1)
|
||||||
|
Year
in Which
|
||||||
|
Directorship
|
Common
|
%
of
|
||||
|
Name
|
Age
|
Principal
Occupation(3)
|
Assumed
|
Stock
|
Class
|
|
|
Nominees
for Election to the Board of Directors
|
||||||
|
Term
Expiring in April, 2008
|
||||||
|
Toby
S. Wilt
|
62
|
Chairman,
Christie Cookie Company (gourmet foods);
|
2002
|
11,000
|
*
|
|
|
President,
TSW Investment Company; Director, Outback
|
||||||
|
Steakhouse,
Inc.; and Director, TLC Vision Corporation
|
||||||
|
Beneficial
Ownership
|
||||||
|
of
Equity Securities(1)
|
||||||
|
Year
in Which
|
||||||
|
Directorship
|
Common
|
%
of
|
||||
|
Name
|
Age
|
Principal
Occupation(3)
|
Assumed
|
Stock
|
Class
|
|
|
Nominees
for Election to the Board of Directors
(continued)
|
||||||
|
Terms
Expiring in April, 2010
|
||||||
|
Daniel
B. Fitzpatrick
|
49
|
Chairman
and Chief Executive Officer, Quality Dining, Inc.
|
1995
|
23,278
|
*
|
|
|
(quick
service and casual dining restaurant operator)
|
||||||
|
Wellington
D. Jones III
|
62
|
Executive
Vice President, 1st Source Corporation, and President
|
1998
|
250,530
|
1.08%
|
|
|
and
Chief Operating Officer, 1st Source Bank
|
||||||
|
Dane
A. Miller, Ph.D.
|
61
|
Formerly,
President and Chief Executive Officer, Biomet, Inc.
|
1987
|
20,684
|
*
|
|
|
(medical
products and technology)
|
||||||
|
Directors
Continuing in Office
|
||||||
|
Terms
Expiring in April, 2008
|
||||||
|
Lawrence
E. Hiler
|
61
|
Chairman,
Hiler Industries (metal castings)
|
1992
|
2,382
|
*
|
|
|
Rex
Martin
|
55
|
Chairman
and Chief Executive Officer, NIBCO, Inc.
|
1996
|
3,044
|
*
|
|
|
(copper
and plastic plumbing parts manufacturer)
|
||||||
|
Christopher
J. Murphy III
|
60
|
Chairman
of the Board, President, and Chief Executive Officer,
|
1972
|
3,075,806
(2)
|
13.23%
|
|
|
1st
Source Corporation; and Chairman of the Board and
|
||||||
|
Chief
Executive Officer, 1st Source Bank
|
||||||
|
Timothy
K. Ozark
|
57
|
Chairman
and Chief Executive Officer,
|
1999
|
5,830
|
*
|
|
|
Aim
Financial Corporation(mezzanine funding and leasing)
|
||||||
|
Terms
Expiring in April, 2009
|
||||||
|
Terry
L. Gerber
|
66
|
President
and Chief Executive Officer,
|
2004
|
11,774
|
*
|
|
|
Gerber
Manufacturing Company, Inc.(clothing manufacturer)
|
||||||
|
William
P. Johnson
|
64
|
Chief
Executive Officer, Flying J, LLC (consulting);
|
1996
|
19,016
|
*
|
|
|
prior
thereto, Chief Executive Officer, Goshen Rubber Co. Inc.
|
||||||
|
(rubber
and plastic parts manufacturer); and Director,
|
||||||
|
Coachmen
Industries, Inc.
|
||||||
|
Craig
A. Kapson
|
56
|
President,
Jordan Automotive Group (automotive dealerships)
|
2004
|
27,222
|
*
|
|
|
John
T. Phair
|
57
|
President,
Holladay Properties (real estate development)
|
2004
|
35,689
|
*
|
|
|
Mark
D. Schwabero
|
54
|
President,
Outboard Business Unit, Mercury Marine
|
2004
|
3,121
|
*
|
|
|
(marine
propulsion systems); prior thereto, President
|
||||||
|
and
Chief Executive Officer, Hendrickson International
|
||||||
|
(heavy-duty
transportation products)
|
||||||
|
Non-Director
Executive Officers
|
||||||
|
Richard
Q. Stifel
|
65
|
Executive
Vice President, Loan
|
121,041
|
*
|
||
|
Services
Group and Chief Credit Officer,
|
||||||
|
1st
Source Bank (since 1992)
|
||||||
|
Allen
R. Qualey
|
54
|
President
and Chief Operating Officer,
|
119,009
|
*
|
||
|
Specialty
Finance Group, 1st Source Bank (since 1997)
|
||||||
|
John
B. Griffith
|
49
|
Senior
Vice President, General Counsel
|
17,660
|
*
|
||
|
and
Secretary, 1st Source Corporation and 1st Source Bank (since
2001)
|
||||||
|
Larry
E. Lentych
|
60
|
Senior
Vice President, Treasurer and Chief Financial Officer,
|
84,523
|
*
|
||
|
1st
Source Corporation and 1st Source Bank (since 1988)
|
||||||
|
All
Directors and Executive Officers as a Group (18 persons)
|
3,831,609
|
16.48%
|
||||
*
Represents holdings of less than 1%.
(1)Based
on
information furnished by the directors and executive officers as of February
20,
2007.
(2)The
amounts shown include shares of Common Stock held directly or indirectly
in the
following amount by the spouse and other family members of the immediate
household of Christopher J. Murphy III, who disclaims beneficial ownership
of
such securities: 2,241,611 shares. Voting authority for 1,043,804 shares
owned
indirectly by Mr. Murphy is vested in 1st Source Bank as Trustee for
various
family trusts. Investment authority for those shares is held by 1st Source
Bank
as Trustee of the underlying trusts.
(3)The
principal occupation represents the employment for the last five years
for each
of the named directors and executive officers. Directorships presently
held in
other registered corporations are also disclosed.
E-71
Directors
and officers of 1st Source and their affiliates were customers of and
had
transactions with 1st Source and its subsidiaries in the ordinary course
of
business during 2006 and in compliance with applicable federal and state
laws
and regulations. Additional transactions are expected to take place in
the
ordinary course of business in the future. All outstanding loans and
commitments
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with
other persons and did not involve more than the normal risk of collectibility,
or present other unfavorable features. Credit underwriting procedures
followed
were no less stringent than those for comparable transactions with other
borrowers.
1st
Source’s Loan Policy requires prior board approval is required for aggregate
extensions of credit to executive officers and directors in excess of
$500,000,
with any interested director abstaining from the vote. Loans to executive
officers may not exceed $100,000 except for loans 1) to finance the education
of
the executive officer’s children, 2) to purchase, construct, maintain or improve
a residence owned by the executive officer and secured by a first lien
or 3)
secured by a perfected security interest in bonds, notes, certificates
of
indebtedness or other obligations fully guaranteed by the United States,
cash or
a cash-equivalent. Loans to executive officers are 1) reported to the
1st Source
Board at its next regularly scheduled meeting, 2) preceded by the submission
of
a current, detailed financial statement, and 3) made subject to the condition
that the loan will become due if the officer becomes indebted to any
other
financial institution or financial institutions in an aggregate amount
greater
than the amount the executive officer may borrow from 1st Source. Finally,
within 10 days of the date of the aggregate indebtedness to other financial
institutions exceeds $100,000 (excluding first mortgage debt, children’s
educational loans and loans secured by the types of collateral described
above),
an executive must make a written report to the Board.
Mr.
Kapson is President and a principal shareholder of Jordan Motors, Inc.,
an
automobile dealership. 1st Source Bank has established an ongoing relationship
with Jordan Motors in which Jordan Motors facilitates the purchase of
automobiles by car rental companies that are commercial lending customers
of the
Bank. Where the customer chooses to utilize this arrangement, the purchase
price
of such vehicles is funded by the Bank as a loan to the customer on customary
terms. During 2006, the Bank loaned customers approximately $4.0 million
for the
purchase of automobiles from Jordan Motors, which amount included service
fees
paid to Jordan of less than $13,000 in the aggregate. Also during 2006,
the Bank
purchased vehicles in an aggregate amount of approximately $862,000 from
Jordan
Motors for lease to various commercial finance customers of the Bank
on
customary terms. Revenues from all of the foregoing represented less
than 0.003%
of 2006 revenues of Jordan Motors.
Board
Committees and Other Corporate Governance Matters
In
January 2004, the Board of Directors adopted Corporate Governance Guidelines
to
ensure and document the Company’s existing high standards for corporate
governance. The Corporate Governance Guidelines are in accordance with
the
listing standards of the Nasdaq Stock Market and Securities and Exchange
Commission rules. The Corporate Governance Guidelines are available on
the
Company’s website at www.1stsource.com.
Director
Independence — The Board assesses each director’s independence in accordance
with the Corporate Governance Guidelines. The Corporate Governance Guidelines
define an independent director as one who has no relationship to the
Company
that would interfere with the exercise of independent judgment in carrying
out
responsibilities as a director of the Company and who is otherwise “independent”
under the listing standards of the Nasdaq Stock Market. The Board has
determined, after careful review, that each member of the Board is independent
as defined in the Company’s Corporate Governance Guidelines, with the exception
of Mr. Murphy and Mr. Jones, who are employed by the Company. Accordingly,
twelve out of the fourteen current members of the Board are independent
directors.
Board
Committees — 1st Source and its major subsidiary, 1st Source Bank, share the
following permanent committees made up of board members of both organizations.
Executive and Governance, Nominating, Audit, and Executive Compensation
and
Human Resources Committee members are appointed annually after the Annual
Meeting of Shareholders.
|
Committee
|
Members
|
Functions
|
2006
Meetings
|
|
Executive
and Governance(2)
|
Christopher
J. Murphy III
|
•
Serve as senior committee with oversight responsibility
|
2
|
|
William
P. Johnson(1)
|
for
effective governance of the Company.
|
||
|
Rex
Martin
|
•
Power to act for the Board of Directors between meetings
|
||
|
Timothy
K. Ozark
|
subject
to certain statutory limitations.
|
||
|
Toby
S. Wilt
|
•
Identify and monitor the appropriate structure of the
Board.
|
||
|
•
Select Board members for committee assignments.
|
|||
|
Nominating(2)
|
William
P. Johnson(1)
|
•
Identify, evaluate, recruit and select qualified candidates
for
|
1
|
|
Rex
Martin
|
election,
re-election or appointment to the Board
|
||
|
Timothy
K. Ozark
|
of
Directors.
|
||
|
Toby
S. Wilt
|
•
See also “Nominating Committee Information” below.
|
||
|
Audit(2)
|
David
C. Bowers(1)
|
•
Select the Company’s independent registered public accounting
firm.
|
6
|
|
Daniel
B. Fitzpatrick
|
•
Review the scope and results of the audits by the internal
audit
staff
|
||
|
Terry
L. Gerber
|
and
the independent registered public accounting firm.
|
||
|
Lawrence
E. Hiler
|
•
Review the adequacy of the accounting and financial controls
|
||
|
Dane
A. Miller
|
and
presents the results to the Board of Directors with respect
|
||
|
Timothy
K. Ozark
|
to
accounting practices and internal procedures. Also makes
|
||
|
Mark
D. Schwabero
|
recommendations
for improvements in such procedures.
|
||
|
Toby
S. Wilt
|
•
See also “Report of the Audit Committee” below.
|
||
|
Committee
|
Members
|
Functions
|
2006
Meetings
|
|
Executive
Compensation
|
Timothy
K. Ozark(1)
|
•
Determine compensation for senior management personnel,
|
2
|
|
and
Human Resources(2)
|
William
P. Johnson
|
review
the Chief Executive Officer and manage the
|
|
|
Rex
Martin
|
Company’s
stock plans.
|
||
|
Toby
S. Wilt
|
•
Establish wage and benefit policies for the Company and its
subsidiaries.
|
||
|
•
Review human resource guidelines, policies and procedures.
|
|||
|
•
See also “Report of the Executive Compensation and Human
Resource
|
|||
|
Committee”
below.
|
(1)Committee
chairman
(2)The
charter of the committee is available on the Company’s website at
www.1stsource.com.
Meetings
of the Board Of Directors and Directors’ Compensation— The Board of
Directors held six meetings in 2006. The only incumbent director attending
fewer
than 75% of the aggregate total meetings of the Board of Directors and
all
committees of the board of 1st
Source on which he served was Dane A. Miller. Directors receive fees
in the
amount of $16,000 per year, $1,000 per board meeting and $750 per committee
meeting attended ($1,000 per Audit Committee meeting attended). Committee
chairpersons receive an additional $250 per meeting attended (an additional
$750
per Audit Committee meeting attended). Total fees paid in 2006 were
$446,500.
E-72
Compensation
Discussion & Analysis
Compensation
Philosophy and Program
The
Executive Compensation and Human Resource Committee of the Board of Directors,
comprised entirely of independent directors, among other things administers
the
Company’s executive compensation program. The purpose of the Executive
Compensation and Human Resource Committee is described in its charter
as
follows:
|
•
|
To
determine compensation for senior management
personnel;
|
|
•
|
Review
the Chief Executive Officer;
|
|
•
|
Establish
wage and benefit policies for the
Company;
|
|
•
|
Review
general human resources guidelines, policies and procedures;
and
|
|
•
|
Oversee
the Company’s stock and benefit
plans.
|
In
addition, the Executive Compensation and Human Resource Committee generally
reviews the recommendations of the Chief Executive Officer with regard
to other
executive officers and with regard to cash and stock incentives in the
Executive
Incentive Plan for officers in the Company.
The
Company’s compensation philosophy begins with the concept that its executive
officers and key employees are all in partnership with each other and
that the
Company succeeds best when the officers work together in this partnership.
The
Company believes that executive compensation programs should be designed
to
attract, retain and motivate executive officers and key employees who
will make
a valuable contribution to the whole enterprise. The Company accomplishes
this
through its compensation packages that include cash bonuses and equity
compensation that link executive compensation to the Company’s overall
performance on both a short-term and long-term basis, thereby aligning
the
executive’s interests with the interests of the Company’s shareholders.
Components
of Compensation
To
that
end, the Executive Compensation and Human Resource Committee has implemented
a
compensation program for executive officers that includes the following
components:
-
Base Salaries: Annual base salary is designed to compensate 1st Source executives for their qualifications, responsibilities and performance. Salaries are administered under the 1st Source Salary Administration Program for all exempt employees. Through this program, positions are rated under direction of the Human Resources Department and placed in a salary range. Annually, management establishes a salary performance grid that sets the range of merit increases that may be given to exempt personnel, including officers, depending on their individual performance and position in the respective salary range (i.e. lower, middle or upper third). The salary performance grid is reviewed, adjusted and approved annually by the Executive Compensation and Human Resource Committee based on market and industry information, including data from SNL, Watson Wyatt, Crowe Chizek, the Indiana Chamber of Commerce and other publicly available sources. An officer’s annual salary will increase based on his or her position in the salary range and his or her individual performance rating determined through the annual review process. The categories for performance under the Company’s Salary Administration Program are:
|
o
|
Substantially
and consistently exceeds job
requirements;
|
|
o
|
Often
exceeds job requirements;
|
|
o
|
Meets
and sometimes exceeds job
requirements;
|
|
o
|
Meets
some job requirements, improvement is required;
and
|
|
o
|
Does
not meet minimal job requirements.
|
E-73
Generally,
management awards salary increases as determined under these guidelines
in
conformance with the approved salary grid. All of the named executive
officers,
including the Chief Executive Officer, are eligible to receive annual
increases
through this Salary Administration process.
| · |
Annual
Executive Incentive Plan Awards: The Company pays incentive
compensation
under its Executive Incentive Plan to all of the named executive
officers.
The Executive Incentive Plan bonuses are determined annually
following the
close of each year.
|
| o |
Calculation
of Amount of Awards: Each executive is assigned a “partnership level” that
is a percentage of the midpoint of the salary range or his
or her annual
base salary. Based on the executive’s individual performance, an executive
may earn between 100% and 300% of their “partnership level” as incentive
compensation. The actual amount received by the executive as
incentive
compensation is based upon the executive’s performance against a set of
individual performance goals developed by the executive’s immediate
supervisor and the executive early each calendar year. In assessing
performance against these performance goals, the Company considers
the
level of achievement against each objective, and whether significant
or
unforeseen circumstances altered the expected difficulty of
achieving the
results. The amount is then adjusted based upon overall corporate
performance against its annual profit plan. This “partnership level”
percentage rises 2.5% for every 1% the corporation exceeds
its profit plan
and decreases 2.5% for every 1% the corporation falls short
of its profit
plan.
|
| o |
Method
of Payment and Forfeiture: 50% of the Executive Incentive Plan
bonus is
paid in cash at the time of the award. The other 50% is paid
in book value
stock that is subject to forfeiture over a five-year period
based on the
executive remaining with the Company and on the continued financial
performance of the Company. The Company believes that this
form of
equity-based compensation will encourage its executives to
make sound
business decisions that will grow the Company, strengthen its
financial
position and discourage decisions designed for short-term gain
only. The
Company acknowledges that these equity awards could become
a significant
portion of an individual’s net worth over time. The Company has chosen
book value stock as the method of compensation because it is
the one value
that management of the Company can affect by its collective
decisions. The
earnings of the Company are either added to the book value
per share or
are paid out as dividends on all outstanding shares (including
book value
shares still subject to forfeiture). In this way, the value
of the book
value shares are protected from fluctuations in the stock market
that are
unrelated to performance of the Company. The executive generally
is
required to hold the book value shares until retirement except
that seven
years after the forfeiture risk has lapsed the executive may
sell 50% of
these vested book value shares back to the Company at its then
book value
for specific purposes: purchase of a personal residence or
second home,
college education tuition, or financial
hardship.
|
| · |
Five-Year
Long-Term Incentive Awards:
|
| o |
Calculation
of Amount of Awards: The Company further rewards its executives
for good
long-term actions with the five-year, long-term incentive awards.
Every
five years, the Company establishes a set of corporate goals.
These change
from time to time, but usually include a growth goal, a return
on equity
goal and some credit and operating performance goals. The executive
bonuses under this program are calculated based upon a pre-determined
mathematical formula that compares the Company’s performance relative to
its five-year plan and the executive’s average award over the prior five
years. The final bonus amounts are determined by multiplying
the result of
that calculation by the the executive’s assigned “partnership level” for
long-term incentive award purposes.
|
| o |
Method
of Payment: Under the Executive Incentive Plan, 25% to 50%
of the
long-term award is paid in cash at the time of the award, with
lower cash
amounts being paid to more senior executives. The remainder
of the
long-term award is paid to executives in market value stock,
with 10%
vesting at the time of the award. The remaining market value
stock is
subject to forfeiture over a nine-year period based upon the
continued
growth of the Company.
|
E-74
Chief
Executive Officer Performance and Compensation
Mr.
Murphy’s compensation includes the same components described above for all
executive officers of the Company. In addition, Mr. Murphy participates
in the
1998 Performance Compensation Plan that is described below. Mr. Murphy’s
performance is evaluated by the Executive Compensation and Human Resources
Committee each year against a series of objectives set in the Company’s annual
budget plan and in the Company’s long-term strategic plan as approved each year
by the Board of Directors.
| · |
Base
Salary: Each year, the Executive Compensation and Human Resources
Committee reviews reports by SNL, Watson Wyatt and the National
Executive
and Senior Management Compensation Survey published by Compensation
Data
Surveys, Dolan Technologies Corporation, comparing compensation
among
comparable banks and also proxy statements for many of the
companies
identified. These reports are used by the Executive Compensation
and Human
Resources Committee to evaluate Mr. Murphy’s pay package against other pay
packages for Chief Executive Officers with similar tenure at
peer banks in
terms of size and complexity. The Executive Compensation and
Human
Resources Committee checks comparables to ensure fairness as
to aggregate
compensation and its components. These are looked at in a general
sense.
The Executive Compensation and Human Resources Committee applies
the
salary grid used by the Company for all exempt employees when
determining
Mr. Murphy’s base salary increase.
|
| · |
Base
Salary Increases: The Executive Compensation and Human Resources
Committee
reviewed Mr. Murphy’s salary in February 2005. Under his Employment
Agreement, the terms of which are summarized on page 10 of
this proxy
statement, Mr. Murphy has had a right to receive a minimum
annual increase
of 5%. In 2003 and 2004, Mr. Murphy waived his right to receive
an annual
increase of 5% based upon the Company’s performance in 2002 and 2003 and
had no increase for either year. In February 2005, the Executive
Compensation and Human Resources Committee assessed Mr. Murphy’s
performance in dealing with the challenges facing the Company
and his
leadership efforts and granted him a 5% increase. In February
2006, Mr.
Murphy again waived his right to a minimum 5% annual increase,
and was
evaluated based on the 1st Source Salary Administration Program
described
above, receiving a 3.7% increase. Mr. Murphy has relieved
the company of
any obligation for future annual increases. Annually, Mr.
Murphy is
reviewed on his success in achieving the Company’s business plan and
budget for the year with special focus on the Company’s return on equity
and absolute earnings. He is also responsible for the overall
performance
of the Company relative to its operating and strategic plans
and for
representing it to various constituencies, for its community
participation
and for ensuring the development of a culture of independence,
integrity
and long-term success. Based on Mr. Murphy’s 2006 performance and the
Company’s performance against its annual profit plan and using the
salary
performance grid, the Executive Compensation and Human Resources
Committee
granted Mr. Murphy a 3.2%
increase.
|
| · |
Annual
Executive Incentive Plan Award
|
| o |
Calculation
of Amount of Award. Mr. Murphy’s base award is calculated based on a
“partnership level” of 25% of his base salary. That base bonus is subject
to increase or decrease based upon performance of the Company
as described
above. The Company performed above its plan for the year 2006.
Mr. Murphy
generally met his qualitative and other quantitative objectives,
which
included return on assets, return on equity, credit quality
and growth
objectives, Based upon the formula tied to those objectives,
Mr. Murphy
was awarded $445,301 for his performance in 2006 under the
Executive
Incentive Plan.
|
| o |
Method
of Payment. Consistent with the Executive Incentive Plan, 50%
of the award
was paid in cash to Mr. Murphy at the time the award was made.
The other
50% of Mr. Murphy’s award is determined in book value stock, but paid to
Mr. Murphy in cash as the forfeiture period elapses. Mr. Murphy
and his
family own a substantial amount of Company stock. As shown
on page 2 of
this proxy statement, Mr. Murphy owns over three million shares
of Company
stock directly or indirectly and therefore is already significantly
invested in the Company. The Executive Compensation and Human
Resources
Committee believes Mr. Murphy’s interest as an owner are significantly
enough aligned with the shareholders that the Executive Incentive
Plan’s
stock components can be paid in cash as the forfeiture risk
lapses.
|
| · |
Five-year
Long-term Incentive Award:
|
| o |
Calculation
of Amount of Award: The Company largely achieved its long-term
credit
quality goals and partially achieved its profitability goals
for the
five-year period ended December 31, 2005. Based upon the mathematical
formula applied to the Company’s performance and the average of Mr.
Murphy’s annual incentive award over that five-year period, Mr. Murphy
received a bonus of $74,536 in 2006.
|
| o |
Method
of Payment: Under the Executive Incentive Plan, 32.5% of this
award was
paid in cash at the time of the award, and the remaining 67.5%
will be
subject to forfeiture over the next nine years based upon the
Company’s
performance. During this period, the “at risk” portion of the award is
delineated in market value stock but is paid in cash to Mr.
Murphy as the
forfeiture restriction lapses for the same reason that the
Executive
Incentive Plan’s annual award is eventually settled in cash.
|
E-75
Mr.
Murphy also participates in the 1998 Performance Compensation Plan.
This plan
was designed so that a program could be available to the Executive
Compensation
and Human Resources Committee for awarding bonuses that are specifically
mathematically-based and qualify for full deduction under the tax rules
described below. For officers, bonus awards may approach the $1,000,000
level.
This program may be used to replace or supplement the Executive Incentive
Plan.
Thus far, the Executive Compensation and Human Resources Committee
has not
deemed it necessary to use this plan for anyone other than Mr. Murphy.
| · |
1998
Performance Compensation Plan Award: Mr. Murphy was eligible
for a cash
bonus under the 1998 Performance Compensation Plan based on
the Company’s
earning goals established by the Executive Compensation and
Human
Resources Committee at the beginning of 2006. The Executive
Compensation
and Human Resources Committee determined that these goals were
attained.
For 2006, the award level was set up to 2.5% of net income,
which is the
same percentage as the seven previous years. Under the terms
of the plan,
Mr. Murphy earned a bonus of $500,000, or approximately 1.27%
of net
income.
|
Tax
Deductibility of Pay
Federal
income tax law caps at $1,000,000 the deductible compensation per year
for each
of the named executive officers in the proxy statement, subject to certain
exceptions. In developing and implementing executive compensation policies
and
programs, the Executive Compensation and Human Resources Committee considers
whether particular payments and awards are deductible for federal income
tax
purposes, along with other relevant factors. Consistent with this policy,
the
Executive Compensation and Human Resources Committee has taken what it
believes
to be appropriate steps to maximize the deductibility of executive compensation.
It is the general intention of the Executive Compensation and Human Resources
Committee to meet the requirements for deductibility. The Executive Compensation
and Human Resources Committee will continue to review and monitor the
deductibility of compensation.
SUMMARY
COMPENSATION TABLE
|
Stock
|
Option
|
Non-Equity
|
||||||||||||||||||||
|
Awards
|
Awards
|
Incentive
Plan
|
All
Other
|
|||||||||||||||||||
|
Name
and Principal Position
|
Year
|
Salary($)
|
($)
(1)
|
($)(2)
|
Compensation($)
|
Compensation($)(3)
|
Total
|
|||||||||||||||
|
Christopher
J. Murphy III
|
2006
|
$
|
614,077
|
$
|
111,015
|
$
|
-
|
$
|
722,651
|
$
|
107,547
|
$
|
1,555,290
|
|||||||||
|
Chairman,
President & CEO,
|
||||||||||||||||||||||
|
1st
Source, and Chairman
|
||||||||||||||||||||||
|
&
CEO, 1st Source Bank
|
||||||||||||||||||||||
|
Larry
E. Lentych
|
2006
|
207,385
|
23,367
|
-
|
45,847
|
35,037
|
311,636
|
|||||||||||||||
|
Senior
Vice President,
|
||||||||||||||||||||||
|
Treasurer
and
|
||||||||||||||||||||||
|
Chief
Financial Officer
|
||||||||||||||||||||||
|
Wellington
D. Jones III
|
2006
|
340,846
|
50,204
|
-
|
97,369
|
60,392
|
548,811
|
|||||||||||||||
|
Executive
Vice President,
|
||||||||||||||||||||||
|
1st
Source, and President
|
||||||||||||||||||||||
|
&
COO, 1st Source Bank
|
||||||||||||||||||||||
|
John
B. Griffith
|
2006
|
257,369
|
34,461
|
37,632
|
61,863
|
32,212
|
423,537
|
|||||||||||||||
|
Senior
Vice President,
|
||||||||||||||||||||||
|
General
Counsel and
|
||||||||||||||||||||||
|
Secretary
|
||||||||||||||||||||||
|
Richard
Q. Stifel
|
2006
|
234,332
|
142,149
(4
|
)
|
-
|
52,878
|
37,254
|
466,613
|
||||||||||||||
|
Executive
Vice President,
|
||||||||||||||||||||||
|
Business
Banking Group,
|
||||||||||||||||||||||
|
1st
Source Bank
|
||||||||||||||||||||||
(1)
Amounts included in Stock Awards for 2006 are computed based on the 2006
annual
expense that would have been included in 1st Source’s financial statements under
SFAS 123R utilizing the modified prospective transition method. These
amounts
are computed using grant date fair values for each individual grant classified
as an equity award under SFAS 123R and settlement date fair values for
each
individual grant classified as a liability award under SFAS 123R.
(2)
Amounts included in Option Awards for 2006 are computed based on the
2006 annual
expense included in 1st Source’s financial statements under SFAS 123R utilizing
the modified prospective transition method and the grant date fair value
for the
applicable grant. Valuation assumptions for this grant were included
in the
weighted average computation of assumptions for 2001 stock option grants
in Note
H to 1st Source’s 2001 Annual Report.
(3)
Amounts included in All Other Compensation for the most recent fiscal
year are
as follows:
E-76
|
Company
Contributions to Defined
|
Dividends
on
|
Other
Amounts
|
|||||||||||||||||
|
Name
|
Contribution
Retirement Plans
|
Stock
Awards
|
Directors’
Fees
|
Perquisites
|
of
$10,000 or Less
|
Total
|
|||||||||||||
|
Mr.
Murphy
|
$
|
25,900
|
$
|
13,381
|
$
|
16,000
|
$
|
47,142
(5)(6
|
)
|
$
|
5,124
|
$
|
107,547
|
||||||
|
Mr.
Lentych
|
25,900
|
6,429
|
—
|
*
|
2,708
|
35,037
|
|||||||||||||
|
Mr.
Jones
|
25,900
|
13,807
|
16,000
|
*
|
4,685
|
60,392
|
|||||||||||||
|
Mr.
Griffith
|
25,900
|
4,040
|
—
|
*
|
2,272
|
32,212
|
|||||||||||||
|
Mr.
Stifel
|
25,900
|
6,486
|
—
|
*
|
4,868
|
37,254
|
|||||||||||||
*
Not
included - total of perquisites and benefits is less than
$10,000
(4)
Mr.
Stifel turned age 65, which is considered normal retirement age for Executive
Incentive Plan purposes, during 2006. Accordingly, for purposes of this
table
and in accordance with the requirements of SFAS 123R, the entire fair
value of
stock awards made to him during 2006 ($50,599) and the fair value of
stock
awards made to him prior to 2006 but unvested as of January 1, 2006 ($90,550)
have been included in his Stock Awards amount for 2006. Only the fair
value of
stock awards made prior to 2006 and that vested for 2006 performance
has been
included for the other named individuals. Mr. Stifel’s amount is $118,910 higher
than it would have been had it been computed on the same basis as the
other
individuals in the table.
(5) Mr.
Murphy’s perquisites included personal usage of the company plane ($34,348),
company car mileage and country club dues. These are valued at the incremental
cost of the personal usage to the Company. For personal usage of the
company
plane, the incremental cost is the variable hourly cost.
(6) Mr.
Murphy reimbursed the Company $5,000 for other miscellaneous incalculable
personal benefits.
(7) There
were no bonus awards or changes in pension value and non-qualified deferred
compensation earnings for the named executive officers in 2006.
E-77
GRANTS
OF PLAN-BASED AWARDS
|
Estimated
Future Payouts
|
Estimated
Future Payouts
|
||||||||||||||||||||||||
|
Under
Equity Incentive Plan
|
Under
Equity Incentive Plan
|
||||||||||||||||||||||||
|
“Book
Value” Awards (#Shares)
|
“Market
Value” Awards (#Shares)
|
||||||||||||||||||||||||
|
Grant
Date Fair Value
|
|||||||||||||||||||||||||
|
Name
|
Grant
Date
|
Threshold
|
Target
|
Maximum
|
Threshold
|
Target
|
Maximum
|
of
Stock Awards
|
|||||||||||||||||
|
Christopher
J. Murphy III
|
2/9/2006
|
|
|
|
|
|
9,040
|
|
|
|
|
|
|
|
|
2,445
|
|
|
|
|
$
|
196,498
|
|
||
|
Larry
E. Lentych
|
|
|
2/9/2006
|
|
|
|
|
|
1,566
|
|
|
|
|
|
|
|
|
613
|
|
|
|
|
|
38,705
|
|
|
Wellington
D. Jones III
|
|
|
2/9/2006
|
|
|
|
|
|
4,215
|
|
|
|
|
|
|
|
|
1,572
|
|
|
|
|
|
102,282
|
|
|
John
B. Griffith
|
|
|
2/9/2006
|
|
|
|
|
|
2,443
|
|
|
|
|
|
|
|
|
618
|
|
|
|
|
|
52,157
|
|
|
Richard
Q. Stifel
|
|
|
2/9/2006
|
|
|
|
|
|
2,408
|
|
|
|
|
|
|
|
|
617
|
|
|
|
|
|
51,600
|
|
Note:
There were no non-equity incentive plan awards with future payouts made
during
2006. Also, there were no other stock awards or option awards made during
2006.
NARRATIVE
DISCLOSURE TO SUMMARY COMPENSATION TABLE AND GRANTS OF PLAN-BASED AWARDS
TABLE
Employment
Agreements:
Mr.
Murphy, Mr. Lentych, Mr. Jones and Mr. Stifel signed employment agreements
in
April 1998. Mr. Griffith signed an employment agreement in March 2001.
Mr.
Murphy’s agreement, including subsequent changes agreed to with the Executive
Compensation and Human Resources Committee, provides for a $620,000 base
salary
at December 31, 2006, with annual increases as the Committee may deem
appropriate each year, and cash bonus payments under the Executive Incentive
Plan and Long-Term Executive Award Program and the 1998 Performance Compensation
Plan.
Under
the
other four agreements, Mr. Jones, Mr. Lentych, Mr. Stifel and Mr. Griffith
receive base salaries of $345,000, $210,000, $238,065 and $260,000,
respectively, at December 31, 2006, with annual increases each year as
may be
determined by 1st Source, and cash and stock bonuses determined under
the
Executive Incentive Plan and the Long-Term Executive Award Program. The
agreements permit gross-up payments necessary to cover possible excise
tax
payments by the Executives and to reimburse the Executives for legal
fees that
might be expended in enforcing the agreements’ provisions or contesting tax
issues relating to the agreements’ parachute provisions.
Mr.
Murphy’s agreement is a five-year agreement which is extended an additional
year
each year unless either party gives notice not to extend. The agreements
for Mr.
Jones, Mr. Lentych and Mr. Stifel expire on December 31, 2007. Mr. Griffith’s
agreement expires on March 31, 2007. In each case the Executive’s agreement will
be extended from year to year thereafter unless either party gives notice
not to
extend. If an Executive terminates employment because of any adverse
change in
his status, he will continue to receive his base salary for a period
of twelve
months after his termination. If an Executive terminates employment within
one
year of a change in control (which term includes any third party which
becomes
beneficial owner of 50%, or in the case of Mr. Murphy, 20% or more of
the
outstanding stock of 1st Source, the election of a majority of new directors
in
connection with a sale, merger, other business combination or contested
Board of
Directors election, or any approval of any transaction which results
in a
disposition of substantially all of the assets of 1st Source), he will
receive
severance pay in cash equal to 2.99 times his “Annualized Includable
Compensation” (as defined under the Internal Revenue Code of 1986, as amended.)
The
agreements include restrictive covenants which require, among other things,
that
the Executives not compete with 1st Source in bank or bank-related services
within certain designated counties of Indiana and not divulge confidential
information or trade secrets for a twenty-four month period (in the agreement
of
Mr. Griffith, an unlimited period with respect to confidential information
or
trade secrets) after termination of employment. In the event of disability,
an
Executive will receive his base salary for up to one year, in addition
to other
disability programs in effect for all officers of 1st Source.
E-78
Bonus
Plan:
Bonuses
under 1st Source’s Executive Incentive Plan (EIP) are determined annually
following the close of the year. The bonus is calculated based on the
officer’s
“partnership level” adjusted for the Company’s performance relative to plan and
for the individual’s personal performance relative to weighted objectives set by
the individual with his or her supervisor at the beginning of the year.
For the
named executives, the base bonus is calculated at a “partnership level” ranging
from 15% to 25% of their salaries. For each 1% that the Company varies
from its
profit plan for the year, the base bonus is adjusted up or down by 2.5%.
Finally, this possible bonus is adjusted by the individual’s performance ranging
from 0% to 300% of the possible bonus.
Under
the
terms of the EIP, 50% of an Executive Incentive Plan bonus is paid in
cash at
the time of the award. The other 50% is paid in “Book Value” stock which is
subject to forfeiture over the succeeding five (5) years. “Book Value” shares
may only be sold to 1st Source, and such sale is mandatory in the event
of
death, retirement, disability or termination of employment. 1st Source
may
terminate or extend the Plan at any time. The forfeiture lapses ratably
for each
year the employee remains with the Company and for each year, or period
of
years, the Company grows its net income by a targeted minimum per year.
During
this period, the “at risk” portion of the bonus, delineated in book value stock,
is transferred to the participant as the forfeiture period lapses. In
Mr.
Murphy’s case, while determined in book value stock, the award is paid in cash
as the forfeiture lapses.
Due
to
the Company’s performance in 2002, the remaining 20% of the award made in 1997
would be forfeited. In early 2003 Mr. Murphy asked that the forfeiture
period
for these awards be extended for four (4) years for all members of the
Executive
Incentive Plan except those most senior officers (including Mr. Murphy
and Mr.
Jones) of the Corporation with credit and management authority bearing
full
responsibility for the Company’s performance. The recommendation for the
extension was made in an effort to encourage the management team throughout
the
Company to accelerate their efforts to return 1st Source to its historic
earnings levels. This extension was approved by the Board of Directors
and the
shareholders. The Board and Shareholders also approved extensions of
the
forfeiture period for the awards made in 1998, 1999, 2000 and 2001 by
four (4)
years for all members of the Executive Incentive Plan except Mr. Murphy,
who
forfeited the remaining 20% and 60%, respectively of the 1997 and 1998
award
in
January 2003 and January 2004 and the remaining 100% of the 1999, 2000
and 2001
awards in January 2005, January 2006 and January 2007, respectively.
All other
members of the Executive Incentive Plan forfeited the remaining 20% of
the 1997
awards in January 2007.
Mr.
Murphy was also eligible for a cash bonus under the 1998 Performance
Compensation Plan based on goals established at the beginning of 2006.
For 2006,
the award level set was up to 2.5% of net income, or the same percentage
as set
for the seven (7) previous years. Based on Mr. Murphy’s performance, Mr. Murphy
earned a bonus of approximately 1.27% of net income, or $500,000.
The
stock
award amounts shown in the Stock Awards column of the Summary Compensation
Table
represent the 2006 annual expense that would have been included in 1st
Source’s
financial statements under SFAS 123R using the modified prospective transition
method for awards related to periods before 2006. The option award amount
shown
in the Option Awards column of the Summary Compensation Table represents
the
expense of the related option award computed in accordance with SFAS
123R for
2006. The amounts shown in the Non-Equity Incentive Plan Compensation
column of
the Summary Compensation Table represent the annual cash awards under
the Plan
and the 1998 Performance Compensation Plan award. Estimated future payout
amounts for 2006 book value and market value stock awards and the corresponding
grant date fair values are shown in the Grants of Plan-Based Awards
Table.
Recipients
of unvested book value and market value shares granted under the Executive
Incentive Plan receive dividends at the same time and in the same amount
as all
other holders of 1st Source common stock.
E-79
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||
|
Equity
|
||||||||||||||||||||||||||||
|
Incentive
|
||||||||||||||||||||||||||||
|
Equity
|
Equity
|
Plan
|
||||||||||||||||||||||||||
|
Incentive
|
Incentive
|
Awards:
|
||||||||||||||||||||||||||
|
Plan
Awards:
|
Plan
|
Market
or
|
||||||||||||||||||||||||||
|
Number
of
|
Number
of
|
Number
of
|
Market
|
Awards:
|
Payout
|
|||||||||||||||||||||||
|
Securities
|
Securities
|
Securities
|
Number
of
|
Value
of
|
Number
of
|
Value
of
|
||||||||||||||||||||||
|
Underlying
|
Underlying
|
Underlying
|
Shares
of
|
Shares
of
|
Unearned
|
Unearned
|
||||||||||||||||||||||
|
Unexercised
|
Unexercised
|
Unexercised
|
Option
|
Option
|
Stock
That
|
Stock
That
|
Shares
|
Shares
That
|
||||||||||||||||||||
|
Options
|
Options
|
Unearned
|
Exercise
|
Expiration
|
Have
Not
|
Have
Not
|
That
Have
|
Have
Not
|
||||||||||||||||||||
|
Name
|
Exerciseable
|
Unexerciseable
|
Options
|
Price
|
Date
|
Vested
(1)
|
Vested
|
Not
Vested (1)
|
Vested
|
|||||||||||||||||||
|
Christopher
J. Murphy III
|
133,403
|
|
|
-
|
|
|
-
|
|
$
|
28.30
|
|
|
7/21/2008
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
“Book
Value” Shares
|
18,500
|
|
$
|
303,400
|
||||||||||||||||||||||||
|
“Market
Value” Shares
|
8,588
|
|
$
|
275,923
|
|
|
||||||||||||||||||||||
|
Larry
E. Lentych
|
40,021
|
|
|
-
|
|
|
-
|
|
|
28.30
|
|
|
7/21/2008
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
“Book
Value” Shares
|
10,800
|
|
|
177,120
|
||||||||||||||||||||||||
|
“Market
Value” Shares
|
1,519
|
|
|
48,805
|
|
|
||||||||||||||||||||||
|
Wellington
D. Jones III
|
66,702
|
|
|
-
|
|
|
-
|
|
|
28.30
|
|
|
7/21/2008
|
|
|
|||||||||||||
|
“Book
Value” Shares
|
22,926
|
|
|
375,986
|
|
|||||||||||||||||||||||
|
“Market
Value” Shares
|
3,834
|
|
|
123,186
|
||||||||||||||||||||||||
|
John
B. Griffith
|
22,916
|
|
|
4,584
|
|
|
-
|
|
|
20.86
|
|
|
7/2/2011
|
|||||||||||||||
|
“Book
Value” Shares
|
6,722
|
|
|
110,241
|
||||||||||||||||||||||||
|
“Market
Value” Shares
|
1,095
|
|
|
35,182
|
||||||||||||||||||||||||
|
Richard
Q. Stifel
|
40,021
|
|
|
-
|
|
|
-
|
|
|
28.30
|
|
|
7/21/2008
|
|
|
|
|
|
|
|
|
|
|
|||||
|
“Book
Value” Shares
|
11,161
|
|
|
183,040
|
||||||||||||||||||||||||
|
“Market
Value” Shares
|
1,503
|
|
|
48,291
|
|
|||||||||||||||||||||||
|
(1)
Vesting dates for these awards are as follows:
|
||
|
“Book
Value” Shares
|
“Market
Value” Shares
|
|
|
Mr.
Murphy
|
12/2006
- 12/2010
|
12/2006
- 12/2014
|
|
Mr.
Lentych
|
12/2006
- 12/2010
|
12/2006
- 12/2014
|
|
Mr.
Jones
|
12/2006
- 12/2010
|
12/2006
- 12/2014
|
|
Mr.
Griffith
|
12/2006
- 12/2010
|
12/2006
- 12/2014
|
|
Mr.
Stifel
|
12/2006
- 12/2010
|
12/2006
- 12/2014
|
Note:
Shares vesting based on calendar year results (e.g., 12/2006 above generally
is
based on 2006 results) are not released until financial results are publicly
announced early in the following year.
E-80
OPTION
EXERCISES AND STOCK VESTED
|
Option
Awards
|
Stock
Awards
|
|||||
|
Number
of
|
Number
of “Book
|
Number
of “Market
|
||||
|
Shares
Acquired
|
Value
Realized
|
Value”
shares
|
Value”
Shares Acquired
|
Value
Realized
|
||
|
Name
|
on
Exercise
|
on
Exercise
|
|
acquired
on vesting
|
on
Vesting
|
on
Vesting
|
|
Christopher
J. Murphy III
|
-
|
-
|
|
1,011
|
1,840
|
$
57,442
|
|
Larry
E. Lentych
|
6,603
|
$
84,271
|
|
563
|
392
|
17,531
|
|
Wellington
D. Jones III
|
5,327
|
38,938
|
|
1,117
|
762
|
34,416
|
|
John
B. Griffith
|
-
|
-
|
|
768
|
1,206
|
39,252
|
|
Richard
Q. Stifel
|
8,988
|
134,479
|
|
503
|
298
|
14,473
|
E-81
DIRECTOR
COMPENSATION
|
Name
|
Fees
Earned or Paid in Cash
|
Total
|
|
|
David
C. Bowers
|
$
41,500
|
$
41,500
|
|
|
Daniel
B. Fitzpatrick
|
33,000
|
33,000
|
|
|
Terry
L. Gerber
|
36,500
|
36,500
|
|
|
Lawrence
E. Hiler
|
35,500
|
35,500
|
|
|
William
P. Johnson
|
37,750
|
37,750
|
|
|
Wellington
D. Jones III
|
See
Summary Compensation Table
|
||
|
Craig
A. Kapson
|
35,000
|
35,000
|
|
|
Rex
Martin
|
33,250
|
33,250
|
|
|
Dane
A. Miller, Ph.D.
|
27,000
|
27,000
|
|
|
Christopher
J. Murphy III
|
See
Summary Compensation Table
|
||
|
Timothy
K. Ozark
|
39,250
|
39,250
|
|
|
John
T. Phair
|
31,000
|
31,000
|
|
|
Mark
D. Schwabero
|
33,000
|
33,000
|
|
|
Toby
S. Wilt
|
31,750
|
31,750
|
|
Note:
There were no stock awards, option awards, non-equity incentive plan
compensation, pension or other deferred compensation earnings, or other
compensation paid to non-employee directors in 2006
Executive
Compensation and Human Resources Committee
|
Timothy
K. Ozark, Chairman
|
|
|
William
P. Johnson
|
Rex
Martin
|
|
Toby
S. Wilt
|
|
Compensation
Committee Interlocks and Insider Participation
The
persons named above were the only persons who served on the Executive
Compensation and Human Resources Committee of the Board of Directors
during the
last fiscal year.
E-82
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 20.
Indemnification of Officers and Directors
The
Indiana Business Corporation Law provides in regard to indemnification of
directors and officers as follows:
23-1-37-8
Indemnification
of director against liability
Sec.
8.(a) A corporation may indemnify an individual made a party to a proceeding
because the individual is or was a director against liability incurred in the
proceeding if;
|
|
(1)
|
|
the
individual’s conduct was in good faith; and
|
||
|
|
|||||
|
|
(2)
|
|
the
individual reasonably believed;
|
||
|
|
(A)
|
|
in
the case of conduct in the individual’s official capacity with the
corporation, that the individual’s conduct was in its best interest;
and
|
||
|
|
|||||
|
|
(B)
|
|
in
all other cases, that the individual’s conduct was at least not opposed to
its best interests; and
|
||
|
|
(3)
|
|
in
the case of any criminal proceeding, the individual
either;
|
||
|
|
(A)
|
|
had
reasonable cause to believe the individual’s conduct was lawful;
or
|
||
|
|
|||||
|
|
(B)
|
|
had
no reasonable cause to believe the individual’s conduct was
unlawful.
|
||
(b) A
director’s conduct with respect to an employee benefit plan for a purpose the
director reasonably believed to be in the interests of the participants in
and
beneficiaries of the plan is conduct that satisfies the requirement of
subsection (a)(2)(B).
(c) The
termination of a proceeding by judgment, order, settlement, conviction, or
upon
a plea of nolo contendere or its equivalent is not, of itself, determinative
that the director did not meet the standard of conduct described in this
section.
23-1-37-9
Mandatory
indemnification of director against expense
Sec.
9. Unless limited by its articles of incorporation, a corporation shall
indemnify a director who was wholly successful, on the merits or otherwise,
in
the defense of any proceeding to which the director was a party because the
director is or was a director of the corporation against reasonable expenses
incurred by the director in connection with the proceeding.
23-1-37-13
Officers,
employees or agents; indemnification and advance of expense
Sec.
13. Unless a corporation’s articles of incorporation provide otherwise:
(1)
an officer of the corporation, whether or not a director, is entitled to
mandatory indemnification under section 9 of this chapter, and is entitled
to
apply for court-ordered indemnification under section 11 of this chapter, in
each case to the same extent as a director;
(2)
the corporation may indemnify and advance expenses under this chapter to an
officer, employee, or agent of the corporation, whether or not a director,
to
the same extent as to a director; and
(3)
a corporation may also indemnify and advance expenses to an officer, employee,
or agent whether or not a director, to the extent, consistent with public
policy, that may be provided by its articles of incorporation, bylaws, general
or specific action of its board of directors, or contract.
23-1-37-15
Indemnification
rights under articles of incorporation, by-laws or
resolutions
Sec.
15. (a) The indemnification and advance for expenses provided for or
authorized by this chapter does not exclude any other rights to indemnification
and advance for expenses that a person may have under:
(1)
a corporation’s articles of incorporation or bylaws;
(2)
a resolution of the board of directors or of the shareholders; or
(3)
any other authorization, whenever adopted, after notice, by a majority vote
of
all the voting shares then issued and outstanding.
(b) If
the articles of incorporation, by-laws, resolutions of the board of directors
or
of the shareholders, or other duly adopted authorization of indemnification
or
advance for expenses limit indemnification or advance for expenses,
indemnification and advance for expenses are valid only to the extent consistent
with the articles, by-laws, resolutions of the board of directors or of the
shareholders, or other duly adopted authorization of indemnification or advance
for expenses.
II-1
(c) This
chapter does not limit a corporation’s power to pay or reimburse expenses
incurred by a director, officer, employee, or agent in connection with the
person’s appearance as a witness in a proceeding at a time when the person has
not been made a named defendant or respondent to the proceeding.
The
Articles of Incorporation of the Registrant provides:
“The
Corporation shall, to the fullest extent permitted in and in the manner provided
by Chapter 37 of the Act, indemnify every person who is or was a Director
of the Corporation. The Corporation may advance expenses to every person who
is
or was a Director of the Corporation to the fullest extent permitted in and
in
the manner provided by Chapter 37 of the Act. The Corporation shall
indemnify and advance expenses to every person who is or was an Officer of
the
Corporation to the same extent as if such person were a Director of the
Corporation. The foregoing indemnification and advance of expenses for Directors
and Officers of the Corporation shall apply when such persons are serving in
their official capacity with the Corporation, when serving at the Corporation’s
request while a Director or Officer of the Corporation as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
whether for profit or not, and when serving as a director or officer of any
corporation at least eighty percent (80%) of the voting capital stock of which
is owned of record by the Corporation. All references in this paragraph to
Chapter 37 of the Act shall be deemed to include any amendment or successor
thereto. Nothing contained in this paragraph shall limit or preclude the
exercise of any right relating to indemnification or advance of expenses to
any
person who is or was a Director or Officer of the Corporation or the ability
of
the Corporation to otherwise indemnify or advance expenses to any such person.
The foregoing provisions shall be binding upon any successor to the Corporation
so that each person who is or was a Director or Officer of the Corporation
shall
be in the same position with respect to any resulting, surviving, or succeeding
entity as he or she would have been had the separate legal existence of the
Corporation continued; provided, that unless expressly provided or agreed
otherwise, this sentence shall be applicable only to Directors and Officers
acting in such capacity prior to termination of the separate legal existence
of
the Corporation. If any word, clause, or sentence of the foregoing provisions
regarding indemnification or advancement of expenses shall be held invalid
as
contrary to law or public policy, it shall be severable and the provisions
remaining shall not be otherwise affected. This paragraph shall be interpreted
and enforced so as to give maximum rights to indemnification and advance of
expenses to each person who is or was a Director or Officer of the Corporation.
If any Court holds any word, clause, or sentence of this paragraph invalid,
the
Court is authorized and empowered to rewrite these provisions to achieve such
purpose.”
Article
VIII of the Code of By-Laws of the Registrant provides as follows:
Section
8.01 Indemnification:
A. Every
person who is or was a Director or Officer of the Corporation shall be
indemnified by the Corporation against all liability, including any obligation
to pay a judgment, settlement, penalty, excise tax, or fine, and against
reasonable expenses, including counsel fees, actually incurred by such person
in
his or her Official Capacity, provided that such person is determined in the
manner specified in D below to have met the standard of conduct specified in
E
below. Upon demand for such indemnification, the Corporation shall proceed
as
provided in D below to determine whether such person is so entitled to
indemnification.
B. Every
person who is or was a Director or Officer of the Corporation shall be
indemnified by the Corporation against reasonable expenses, including counsel
fees, actually incurred by such person in connection with any Proceeding to
which such person was a party because of such person serving in his or her
Official Capacity if such person was wholly successful, on the merits or
otherwise, in the defense of such Proceeding.
C. The
Corporation may, upon authorization of those entitled to select counsel under
D.(3) below, pay for or reimburse the reasonable expenses, including counsel
fees, incurred by any person who is or was a Director or Officer of the
Corporation in connection with any Proceeding to which such person is a Party
because of such person serving in his or her Official Capacity in advance of
final disposition of the Proceeding if:
II-2
(1) The
person furnishes the Corporation a written affirmation of the person's good
faith belief that the person has met the standard of conduct specified in E
below;
(2) The
person furnishes the Corporation an unlimited general written undertaking,
executed personally or on the person's behalf, to repay the advance if it is
ultimately determined that the person did not meet such standard of conduct;
and
(3) A
determination is made in the manner specified in D below that the facts then
known to those making the determination would not preclude indemnification
under
A above.
D. The
determination shall be made by any one of the following procedures, as selected
by the Board of Directors by majority vote of the entire Board of
Directors:
(1) By
the
Board of Directors by majority vote of a quorum consisting of Directors not
at
the time parties to the proceeding as to which indemnification or advancement
of
expenses is at issue.
(2)
If a
quorum cannot be obtained under Subdivision (1), by majority vote of a committee
duly designated by the Board of Directors (in which designation Directors who
are Parties may participate), consisting solely of two or more Directors not
at
the time Parties to the Proceeding.
(3) By
special legal counsel selected by the Board of Directors or its committee in
the
manner prescribed in Subdivision (1) or (2); or, if a quorum of the Board of
Directors cannot be obtained under Subdivision (1) and a committee cannot be
designated under Subdivision (2), by special legal counsel selected by majority
vote of the full Board of Directors (in which selection Directors who are
Parties may participate).
(4) By
a
majority vote of shareholders excluding shares owned or controlled by Directors
or Officers who at the time of the vote are Parties to the
Proceeding.
E. The
standard of conduct for any act or omission is as follows:
(1) In
the
case of any criminal Proceeding, the person either had reasonable cause to
believe that the person's conduct was lawful, or, had no reasonable cause to
believe the person's conduct was unlawful.
(2) In
all
other cases, either (a)(i) the person's conduct was in good faith, and (ii)
the
person reasonably believed that the person's conduct was in the Corporation's
best interest, or, in the situation described in F.(3)(c) below, the person
reasonably believed that the person's conduct was not opposed to the
Corporation's best interests; or (b) the person's breach of or failure to act
in
accordance with the standard set forth in E.(2)(a) above did not constitute
willful misconduct or recklessness. A person's conduct with respect to an
employee benefit plan for a purpose which the person reasonably believed to
be
in the interests of the participants in and beneficiaries of the plan is conduct
that satisfies the requirements of E.(2)(b).
(3) The
termination of a Proceeding by judgment, order, agreement, or settlement, or
upon conviction or a plea of nolo contendere, or the equivalent of any of the
foregoing, is not, of itself, determinative that the person did not meet the
standard of conduct.
F. As
used
hereinabove with respect to indemnification, the following terms have the
following meanings:
II-3
(1) DIRECTOR
means an individual who is or was a director of the Corporation. "Director"
includes the heirs, estate, executors, administrators, and personal
representatives of a Director.
(2) OFFICER
means an individual who is or was an officer of the Corporation. "Officer"
includes the heirs, estate, executors, administrators, and personal
representatives of an Officer.
(3) OFFICIAL
CAPACITY means: (a) when used with respect to a Director, the position of
Director of the Corporation; (b) when used with respect to an Officer, the
office in the Corporation held by an Officer, and (c) when used with respect
to
a Director or Officer, any service by a person while a Director or Officer
of
the Corporation at the Corporation's specific request, as a Director, Officer,
partner, trustee, employee, or agent of the Corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise, whether for profit
or not. For these purposes, a person is considered to be serving an employee
benefit plan at the Corporation's specific request of the person's duties to
the
Corporation also impose duties on, or otherwise involve services by, such person
to the plan or to participants in or beneficiaries of the plan.
(4) PARTIES
means persons who were, are, or are threatened to be named defendant or
respondent in a Proceeding.
(5) PROCEEDING
means any threatened, pending, or completed action, suit, proceeding, or appeal
therefrom, whether civil, criminal, administrative, regulatory, or
investigative, and whether formal or informal.
G. The
Corporation reserves the right to purchase and maintain insurance for the
matters covered by these provisions and to the extent of such insurance payments
these provisions shall not be effective.
Item 21.
Exhibits and Financial Statement Schedules.
An
index
to Exhibits appears at pages II-8 hereof.
Item 22.
Undertakings.
The
undersigned registrant hereby undertakes:
(a)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(1)
To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933.
(2)
To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the
effective registration statement.
(3)
To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(b)
That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the
II-4
securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona
fide
offering
thereof.
(c)
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(d)
For
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant’s annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan’s annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide
offering
thereof.
(e)
That
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain
the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(f)
That
every prospectus (1) that is filed pursuant to paragraph
(e) immediately preceding, or (2) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona
fide
offering
thereof.
(g)
Insofar as indemnification for liabilities arising under the Securities Act
of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the registrant of expenses incurred or paid by a director, officer
or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(h)
To
respond to requests for information that is incorporated by reference into
the
prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(i)
To
supply by means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was not
the
subject of and included in the registration statement when it became effective.
II-5
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of South Bend, State of
Indiana, on May 4, 2007.
|
|
|
|
|
|
|
|
1ST
SOURCE CORPORATION
(Registrant)
|
|
||
|
|
By:
|
/s/
Christopher J. Murphy, III
|
|
|
|
|
|
Christopher
J. Murphy, III, President
|
|
|
|
|
|
and
Chief Executive Officer
|
|
|
|
|
||||
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Christopher J. Murphy III
|
Chairman
of the Board,
|
May
4, 2007
|
||
|
Christopher
J. Murphy III
|
President
and Chief Executive Officer
|
|
||
|
|
|
|
||
|
/s/
Wellington D. Jones III
|
Executive
Vice President
|
May
4, 2007
|
||
|
Wellington
D. Jones III
|
and
Director
|
|
||
|
|
|
|
||
|
/s/
Larry E. Lentych
|
Treasurer,
Chief Financial Officer
|
May
4, 2007
|
||
|
Larry
E. Lentych
|
and
Principal Accounting Officer
|
|
||
|
|
|
|
||
|
/s/
John B. Griffith
|
Secretary
|
May
4, 2007
|
||
|
John
B. Griffith
|
and
General Counsel
|
|
||
|
|
|
|
||
|
/s/
David C. Bowers*
|
Director
|
May
4, 2007
|
||
|
David
C. Bowers
|
|
|
||
|
|
|
|
||
|
/s/
Daniel B. Fitzpatrick*
|
Director
|
May
4, 2007
|
||
|
Daniel
B. Fitzpatrick
|
|
|
||
|
|
|
|
||
|
/s/
Terry L. Gerber*
|
Director
|
May
4, 2007
|
||
|
Terry
L. Gerber
|
|
|
||
|
|
|
|
||
|
/s/
Lawrence E. Hiler*
|
Director
|
May
4, 2007
|
||
|
Lawrence
E. Hiler
|
|
|
||
|
|
|
|
||
|
/s/
William P. Johnson*
|
Director
|
May
4, 2007
|
||
|
William
P. Johnson
|
|
|
||
|
|
|
|
||
|
/s/
Craig A. Kapson*
|
Director
|
May
4, 2007
|
||
|
Craig
A. Kapson
|
|
|
||
|
|
|
|
||
|
/s/
Rex Martin*
|
Director
|
May
4, 2007
|
||
|
Rex
Martin
|
|
|
II-6
|
|
|
|
||
|
/s/
Dane A. Miller*
|
Director
|
May
4, 2007
|
||
|
Dane
A. Miller
|
|
|
||
|
|
|
|
||
|
/s/
Timothy K. Ozark*
|
Director
|
May
4, 2007
|
||
|
Timothy
K. Ozark
|
|
|
||
|
|
|
|
||
|
/s/
John T. Phair*
|
Director
|
May
4, 2007
|
||
|
John
T. Phair
|
|
|
||
|
|
|
|
||
|
/s/
Mark D. Schwabero*
|
Director
|
May
4, 2007
|
||
|
Mark
D. Schwabero
|
|
|
||
|
|
|
|
||
|
/s/
Toby S. Wilt*
|
Director
|
May
4, 2007
|
||
|
Toby
S. Wilt
|
|
|
|
*
|
|||
|
By:
|
/s/
John B. Griffith
|
||
|
John
B. Griffith, Attorney-in-Fact
|
|||
II-7
INDEX
TO EXHIBITS
|
Exhibit
Number
|
Description
of Exhibits
|
|
|
2.1
|
Agreement
and Plan of Merger dated as of February 19, 2007, as amended April
10,
2007, by and among 1st Source Corporation, FINA Bancorp, Inc., Hickory
Acquisition, Inc. and Wayne B. Welter, as shareholders’ agent, included as
Appendix
A
to
the proxy statement/prospectus constituting Part I of this registration
statement. The copy so included does not include the schedules to
the
Agreement and Plan of Merger. The Registrant undertakes to furnish
any
such schedules to the Commission upon its request.
|
|
|
2.2
|
Shareholder
Voting Agreement dated as of February 19, 2007, by and among 1st
Source
Corporation and each of the signatories thereto, included as Appendix
C
to
the proxy statement/prospectus constituting Part I of this registration
statement.
|
|
|
3.1
|
Articles
of Incorporation of 1st Source Corporation as amended April 30, 1996,
filed as an exhibit to Form 10-K dated December 31, 1996, and
incorporated herein by reference.
|
|
|
3.2
|
By-Laws
of 1st Source, as amended January 29, 2004, and filed as an exhibit
to Form 10-K dated December 31, 2003, and incorporated herein by
reference.
|
|
|
4.1
|
Form
of Common Stock Certificates of Registrant filed as exhibit to
Registration Statement 2-40481 and incorporated herein by
reference.
|
|
|
4.2(a)
|
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.
|
|
|
4.2(b)
|
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.
|
|
|
4.2(c)
|
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.
|
|
|
4.3
|
Agreement
to Furnish Long-term Debt Instruments, dated February 11, 2003, filed
as
an exhibit to Form 10-K, dated December 31, 2002, and incorporated
herein
by reference.
|
|
|
5.1
|
Opinion
and consent of John B. Griffith, as to the legality of the securities
being registered.
|
|
|
8.1
|
Opinion
of Krieg DeVault LLP, regarding certain federal income tax consequences
relating to the merger.*
|
|
|
23.1
|
Consent
of Ernst & Young LLP, Independent Registered Public Accounting
Firm.
|
|
|
23.2
|
Consent
of John B. Griffith (included as part of the opinion filed as
Exhibit 5.1).
|
|
|
23.3
|
Consent
of Krieg DeVault LLP (included as part of its opinion filed as Exhibit
8.1).*
|
|
II-8
|
23.4
|
Consent
of AFSI, LLC
|
|
|
24.1
|
Power
of Attorney.*
|
|
|
99.1
|
Form
of Proxy for Special Meeting of FINA Bancorp.
|
|
|
99.2
|
Form
of Letter of Transmittal and Election for Shareholders of FINA
Bancorp.
|
|
|
99.3
|
Form
of Letter of Transmittal for Non-Electing Shareholders of FINA
Bancorp.
|
|
|
99.4
|
Voting
Instruction Letter to Participants in the First National Bank, Valparaiso
Employee Stock Ownership Plan
|
|
|
99.5
|
Voting
Instruction Card for Participants in the First National Bank, Valparaiso
Employee Stock Ownership Plan
|
|
|
*
Previously filed.
|
||
II-9