10-Q 1 firstqtr04_10q.txt FIRST QUARTER 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ________________ Commission file number 0-6233 1ST SOURCE CORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1068133 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 NORTH MICHIGAN STREET, SOUTH BEND, INDIANA 46601 (Address of principal executive offices) (Zip Code) (574)235-2702 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No______ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ______ Number of shares of common stock outstanding as of April 20, 2004 - 20,737,434 shares TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Consolidated statements of financial condition -- March 31, 2004, and December 31, 2003 3 Consolidated statements of income -- three months ended March 31, 2004 and 2003 4 Consolidated statements of cash flows -- three months ended March 31, 2004 and 2003 5 Notes to the Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6(a) Exhibits 17 Item 6(b) Reports on Form 8-K 17 SIGNATURES 18 2
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 1ST SOURCE CORPORATION AND SUBSIDIARIES (UNAUDITED - DOLLARS IN THOUSANDS) March 31, December 31, 2004 2003 ------------------------------- ASSETS Cash and due from banks $ 78,134 $ 109,787 Federal funds sold and interest bearing deposits with other banks 1,055 1,355 Investment securities available-for-sale (amortized cost of $723,011 and $759,945 at March 31, 2004 and December 31, 2003, respectively) 729,924 763,763 Mortgages held for sale 81,650 60,215 Loans - net of unearned discount Commercial and agricultural 407,166 402,905 Auto, light truck and environmental equipment 244,444 269,490 Medium and heavy duty truck 224,912 221,562 Aircraft financing 458,788 489,155 Construction equipment financing 211,388 219,562 Loans secured by real estate 538,066 533,749 Consumer loans 91,349 94,577 ------------------------------- Total loans 2,176,113 2,231,000 Reserve for loan losses (70,045) (70,045) ------------------------------- Net loans 2,106,068 2,160,955 Equipment owned under operating leases, net of accumulated depreciation 62,994 70,305 Net premises and equipment 38,093 38,431 Accrued income and other assets 124,795 125,342 ------------------------------- Total assets $ 3,222,713 $ 3,330,153 =============================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing $ 378,209 $ 396,026 Interest bearing 2,025,781 2,091,189 ------------------------------- Total deposits 2,403,990 2,487,215 Federal funds purchased and securities sold under agreements to repurchase 248,779 276,040 Other short-term borrowings 109,842 114,814 Long-term debt and mandatorily redeemable securities 23,181 22,802 Subordinated notes 56,444 56,444 Accrued expenses and other liabilities 60,617 58,147 ------------------------------- Total liabilities 2,902,853 3,015,462 Shareholders' equity: Preferred stock-no par value - - Common stock-no par value 7,578 7,578 Capital surplus 214,001 214,001 Retained earnings 103,529 100,534 Cost of common stock in treasury (9,512) (9,777) Accumulated other comprehensive income 4,264 2,355 ------------------------------- Total shareholders' equity 319,860 314,691 ------------------------------- Total liabilities and shareholders' equity $ 3,222,713 $ 3,330,153 ===============================
The accompanying notes are a part of the consolidated financial statements. 3
CONSOLIDATED STATEMENTS OF INCOME 1ST SOURCE CORPORATION AND SUBSIDIARIES (UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended March 31, ---------------------------------- 2004 2003 ---------------------------------- Interest and Fee Income: Loans $ 32,454 $ 36,610 Investment securities: Taxable 4,289 4,534 Tax-exempt 1,317 1,435 Other 65 150 ---------------------------------- TOTAL INTEREST INCOME 38,125 42,729 Interest Expense: Deposits 9,823 13,771 Short-term borrowings 1,257 1,264 Subordinated notes 961 940 Long-term debt and mandatorily redeemable securities 322 198 ---------------------------------- TOTAL INTEREST EXPENSE 12,363 16,173 ---------------------------------- NET INTEREST INCOME 25,762 26,556 Provision for loan losses 101 5,550 ---------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,661 21,006 Noninterest Income: Trust fees 3,090 2,640 Service charges on deposit accounts 3,706 3,724 Loan servicing and sale income (1,785) 3,206 Equipment rental income 5,824 6,771 Other income 3,436 3,978 Investment securities and other investment losses (252) (280) ---------------------------------- TOTAL NONINTEREST INCOME 14,019 20,039 ---------------------------------- Noninterest Expense: Salaries and employee benefits 15,754 17,247 Net occupancy expense 1,833 1,864 Furniture and equipment expense 2,584 2,641 Depreciation - leased equipment 4,536 5,358 Supplies and communication 1,432 1,511 Loan collection and repossession expense 1,055 1,871 Other expense 5,148 4,310 ---------------------------------- TOTAL NONINTEREST EXPENSE 32,342 34,802 ---------------------------------- Income before taxes 7,338 6,243 Income tax expense 2,259 1,783 ---------------------------------- NET INCOME $ 5,079 $ 4,460 ================================== Other Comprehensive Income, Net of Tax: Change in unrealized appreciation (depreciation) of available-for-sale securities 1,909 (197) ---------------------------------- Total Comprehensive Income $ 6,988 $ 4,263 ================================== Per Common Share: Basic Net Income Per Common Share $ 0.25 $ 0.21 ================================== Diluted Net Income Per Common Share $ 0.24 $ 0.21 ================================== Dividends $ 0.100 $ 0.090 ================================== Basic Weighted Average Common Shares Outstanding 20,727,035 21,000,317 ================================== Diluted Weighted Average Common Shares Outstanding 21,035,918 21,331,419 ==================================
The accompanying notes are a part of the consolidated financial statements. 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 1ST SOURCE CORPORATION AND SUBSIDIARIES (UNAUDITED - DOLLARS IN THOUSANDS) Three Months Ended March 31, ---------------------------- 2004 2003 ------------ ------------ Operating activities: Net income $ 5,079 $ 4,460 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 101 5,550 Depreciation of premises and equipment 5,777 6,682 Amortization of investment security premiums and accretion of discounts, net 1,426 1,287 Amortization of mortgage servicing rights 1,919 1,870 Mortgage servicing asset impairment charges 3,227 1,777 Change in deferred income taxes 4,309 473 Realized investment securities losses 252 280 Change in mortgages held for sale (21,435) (292) Realized losses on securitized loans 0 306 Change in trading account securities 0 (192) Decrease in interest receivable 943 381 Decrease in interest payable 762 648 Change in other assets (5,541) (8,410) Change in other liabilities (3,788) (585) Other (332) 2,139 ------------ ------------ Net cash used/from operating activities (7,301) 16,374 Investing activities: Proceeds from sales and maturities of investment securities 64,205 87,745 Purchases of investment securities (28,949) (101,329) Net change in short-term investments 300 80,188 Loans sold or participated to others 45 48,569 Net change in loans 54,741 11,045 Net change in equipment owned under operating leases 2,775 1,378 Purchases of premises and equipment (191) (794) ------------ ------------ Net cash from investing activities 92,926 126,802 Financing activities: Net change in demand deposits, NOW accounts and savings accounts (116,527) (89,332) Net change in certificates of deposit 33,302 (26,517) Net change in short-term borrowings (32,233) (20,813) Proceeds from issuance of long-term debt 396 673 Payments on long-term debt (73) (161) Acquisition of treasury stock (30) (154) Cash dividends (2,113) (1,886) ------------ ------------ Net cash used in financing activities (117,278) (138,190) Net change in cash and cash equivalents (31,653) 4,986 Cash and cash equivalents, beginning of year 109,787 120,894 ------------ ------------ Cash and cash equivalents, end of period $ 78,134 $125,880 ============ ============
The accompanying notes are a part of the consolidated financial statements. 5 1ST SOURCE CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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, 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 accounting principles generally accepted in the United States have been omitted. The Notes to the Consolidated Financial Statements appearing in 1st Source Corporation's (1st Source) Annual Report on Form 10-K (2003 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, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current year presentation. 1st Source accounts for its stock-based compensation plans under the recognition and measurement principles provided in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. Stock-based employee compensation expense for the Executive Incentive Plan and the Restricted Stock Award Plan is recognized in net income. For the stock option plans, the stock option agreement, and the Employee Stock Purchase Plan, no compensation expense is recognized in net income as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro forma disclosures presented in Note 5 - Stock-Based Compensation use the fair value method of SFAS No. 123 to measure compensation expense for stock-based employee compensation plans. Note 2. Recent Accounting Pronouncements ACCOUNTING FOR STOCK-BASED COMPENSATION: On March 31, 2004, the Financial Accounting Standards Board (FASB) issued the Exposure Draft, SHARE-BASED PAYMENT, which is a proposed amendment to FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED Compensation. In this draft, the FASB formally proposed to require companies to recognize the fair value of stock options and other stock-based compensation to employees for future reporting periods in the income statement based on their fair values. The final standard is expected in late 2004 that would be effective for public companies (and certain nonpublic companies) that currently use the fair value method, rather than minimum value method, for recognition or disclosure purposes for fiscal years beginning after December 15, 2004. 1st Source is in the process of evaluating the impact that expensing stock options and other stock-based compensation will have on the results of operations, financial position, or liquidity. 6 Note 3. Reserve for Loan Losses The reserve for loan losses is maintained at a level believed to be adequate by management to absorb probable losses inherent in the loan portfolio. The determination of the reserve requires significant judgment reflecting management's best estimate of probable loan losses related to specifically identified loans as well as probable losses in the remainder of the various loan portfolios. The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for identified special attention loans (substandard loans and leases and internal watch list credits), percentage allocations for special attention loans without specific reserves, formula reserves for each business lending division portfolio, including a higher percentage reserve allocation for special attention loans without a specific reserve, and reserves for pooled homogenous loans. Management's evaluation is based upon a continuing review of these portfolios, estimates of future customer performance, collateral values and dispositions and consideration of current economic trends, all of which are subject to judgment and will change. Note 4. Financial Instruments with Off-Balance-Sheet Risk To meet the financing needs of its customers, 1st Source 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. 1st Source's 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. 1st Source uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments. Trustcorp Mortgage Company and 1st Source Bank (Bank), subsidiaries of 1st Source, 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. Letters of credit are conditional commitments issued by 1st Source to 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, 2004 and December 31, 2003, 1st Source had commitments outstanding to originate and purchase mortgage loans aggregating $219.10 million and $143.92 million, respectively. Outstanding commitments to sell mortgage loans aggregated $160.30 million at March 31, 2004 and $99.53 million at December 31, 2003. Standby letters of credit totaled $96.92 million and $101.26 million at March 31, 2004, and December 31, 2003, respectively. Standby letters of credit have terms ranging from six months to one year. Note 5. Stock-Based Compensation The following pro forma information presents net income and earnings per share for the three months ended March 31, 2004 and 2003 as if the fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, had been used to measure compensation cost for stock-based 7 compensation plans. For the purposes of these pro forma disclosures, the estimated fair value of stock options and restricted stock awards is amortized to expense over the related vesting periods. 3 MONTHS ENDED MARCH 31 ----------- ------------- 2004 2003 ----------- ------------- Net income, as reported (000's) $ 5,079 $ 4,460 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 422 0 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (451) (37) --------- --------- Pro forma net income $ 5,050 $ 4,423 ========= ========= Earnings per share: Basic--as reported $0.25 $0.21 ===== ===== Basic--pro forma $0.24 $0.21 ===== ===== Diluted--as reported $0.24 $0.21 ===== ===== Diluted--pro forma $0.24 $0.21 ===== ===== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained herein, the matters discussed in this document express "forward-looking statements." Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will" and similar expressions indicate forward-looking statements. Those statements, including statements, projections, estimates or assumptions concerning future events or performance, and other statements that are other than statements of historical fact, are subject to material risks and uncertainties. 1st Source cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. 1st Source may make other written or oral forward-looking statements from time to time. Readers are advised that various important factors could cause 1st Source's actual results or circumstances for future periods to differ materially from those anticipated or projected in such forward-looking statements. Such factors include, but are not limited to, changes in law, regulations or accounting principles generally accepted in the United States; 1st Source's competitive position within its markets served; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen changes in loan prepayment assumptions; unforeseen downturns in or major events affecting the local, regional or national economies or the industries in which 1st Source has credit concentrations; and other matters discussed in 1st Source's filings with the SEC, including its Annual Report on Form 10-K for 2003, which filings are available from the SEC. 1st Source undertakes no obligation to publicly update or revise any forward-looking statements. The following management's discussion and analysis is presented to provide information concerning the financial condition of 1st Source as of March 31, 2004, as compared to December 31, 2003, and the results of operations for the three months ended March 31, 2004 and 2003. This discussion and analysis should be read in conjunction with 1st Source's consolidated financial statements and the financial and statistical data appearing elsewhere in this report and 1st Source's 2003 Annual Report. 8 FINANCIAL CONDITION 1st Source's assets at March 31, 2004, were $3.22 billion, down 3.23% from December 31, 2003. Total loans were down 2.46% and total deposits decreased 3.35% over the comparable figures at the end of 2003. Nonperforming assets at March 31, 2004, were $32.64 million compared to $36.83 million at December 31, 2003, a decrease of 11.37%. Nonperforming assets decreased due to a decrease in construction equipment and aircraft nonaccrual loans. At March 31, 2004, nonperforming assets were 1.45% of net loans and leases compared to 1.59% at December 31, 2003. Accrued income and other assets were as follows: (Dollars in Thousands) March 31, December 31, 2004 2003 ------------ ----------- Accrued income and other assets: Bank owned life insurance cash surrender value 32,663 27,376 Accrued interest receivable 12,598 13,541 Mortgage servicing assets 20,835 24,324 Other real estate 3,128 4,625 Repossessions 6,234 6,229 Intangible assets 25,561 25,740 All other assets 23,776 23,507 ------------ ----------- Total accrued income and other assets $ 124,795 $ 125,342 ============ =========== CAPITAL As of March 31, 2004, total shareholders' equity was $319.86 million, up 1.64% from the $314.69 million at December 31, 2003. The 1st Source equity-to-assets ratio was 9.93% as of March 31, 2004, compared to 9.45% at December 31, 2003. Book value per common share rose to $15.42 at March 31, 2004, up from $15.19 at December 31, 2003. 1st Source declared and paid dividends per common share of $0.10 during the first quarter of 2004. The dividend payout ratio, representing dividends per share divided by diluted earnings per share, was 41.67% for the first quarter of 2004. The dividend payout is continually reviewed by management and the Board of Directors. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution. These guidelines require all banks to maintain a minimum leverage capital ratio of 4.00% for adequately capitalized banks and 5.00% for well-capitalized banks. 1st Source's leverage capital ratio was 10.69% at March 31, 2004. The Federal Reserve Board has established risk-based capital guidelines for U.S. banking organizations. The guidelines establish a conceptual framework calling for risk weights to be assigned to on and off-balance sheet items in arriving at risk-adjusted total assets, with the resulting ratio compared to a minimum standard to determine whether a bank has adequate capital. The minimum standard risk-based capital ratios effective in 2004 are 4.00% for adequately capitalized banks and 6.00% for well-capitalized banks for Tier 1 risk-based capital and 8.00% and 10.00%, respectively, for total risk-based capital. 1st Source's Tier 1 risk-based capital ratio on March 31, 2004 was 13.13% and the total risk-based capital ratio was 14.44%. 9 LIQUIDITY AND INTEREST RATE SENSITIVITY The Bank's liquidity is monitored and closely managed by the Asset/Liability 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 bank lines of credit, repurchase agreements and the ability to borrow from the Federal Reserve Bank and Federal Home Loan Bank. Close attention is given to various interest rate sensitivity gaps and interest rate spreads. Maturities of rate sensitive assets are relative to the maturities of rate sensitive liabilities and interest rate forecasts. At March 31, 2004, the consolidated statement of financial condition was rate sensitive by $7.00 million more assets than liabilities scheduled to reprice within one year or approximately 1.00%. RESULTS OF OPERATIONS Net income for the three month period ended March 31, 2004, was $5.08 million, compared to $4.46 million for the same period in 2003. Diluted net income per common share was $0.24 for the three month period ended March 31, 2004, compared to $0.21 for the same period in 2003. Return on average common shareholders' equity was 6.43% for the three months ended March 31, 2004, compared to 5.80% in 2003. The return on total average assets was 0.63% for the three months ended March 31, 2004, compared to 0.55% in 2003. The increase in net income for the three months ended March 31, 2004, over the first three months of 2003, was primarily the result of a $5.45 million decrease in the provision for loan losses offset by a $4.61 million decrease in mortgage banking income. Details of the changes in the various components of net income are further discussed below. NET INTEREST INCOME The taxable equivalent net interest income for the three months ended March 31, 2004, was $26.48 million, a decrease of 3.06% over the same period in 2003. The net interest margin on a fully taxable equivalent basis' was 3.53% for the three months ended March 31, 2004, compared to 3.72% for the three months ended March 31, 2003. The impact on net interest margin on a fully taxable equivalent basis due to the recognition of fees on loans over the life of the loans was a reduction of eight basis points for the three months ended March 31, 2004. 10 Total average earning assets increased 1.32% for the three month period ended March 31, 2004, over the comparative period in 2003. Average loan outstandings increased 2.19% for the three month period, compared to the same period in 2003, due primarily to increased loan outstandings in commercial loans secured by aircraft as a result of the fourth quarter 2003 purchase of the securitized aircraft loan portfolio, which was offset by continued runoff in other areas of this loan category. Total average investment securities increased 12.90% for the three month period over one year ago due to an increase in United States treasury, municipal and other securities. For the three month period, average mortgages held for sale decreased 45.35%, as demand for mortgage loans was lower in the first quarter of 2004. Other investments, which include federal funds sold, time deposits with other banks and trading account securities, decreased for the three month period over one year ago as excess funds were used to purchase loans from the securitization facility. The taxable equivalent yields on total average earning assets were 5.18% and 5.92% for the three month period ended March 31, 2004 and 2003, respectively. Average interest bearing deposits decreased 6.27% for the three month period over the same period in 2003. The rate on average interest-bearing deposits was 1.92% and 2.55% for the three month periods ended March 31, 2004 and 2003 due to a decrease in public funds and brokered deposits. These higher cost deposits were not pursued due to lower funding needs. The rate on average interest-bearing funds was 1.98% and 2.61% for the three months ended March 31, 2004 and 2003, respectively. The following table sets forth consolidated information regarding average balances and rates. 11 DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------------------- 2004 2003 ------------------------------ -------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------------------------------ -------------------------- ASSETS: Investment securities: Taxable $ 569,634 $ 4,289 3.03% $ 492,416 $ 4,534 3.73% Tax exempt (1) 171,170 1,957 4.60% 163,765 2,114 5.24% Mortgages held for sale 68,443 907 5.33% 125,240 1,703 5.51% Net loans (2 & 3) 2,199,040 31,620 5.78% 2,151,832 34,984 6.59% Other investments 7,843 65 3.33% 43,546 150 1.40% ------------------------------ -------------------------- Total Earning Assets 3,016,130 38,838 5.18% 2,976,799 43,485 5.92% Cash and due from banks 77,275 85,977 Reserve for loan losses (70,141) (61,091) Other assets 227,295 272,195 ------------ ---------- Total $ 3,250,559 $3,273,880 ============ ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $ 2,053,841 $ 9,823 1.92% $2,191,132 $13,771 2.55% Short-term borrowings 380,694 1,257 1.33% 252,967 1,264 2.03% Subordinated notes 56,444 961 6.85% 54,750 940 6.96% Long-term debt and mandatorily redeemable securities 23,061 322 5.62% 17,496 198 4.59% ------------------------------ -------------------------- Total Interest Bearing Liabilities 2,514,040 12,363 1.98% 2,516,345 16,173 2.61% Noninterest bearing deposits 359,952 391,860 Other liabilities 58,996 53,857 Shareholders' equity 317,571 311,818 ------------ ---------- Total $ 3,250,559 $3,273,880 ============ ========== ------- -------- Net Interest Income $26,475 $ 27,312 ======= ======== Net Yield on Earning Assets on a Taxable ------- ------ Equivalent Basis 3.53% 3.72% ======= ======
(1) Interest income includes the effects of taxable equivalent adjustments, using a 35% rate. Tax equivalent adjustments were $640 in 2004 and $679 in 2003. (2) Loan income includes fees on loans $826 in 2004 and $1,196 in 2003. Loan income also includes the effects of taxable equivalent adjustments, using 35% rate for 2004 and 2003. The tax equivalent were $73 in 2004 and $77 in 2003. (3) For purposes of this computation, nonaccruing loans are included in the daily average loan amounts outstanding. 12 PROVISION AND RESERVE FOR LOAN LOSSES The provision for loan losses for the three month periods ended March 31, 2004 and 2003 was $0.10 million and $5.55 million, respectively. Net charge-offs of $0.10 million were recorded for the first quarter 2004, compared to $2.93 million for the same quarter a year ago. In the first quarter 2004, 1st Source continued to experience moderate improvement in credit quality. Loan delinquencies were 1.17% on March 31, 2004, as compared to 1.38% on March 31, 2003, and 1.04% at the end of 2003. First quarter 2004 net charge-offs decreased as compared to first quarter 2003. The reserve for loan losses as a percentage of loans outstanding at the end of the period was 3.22% as compared to 2.92% one year ago and 3.14% at December 31, 2003. A summary of loan loss experience during the three month periods ended March 31, 2004 and 2003, is provided below.
Summary of Reserve for Loan Losses ---------------------------------- (Dollars in Thousands) Three Months Ended March 31, ---------------------------------- 2004 2003 ---------------------------------- Reserve for loan losses - beginning balance $ 70,045 $ 59,218 Charge-offs (1,573) (3,670) Recoveries 1,472 745 -------------- ----------------- Net charge-offs (101) (2,925) Provision for loan losses 101 5,550 -------------- ---------------- Reserve for loan losses - ending balance $ 70,045 $ 61,843 ============== ================ Loans outstanding at end of period $2,176,113 $ 2,116,913 Average loans outstanding during period 2,199,040 2,151,832 Reserve for loan losses as a percentage of loans outstanding at end of period 3.22% 2.92% Ratio of net charge-offs during period to average loans outstanding 0.02% 0.55%
NONPERFORMING ASSETS Nonperforming assets were as follows: (Dollars in thousands) March 31, December 31, March 31, 2004 2003 2003 --------- ------------ ---------- Loans past due 90 days or more $ 230 $ 212 $ 569 Nonaccrual and restructured loans 23,356 27,085 39,297 Other real estate 2,541 3,010 5,667 Repossessions 6,234 6,263 22,734 Equipment owned under operating leases 280 257 1,563 --------- ------------ ---------- Total nonperforming assets $ 32,641 $ 36,827 $ 69,830 ========= ============ ==========
Nonperforming assets totaled $32.64 million at March 31, 2004, decreasing 11.37% from $36.83 million at December 31, 2003 and decreasing 53.26% from $69.83 million at March 31, 2003. The decrease during the first quarter 2004 was primarily related to a decrease in aircraft and construction equipment nonaccrual loans. Nonperforming assets as a percentage of total loans and leases improved to 1.45% at March 31, 2004, from 1.59% at December 31, 2003 and 3.13% at March 31, 2003. 13 As of March 31, 2004, the Bank had a $4.01 million standby letter of credit outstanding which supported bond indebtedness of a customer. Due to the current financial condition of the customer, if this standby letter of credit is funded, 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. Repossessions consist primarily of aircraft collateral, $5.32 million of the $6.23 million as of March 31, 2004. These aircraft primarily have come from defaulted loans to air cargo operators and aircraft dealers. There are also automobiles, light trucks, construction equipment and environmental equipment in repossessed assets at March 31, 2004. At the time of repossession, the recorded amount of the loan is written down, if necessary, to the estimated value of the equipment or vehicle by a charge to the reserve for loan losses, unless the equipment is in the process of immediate sale. Any subsequent write-downs are included in noninterest expense. Repossessed assets are valued by the loan and credit officers of the Bank or, in certain circumstances, an independent third party. The estimated value generally is determined on an orderly liquidation basis and is based on a variety of available sources. These sources typically include vehicle and equipment dealers, valuation guides and other third parties, including appraisers. A number of variables can lead to a decrease in value after the asset is repossessed. These include deterioration in the market value, discovery of new or additional information about the asset, and validity or invalidity of other liens against the asset. Valuation adjustments and net losses upon disposition of repossessions for the three month period ended March 31, 2004, totaled $0.14 million as compared to the valuation adjustments and net losses for the three month period ended March 31, 2003, of $0.22 million. SUPPLEMENTAL LOAN INFORMATION AS OF MARCH 31, 2004
(Dollars in thousands) Other real estate Year-to-date Loan owned and net credit losses/ outstandings Non-accrual repossessions recoveries -------------- ------------- ----------------- ---------------- Commercial and agricultural loans $ 407,166 $ 2,424 $ 6 $ (58) Auto, light truck and environmental equipment 244,444 3,937 341 472 Medium and heavy duty truck 224,912 1,544 - (2) Aircraft financing 458,788 10,245 5,315 (538) Construction equipment financing 211,388 3,328 518 18 Loans secured by real estate 538,066 1,346 2,541 111 Consumer loans 91,349 532 55 241 -------------- ------------- ----------------- ---------------- Total $2,176,113 $ 23,356 $ 8,776 $ 244 ============== ============= ================= ================
For financial statements purposes, non-accrual loans are included in loan outstandings, whereas repossessions and other real estate are included in other assets. Net credit losses include net charge-offs on loans and valuation adjustments and gains and losses on disposition of repossessions and defaulted operating leases. NONINTEREST INCOME Noninterest income for the three-month periods ended March 31, 2004 and 2003 was $14.02 million and $20.04 million, respectively. The predominant factor behind the decrease in 2004 was a reduction in mortgage banking income. 14 (Dollars in Thousands) Three Months Ended March 31, ----------------------- 2004 2003 ----------------------- Noninterest Income: Trust fees $ 3,090 $ 2,640 Service charges on deposit accounts 3,706 3,724 Mortgage banking (1,522) 3,092 Securitization income - 675 Insurance commissions 962 813 Equipment rental income 5,824 6,771 Other income 2,211 2,604 Investment securities and other investment losses (252) (280) ----------- --------- Total Noninterest Income $ 14,019 $ 20,039 =========== ========= The decrease in mortgage banking revenue on a quarter-over-quarter basis was driven primarily by a reduction in origination volumes and decreased gains on sales of loans into the secondary market. Also impacting the decline in mortgage banking income was mortgage servicing rights impairment of $3.23 million in the first quarter of 2004 versus $1.78 million for the same period in 2003. The three months ended March 31, 2004, saw increases in trust fees and insurance commission income. Equipment rental income decreased due to the decrease in the operating lease portfolio. Services charges on deposit accounts remained stable, while securitization income was eliminated in 2004 as 1st Source no longer has loans securitized. Other income decreased due to decreased trading security income. During the 1st quarter of 2004, there were no trading account securities. Investment security and other investment losses are due to the effects of market value adjustments of venture capital investments. NONINTEREST EXPENSE Noninterest expense for the three-month periods ended March 31, 2004 and 2003 was $32.34 million and $34.80 million, respectively. The decrease in noninterest expense in 2004 was primarily due to decreased salaries and employee benefits, decreased loan collection and repossession expense, offset by increased professional fees. (Dollars in Thousands) Three Months Ended March 31, ---------------------------- 2004 2003 ---------------------------- Noninterest Expense: Salaries and employee benefits $ 15,754 $ 17,247 Net occupancy expense 1,833 1,864 Furniture and equipment expense 2,584 2,641 Depreciation - leased equipment 4,536 5,358 Professional fees 1,561 620 Supplies and communication 1,432 1,511 Business development and marketing expense 632 709 Intangible asset amortization 658 806 Loan collection and repossession expense 1,055 1,871 Other expense 2,297 2,175 ------------ ----------- Total Noninterest Expense $ 32,342 $ 34,802 ============ =========== 15 Salaries and employee benefits decreased on a year-over-year basis caused primarily by the capitalization of $1.26 million in salaries and benefits in connection with the deferral of loan origination costs in 2004. Decreased mortgage commissions also contributed to the decrease in salaries and employee benefits. These decreases were partially offset by higher executive incentive accruals and increased group insurance costs. First quarter net occupancy expense, furniture and equipment expense, supplies and communication, and business development and marketing expense, all remained comparable to 2003 levels. Leased equipment depreciation decreased due to the decrease in the operating lease portfolio. Loan collection and repossession expense decreased as valuation adjustments and other expenses related to repossessed assets decreased. Professional fees increased due to increased legal fees relating, in part, to the lawsuit described in the 2003 Form 10-K Item 3, Legal Proceedings. Other expenses increased primarily due to unfavorable market value adjustments on derivatives in 2004 offset by losses on branch closings recorded in 2003. INCOME TAXES The provision for income taxes for the three months ended March 31, 2004, was $2.26 million, compared to $1.78 million for the comparable period in 2003. The provision for income taxes for the three months ended March 31, 2004 and 2003, is at a rate which management believes approximates the effective rate for the year. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risks faced by 1st Source since December 31, 2003. For information regarding 1st Source's market risk, refer to 1st Source's Annual Report on Form 10-K for the year ended December 31, 2003. ITEM 4. CONTROLS AND PROCEDURES 1st Source carried out an evaluation, under the supervision and with the participation of 1st Source's management, including 1st Source's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of 1st Source's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, at March 31, 2004, 1st Source's disclosure controls and procedures are effective in accumulating and communicating to management (including such officers) the information relating to 1st Source (including its consolidated subsidiaries) required to be included in 1st Source's periodic SEC filings. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. 1st Source reported in its Form 10-K filed February 19, 2004, on an adversary proceeding filed against the Bank by Airmotive, Inc., by and through the Official Unsecured Creditor's Committee of Airmotive, Inc. 1st Source and its subsidiaries are involved in various legal proceedings incidental to the conduct of their businesses. Management does not expect that the outcome of any such proceedings will have a material adverse effect on 1st Source's consolidated financial position or results of operations. 16 ITEM 2. Changes in Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES (A) (B) (C) (D) Total number of Maximum number (or approximate Total number Average shares purchased dollar value) of shares of shares price paid per as part of publicly announced that may yet be purchased under Period purchased share plans or programs the plans or programs ------------------------------------------------------------------------------------------------------------------------------------ January 01 - 31, 2004 0 - 0 862,754 February 01 - 29, 2004 6,969 21.70 6,969 855,785 March 01 - 31, 2004 0 - 0 855,785
ITEM 3. Defaults Upon Senior Securities. None ITEM 4. Submission of Matters to a Vote of Security Holders. None ITEM 5. Other Information. None ITEM 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed with this report: 1. Exhibit 31.1 Certification of Chief Executive Officer required by Rule 13a-14(a). 2. Exhibit 31.2 Certification of Chief Financial Officer required by Rule 13a-14(a). 3. Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 of Chief Executive Officer. 4. Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 of Chief Financial Officer. (b) Reports on Form 8-K. A report on Form 8-K, dated January 29, 2004, was filed under report item number 7 and 12, concerning 1st Source's results of operations for the year ended December 31, 2003. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 1ST SOURCE CORPORATION DATE APRIL 27, 2004 /S/CHRISTOPHER J. MURPHY III -------------- ----------------------------------- Christopher J. Murphy III Chairman of the Board, President and CEO DATE APRIL 27, 2004 /S/LARRY E. LENTYCH -------------- -------------------- Larry E. Lentych Treasurer and Chief Financial Officer Principal Accounting Officer 18