FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-6233
--------
1st SOURCE CORPORATION
----------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1068133
------- ----------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 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
----- -----
Number of shares of common stock outstanding as of June 30, 2002 -
20,966,194.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Consolidated statements of financial condition -- 3
June 30, 2002, and December 31, 2001
Consolidated statements of income -- 4
three months and six months ended June 30, 2002 and 2001
Consolidated statements of cash flows -- 5
six months ended June 30, 2002 and 2001
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION 14
Exhibit 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002
Exhibit 99.2 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002
SIGNATURES 15
- 2 -
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Dollars in thousands)
June 30, December 31,
2002 2001
----------- -----------
(Unaudited)
ASSETS
Cash and due from banks .......................... $ 91,453 $ 129,431
Federal funds sold and
interest bearing deposits with other banks ..... 23,411 17,038
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $619,862 and $632,712
at June 30, 2002 and December 31, 2001) ..... 629,340 640,478
Loans - net of unearned discount ................. 2,460,959 2,535,364
Reserve for loan losses ........................ (57,420) (57,624)
----------- -----------
Net loans ........................................ 2,403,539 2,477,740
Equipment owned under operating leases,
net of accumulated depreciation ............... 109,467 115,754
Premises and equipment,
net of accumulated depreciation ............... 42,008 41,923
Other assets ..................................... 131,978 140,327
----------- -----------
Total assets ..................................... $ 3,431,196 $ 3,562,691
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ............................ $ 352,454 $ 365,193
Interest bearing ............................... 2,438,882 2,517,613
----------- -----------
Total deposits ................................... 2,791,336 2,882,806
Federal funds purchased and securities
sold under agreements to repurchase ............ 194,601 214,709
Other short-term borrowings ...................... 39,619 49,764
Other liabilities ................................ 37,594 52,533
Long-term debt ................................... 11,818 11,939
----------- -----------
Total liabilities ................................ 3,074,968 3,211,751
Guaranteed preferred beneficial interests
in 1st Source's subordinated debentures ........ 44,750 44,750
Shareholders' equity:
Common stock-no par value ...................... 7,579 7,579
Capital surplus ................................ 214,001 214,001
Retained earnings ............................. 91,651 91,591
Less cost of common stock in treasury ......... (7,382) (12,591)
Accumulated other comprehensive income ........ 5,629 5,610
----------- -----------
Total shareholders' equity ....................... 311,478 306,190
----------- -----------
Total liabilities and shareholders' equity ....... $ 3,431,196 $ 3,562,691
=========== ===========
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 Six Months Ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Interest and fee income:
Loans ...................................................... $ 43,134 $ 54,814 $ 88,324 $ 108,653
Investment securities:
Taxable ................................................ 4,780 5,877 9,692 11,720
Tax-exempt ............................................. 1,549 1,752 3,091 3,504
Other .................................................. 126 114 198 277
----------- ------------ ------------ ------------
Total interest income ....................................... 49,589 62,557 101,305 124,154
Interest expense:
Deposits ................................................. 18,227 28,940 37,906 57,898
Short-term borrowings .................................... 1,211 3,740 2,528 8,991
Long-term debt ........................................... 213 219 424 437
----------- ------------ ------------ ------------
Total interest expense ...................................... 19,651 32,899 40,858 67,326
----------- ------------ ------------ ------------
Net interest income ......................................... 29,938 29,658 60,447 56,828
Provision for loan losses ................................... 12,112 4,464 24,666 11,759
----------- ------------ ------------ ------------
Net interest income after
provision for loan losses ................................ 17,826 25,194 35,781 45,069
Noninterest income:
Trust fees ............................................... 2,661 2,463 5,321 4,931
Service charges on deposit accounts ...................... 3,684 2,837 7,155 5,276
Loan servicing and sale income ........................... 3,293 5,408 7,316 20,480
Equipment rental income .................................. 7,464 6,257 14,744 12,048
Other income ............................................. 2,886 2,861 6,068 6,263
Investment securities and other investment gains (losses) 0 52 (488) 1,084
----------- ------------ ------------ ------------
Total noninterest income .................................... 19,988 19,878 40,116 50,082
----------- ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits ........................... 16,417 15,535 32,995 30,596
Net occupancy expense .................................... 1,678 1,477 3,380 3,039
Furniture and equipment expense .......................... 2,626 2,334 5,355 4,586
Depreciation - leased equipment .......................... 5,966 4,993 12,113 9,657
Supplies and communications .............................. 1,470 1,306 3,015 2,647
Business development and marketing expense ............... 1,010 1,240 1,610 2,082
Other expense ............................................ 4,372 2,985 7,194 5,280
----------- ------------ ------------ ------------
Total noninterest expense ................................... 33,539 29,870 65,662 57,887
----------- ------------ ------------ ------------
Income before income taxes and subsidiary trust distributions 4,275 15,202 10,235 37,264
Income taxes ................................................ 1,015 5,195 2,276 13,013
Distribution on preferred securities of
subsidiary trusts, net of income tax benefit .............. 493 560 984 1,161
----------- ------------ ------------ ------------
Net income .................................................. $ 2,767 $ 9,447 $ 6,975 $ 23,090
=========== ============ ============ ============
Other comprehensive income, net of tax:
Change in unrealized appreciation of
available-for-sale securities ........................... 2,372 1,286 19 4,726
----------- ------------ ------------ ------------
Total comprehensive income .................................. $ 5,139 $ 10,733 $ 6,994 $ 27,816
=========== ============ ============ ============
Per common share:
Basic net income per common share ......................... $ 0.13 $ 0.45 $ 0.33 $ 1.11
=========== ============ ============ ============
Diluted net income per common share ....................... $ 0.13 $ 0.44 $ 0.33 $ 1.09
=========== ============ ============ ============
Dividends ................................................. $ 0.09 $ 0.085 $ 0.180 $ 0.171
=========== ============ ============ ============
Basic weighted average common shares outstanding ............ 20,950,747 20,787,074 20,909,450 20,754,695
============ ============ ============ ============
Diluted weighted average common shares outstanding .......... 21,368,441 21,199,014 21,297,194 21,149,770
============ ============ ============ ============
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)
Six Months Ended June 30
2002 2001
--------- ---------
Operating activities:
Net income .................................... $ 6,975 $ 23,090
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ..................... 24,666 11,759
Depreciation of premises and equipment ........ 14,685 12,016
Amortization of investment security premiums
and accretion of discounts, net ............. 2,127 537
Amortization of mortgage servicing rights ..... 4,080 2,100
Deferred income taxes ......................... (8,747) 61
Realized investment securities losses (gains) 488 (1,084)
Realized gains on securitized loans ........... (4,499) (4,405)
Decrease in interest receivable ............... 1,482 294
Decrease in interest payable .................. (3,571) (4,943)
Other ......................................... 9,942 (4,886)
--------- ---------
Net cash provided by operating activities 47,628 34,539
Investing activities:
Proceeds from sales and maturities
of investment securities .................... 129,960 181,131
Purchases of investment securities ............ (119,725) (177,977)
Net increase in short-term investments ........ (6,373) (669)
Loans sold or participated to others .......... 268,168 1,451,061
Increase in loans net of
principal collections ....................... (218,632) (1,655,800)
Net increase in equipment owned
under operating leases ...................... (5,826) (19,439)
Purchases of premises and equipment ........... (3,097) (3,052)
(Increase) decrease in other assets ........... (2,756) 4,548
Other ......................................... 440 (1,141)
--------- ---------
Net cash provided (used in) investing activities 42,159 (221,338)
Financing activities:
Net increase in demand deposits, NOW
accounts and savings accounts ............... 65,067 37,180
Net (decrease) increase in
certificates of deposit ..................... (156,538) 182,097
Net decrease in
short-term borrowings ....................... (30,252) (15,732)
Proceeds from issuance of long-term debt ...... 37 217
Payments on long-term debt .................... (158) (88)
Acquisition of treasury stock ................. (2,158) (951)
Cash dividends ................................ (3,763) (3,566)
---------- ---------
Net cash (used in ) provided by
financing activities ........................ (127,765) 199,157
(Decrease) increase in cash and cash equivalents (37,978) 12,358
Cash and cash equivalents, beginning of period .. 129,431 118,123
--------- ---------
Cash and cash equivalents, end of period ........ $ 91,453 $ 130,481
========= =========
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
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's 2001 Management's
Discussion and Analysis of Financial Condition and Consolidated Financial
Statements and Notes on Form 10-K (2001 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, 2001
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.
Note 2. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill (and intangible
assets deemed to have indefinite lives) will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets, such as core deposit intangibles, will continue to be
amortized over their useful lives.
1st Source Corporation adopted the new rules on accounting for goodwill and
other intangible assets beginning January 1, 2002. Approximately $25.8 million
of goodwill and other intangible assets was on the balance sheet at December 31,
2001. 1st Source Corporation performed the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January 1, 2002
and has determined no impairment exists. Application of the nonamortization
provisions of the statement are immaterial for the second quarter of 2002 and
anticipated to result in an increase in net income of approximately $220,000, or
$.01 per common share for the entire year.
Based on the exposure draft on Acquisition of Certain Financial
Institutions issued by FASB on May 10, 2002, management has determined that the
previously identified "goodwill" related to the branch purchases of Citizen
Financial and Old Kent Bank qualifies as "unidentifiable intangible assets," as
defined in the FASB NO. 72, "Accounting for Certain Acquisitions of Banking or
Thrift Institutions." This unidentifiable intangible asset is being amortized
over the estimated life of deposits starting in the second quarter of 2002. As
of June, 2002, the total amount that was reclassified from "goodwill" to
"unidentifiable intangible assets" was $6.8 million.
- 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.
Management evaluates the adequacy of the reserve, reviewing all loans over a
fixed-dollar amount 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, estimated losses on pools of homogeneous loans based
on historical loss experience and consideration of economic trends, all of which
may be susceptible to significant change. Loans losses are charged off against
the reserve, while recoveries of amounts previously charged off are credited to
the reserve. A provision for loan losses is charged to operations based on
management's periodic evaluation of the factors previously mentioned as well as
other pertinent factors.
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, and other information contained in 1st Source's SEC filings,
may express "forward-looking statements." Those statements, including statements
or assumptions concerning future events or performance, and other statements
that are other than statements of historical facts, 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. Readers
are advised that various factors - including, but not limited to, changes in
laws, 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 downturns in the local, regional or national economies - could cause
1st Source's actual results or circumstances for future periods to differ
materially from those anticipated or projected.
1st Source does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions that may be made to any
forward-looking statements to reflect the occurrence of unanticipated events or
circumstances after the date of such statements.
The following management's discussion and analysis are presented to provide
information concerning the financial condition of 1st Source as of June 30,
2002, as compared to December 31, 2001, and the results of operations for the
six months ended June 30, 2002 and 2001. 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 2001 Annual Report
- 7 -
FINANCIAL CONDITION
1st Source's assets at June 30, 2002 were $3.43 billion, down 3.7%,
compared to December 31, 2001. Total loans were down 2.9% and total deposits
decreased 3.2% over the comparable figures at the end of 2001.
Nonperforming assets at June 30, 2002, were $60,996,000, compared to
$43,294,000 at December 31, 2001, an increase of 40.89%. At June 30, 2002,
nonperforming assets were 2.37% of net loans and leases compared to 1.63% at
December 31, 2001.
Loans are reported at the principal amount outstanding, net of unearned
income. Loans identified as held-for-sale are carried at the lower of cost or
market determined on an aggregate basis. Loans held-for-sale were $84.9 million
and $173.5 million at June 30, 2002 and December 31, 2001, respectively. The
carrying value of mortgage servicing rights were $22.1 million and $20.09
million at June 30,2002 and December 31, 2001, respectively.
CAPITAL RESOURCES
Shareholders' equity was $311.5 million, up 1.7% from the $306.2 million at
December 31, 2001. As of June 30, 2002, the 1st Source equity-to-assets ratio
was 9.1%, compared to 8.6% at the end of 2001.
The banking regulators have established guidelines for leverage capital
requirements, expressed in terms of Tier 1 or core capital as a percentage of
average assets, to measure the soundness of a financial institution. These
guidelines require all banks to maintain a minimum leverage capital ratio of
4.00% for adequately capitalized banks and 5.00% for well-capitalized banks. 1st
Source's leverage capital ratio was 9.34% at June 30, 2002.
The Federal Reserve Board has established risk-based capital guidelines for
U.S. banking organizations. The guidelines established a conceptual framework
calling for risk weights to be assigned to on and off-balance sheet items in
arriving at risk-adjusted total assets, with the resulting ratio compared to a
minimum standard to determine whether a bank has adequate capital. The minimum
standard risk-based capital ratios effective in 2002 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 June 30, 2002 was 10.94% and the
total risk-based capital ratio was 12.25%.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Asset and liability management includes the management of interest rate
sensitivity and the maintenance of an adequate liquidity position. The purpose
of liquidity management is to match the sources and uses of funds to anticipated
customers' deposits and withdrawals, to anticipate borrowing requirements and to
provide for the cash flow needs of 1st Source. The purpose of interest rate
sensitivity management is to stabilize net interest income during periods of
changing interest rates.
Close attention is given to various interest 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 June
30, 2002, the consolidated statement of financial condition was rate sensitive
- 8 -
by $51,268,000 more assets than liabilities scheduled to reprice within one year
or approximately 1.03%.
RESULTS OF OPERATIONS
NET INCOME
Net income for the three-month and six-month periods ended June 30, 2002,
was $2,767,000 and $6,975,000 respectively, compared to $9,447,000 and
$23,090,000 for the same periods in 2001. The decrease in net income was
attributed to increases in loan loss provision and noninterest expense, as well
as a decrease in noninterest income, offset by an increase in net interest
income. The results of the first quarter of 2001 were positively affected by the
sale of $1.0 billion in servicing rights from the Trustcorp Mortgage portfolio
which added $6.87 million (net of tax) to the quarter, and by a $639,000 ( net
of tax ) venture capital gain.
Diluted net income per common share was $0.13 and $0.33, respectively, for
the three-month and six-month periods ended June 30, 2002, compared to $0.44 and
$1.09 for the same periods in 2001. Return on average common shareholders'
equity was 4.53% for the six months ended June 30, 2002, compared to 16.36% in
2001. The return on total average assets was 0.40% for the six months ended June
30, 2002, compared to 1.43% in 2001.
NET INTEREST INCOME
The taxable equivalent net interest income for the three-month period ended
June 30, 2002, was $30,740,000, an increase of 0.82% over the same period in
2001. The net interest margin on a fully taxable equivalent basis was 3.92% for
the three-month period ended June 30, 2002, compared to 4.02% for the
three-month period ended June 30, 2001. The taxable equivalent net interest
income for the six-month period ended June 30, 2002, was $62,048,000, an
increase of 6.10% over 2001, resulting in a net yield of 3.97%, which remained
unchanged compared to the same period in 2001.
Total average earning assets increased 3.56% and 6.01%, respectively, for
the three-month and six-month periods ended June 30, 2002, over the comparative
periods in 2001. Total average investment securities increased 14.01% and
15.83%, respectively, for the three-month and six-month periods over one year
ago primarily due to an increase of investments in U.S. Government Securities.
Average loans increased by 0.49% and 3.58% for the three-month and six-month
periods, compared to the same periods in 2001, due to growth in loan volume in
commercial loans secured by transportation and construction equipment. The
taxable equivalent yields on total average earning assets were 6.42% and 8.37%
for the three-month periods ended June 30, 2002, and 2001, and 6.58% and 8.53%
for the six-month periods ended June 30,2002 and 2001, respectively.
Average deposits increased 6.04% and 9.76% for the three-month and
six-month periods respectively over the same periods in 2001. The rate on
average interest-bearing funds was 2.88% and 5.00% for the three-month periods
ended June 30, 2002, and 2001, and 3.01% and 5.27% for the six-month periods
ended June 30, 2002 and 2001. The majority of the growth in deposits from last
year has occurred in savings deposits, demand deposits and money management
savings.
The following table sets forth consolidated information regarding average
balances and rates.
- 9 -
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three Months Ended June 30
------------------------------------
2002 2001
--------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
ASSETS:
Investment securities:
Taxable ................. $ 477,022 $ 4,780 4.02% $ 395,988 $ 5,877 5.95%
Tax exempt (1)........... 150,317 2,277 6.08% 154,249 2,523 6.56%
Net loans (2)(3)........... 2,489,468 43,208 6.96% 2,477,334 54,875 8.88%
Other investments ......... 30,467 126 1.66% 11,450 114 4.01%
---------- -------- ----- ---------- -------- -----
Total earning assets 3,147,274 50,391 6.42% 3,039,021 63,389 8.37%
Cash and due from banks ... 90,384 100,722
Reserve for loan losses ... (58,828) (49,449)
Other assets .............. 292,443 249,489
---------- ----------
Total ..................... $3,471,273 $3,339,783
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $2,448,524 $18,227 2.99% $2,323,736 $28,940 5.00%
Short-term borrowings ... 272,938 1,211 1.78% 305,761 3,741 4.91%
Long-term debt .......... 11,850 213 7.19% 12,163 218 7.20%
---------- ------- ----- ---------- ------- -----
Total interest bearing
liabilities ............. 2,733,312 19,651 2.88% 2,641,660 32,899 5.00%
Non-interest bearing deposits 337,547 303,576
Other liabilities ....... 91,310 103,198
Shareholders' equity .... 309,104 291,349
---------- ----------
Total ..................... $3,471,273 $3,339,783
========== ==========
------- -------
Net interest income ....... $30,740 $30,490
======= =======
Net yield on earning assets on a taxable ----- -----
equivalent basis ........ 3.92% 4.02%
===== =====
Six Months Ended June 30
------------------------------------
2002 2001
--------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
ASSETS:
Investment securities:
Taxable ................. $ 481,702 $ 9,692 4.06% $ 390,809 $11,720 6.05%
Tax exempt (1)........... 148,263 4,539 6.17% 153,045 5,030 6.63%
Net loans (2)(3)........... 2,504,930 88,477 7.12% 2,418,397 108,779 9.07%
Other investments ......... 17,897 198 2.24% 11,675 278 4.81%
---------- -------- ----- ---------- -------- -----
Total earning assets 3,152,792 102,906 6.58% 2,973,926 125,807 8.53%
Cash and due from banks ... 88,860 95,103
Reserve for loan losses ... (58,798) (47,719)
Other assets .............. 296,015 243,615
---------- ----------
Total ..................... $3,478,869 $3,264,925
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $2,440,126 $37,906 3.13% $2,233,811 $57,899 5.23%
Short-term borrowings ... 282,902 2,528 1.80% 332,592 8,991 5.45%
Long-term debt .......... 11,877 424 7.19% 12,161 437 7.24%
---------- ------- ----- ---------- ------- -----
Total interest bearing
liabilities ............. 2,734,905 40,858 3.01% 2,578,564 67,327 5.27%
Non-interest bearing deposits 337,168 296,598
Other liabilities ....... 96,397 105,117
Shareholders' equity .... 310,399 284,646
---------- ----------
Total ..................... $3,478,869 $3,264,925
========== ==========
------- -------
Net interest income ....... $62,048 $58,480
======= =======
Net yield on earning assets on a taxable ----- -----
equivalent basis ........ 3.97% 3.97%
===== =====
(1) Interest income includes the effects of taxable equivalent adjustments,
using a 35% rate for 2002 and 2001. Tax equivalent adjustments for the
three-month periods were $728 in 2002 and $771 in 2001 and for the
six-month periods were $1,448 in 2002 and $1,526 in 2001.
(2) Loan income includes fees on loans for the three-month periods of $1,029 in
2002 and $1,691 in 2001 and for the six-month periods of $2,557 in 2002 and
$2,986 in 2001. Loan income also includes the effects of taxable equivalent
adjustments, using a 35% rate for 2002 and 2001. The tax equivalent
adjustments for the three-month periods were $74 in 2002 and $61 in 2001
and for the six-month periods were $153 in 2002 and 126 in 2001.
(3) For purposes of this computation, non-accruing loans are included in the
daily average loan amounts outstanding.
- 10 -
PROVISION AND RESERVE FOR LOAN LOSSES
The provision for loan losses for the three-month periods ended June 30,
2002, and 2001 was $12,112,000 and $4,464,000, respectively, and was $24,666,000
and $11,759,000 for the six-month periods ended June 30, 2002 and 2001. Net
Charge-offs of $11,222,000 have been recorded for the second quarter, compared
to $1,004,000 for the same quarter a year ago and $11,541,000 for the first
quarter of 2002. Year-to-date Net Charge-offs of $22,763,000 have been recorded
in 2002, compared to Net Charge-offs of $4,069,000 through June 2001. Loan
delinquencies have increased to 2.42% on June 30, 2002, as compared to 1.88% on
June 30, 2001 and 2.40% at the end of 2001. The second quarter was difficult for
1st Source Corporation. The local economy and our national niche businesses
(particularly the financing of aircraft for dealers and air cargo operators) are
still working through the difficulties caused by the slow down in the technology
markets (a large user of air cargo services), the substantial sell off in the
stock markets, and the strong falloff of durable goods manufacturing which were
all dramatically exacerbated by the events of September 11th. Aircraft and used
automobile values have dropped precipitously. Our customers who rely on the use
of this equipment for the production of their income continue to feel the
impact. We have experienced substantial loan losses in our aircraft and auto
rental financing units. The majority of these loan losses have come from
customers who buy and sell aircraft and who operate them as their primary
revenue source. As we work through these problems, we expect our non-performing
assets will fluctuate over the remainder of the year. Since some of our
relationships in these industries are large, up to $15 million in size, they can
have a significant impact on the size of our nonperforming number if they become
problem accounts. When an account goes into a nonperforming category, we
estimate the value of the collateral and write down the loan accordingly. This
is not an exact science since collateral values can be volatile, especially in
this economy. A summary of loan loss experience during the three-month and
six-month periods ended June 30, 2002 and 2001 is provided below.
Summary of Reserve for Loan Losses
------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
--------- --------- --------- ---------
Reserve for loan losses - beginning balance $ 57,892 $ 48,189 $ 57,624 $ 44,644
Charge-offs (11,696) (1,448) (24,435) (4,666)
Recoveries 474 444 1,672 597
--------- --------- --------- ---------
Net charge-offs (11,222) (1,004) (22,763) (4,069)
Provision for loan losses 12,112 4,464 24,666 11,759
Recaptured reserve due to loan securitizations (1,362) (748) (2,107) (1,433)
Acquired reserves from acquisitions -- -- -- --
--------- --------- --------- ---------
Reserve for loan losses - ending balance $ 57,420 $ 50,901 $ 57,420 $ 50,901
========= ========= ========= =========
Loans outstanding at end of period 2,460,959 2,508,246 2,460,959 2,508,246
Average loans outstanding during period 2,489,468 2,477,334 2,504,930 2,418,397
Nonperforming assets at end of period 60,996 24,802 60,996 24,802
Reserve for loan losses as a percentage of
loans outstanding at end of period 2.33% 2.03% 2.33% 2.03%
- 11 -
Ratio of net charge-offs during period to
average loans outstanding 1.81% 0.16% 1.83% 0.34%
Nonperforming assets as a percentage of
loans and leases at end of period 2.37% 0.95% 2.37% 0.95%
It is management's opinion that the reserve for loan losses is adequate to
absorb losses inherent in the loan portfolio as of June 30, 2002.
NONINTEREST INCOME
Noninterest income for the three-month periods ended June 30, 2002 and 2001
was $19,988,000 and $19,878,000, respectively, and was $40,116,000 and
$50,082,000 for the six-month periods ended June 30, 2002 and 2001,
respectively. Loan servicing and sale income for the three-month and six-month
periods ended June 30, 2002 decreased 39.11% and 64.28%, respectively. The
decrease in loan servicing and sale income for the three-month period is
primarily due to the $1.2 million valuation adjustment of certain mortgage
servicing rights, whereas the decrease for the six-month period is attributed to
the $1.0 billion sale of mortgage servicing rights in the first quarter of 2001.
This sale generated pre-tax income of $11.06 million ($6.87 million net of tax).
Both periods were affected by lower loan and servicing rights sales. As of June
30, 2002, a loss of $488,000 in net investment securities was recorded in the
first quarter of 2002, compared to the $1.03 million of pre-tax venture capital
gains in the first quarter of 2001. Trust fees increased 7.91%, service charges
on deposit accounts increased 35.61%, equipment rental income increased 22.38%.
The increase in service charges on deposits is mainly due to increases in
overdraft fees, debit card fees as well as fees associated with the deposits
acquired in the branch purchases in late 2001. Equipment rental income increased
due to the growth in operating leases.
NONINTEREST EXPENSE
Noninterest expense for the three-month periods ended June 30, 2002 and
2001 was $33,539,000 and $29,870,000, respectively, an increase of 12.28%, and
was $65,662,000 and $57,887,000 for six-month periods ended June 30, 2002 and
2001, respectively, with an increase of 13.43%. Salaries and employee benefits
increased 7.84% for the six months ended June 30, 2002 over the same period in
2001. The increase was due, in part, to the increase in employees as a result of
the purchase of 17 branches in late 2001. Net occupancy expense increased
11.22%, furniture and equipment expense increased 16.77%, depreciation on leased
equipment increased 25.43%, supplies and communications expense increased
13.90%, business development and marketing expense decreased 22.67% and other
expense increased 36.25%. The increase in other expense is attributed primarily
to repossession and collection expenses and the amortization of the core deposit
premium and unidentifiable intangible assets relating to the branch
acquisitions, which also accounts for the increases of expenses in furniture and
equipment, net occupancy and supplies and communications.
INCOME TAXES
The provision for income taxes for the six months ended June 30, 2002, was
$2,276,000, compared to $13,013,000 for the comparable period in 2001. The
provision for income taxes for the six months ended June 30, 2002, and 2001, is
at a rate which management believes approximates the effective rate for the
year.
- 12 -
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk exposures that affect
the "Quantitative and Qualitative Disclosures" presented in 1st Source's annual
report on Form 10-K for the year ended December 31, 2001. See the discussion of
interest rate sensitivity beginning on page 6 of 1st Source's 2001 Annual Report
- 13 -
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
None
ITEM 2. Changes in Securities.
None
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders
During the second quarter of 2002, 1st Source Corporation's
shareholders elected Toby S. Wilt, and re-elected Lawrence E. Hiler,
Rex Martin, Christopher J. Murphy III and Timothy K. Ozark as
directors at the April 25, 2002, annual meeting. All directors were
elected for terms ending April, 2005, except Toby S. Wilt with a term
expiring in April, 2004. The election showed that 19,908,895 votes
were cast (representing 94.53% of all eligible shares) with all
directors receiving a majority of the votes cast.
ITEM 5. Other Information.
None
ITEM 6(a).Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
ITEM 6(b).Reports on Form 8-K.
None
- 14 -
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 08/13/02 /s/ Christopher J. Murphy III
---------- ----------------------------------------
(Signature)
Christopher J. Murphy III
Chairman of the Board, President and CEO
DATE 08/13/02 /s/ Larry E. Lentych
---------- ----------------------------------------
(Signature)
Larry E. Lentych
Treasurer and Chief Financial Officer
Principal Accounting Officer
- 15 -