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, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-6233
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1st SOURCE CORPORATION
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(Exact name of registrant as specified in its charter)
INDIANA 35-1068133
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Michigan Street South Bend, Indiana 46601
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(Address of principal executive offices) (Zip Code)
(219) 235-2702
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares of common stock outstanding as of June 30, 2001 - 20,779,870
shares.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
Consolidated statements of financial condition -- 3
June 30, 2001, and December 31, 2000
Consolidated statements of income -- 4
three months and six months ended June 30, 2001 and 2000
Consolidated statements of cash flows -- 5
six months ended June 30, 2001 and 2000
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 14
PART II.OTHER INFORMATION 15
SIGNATURES 16
- 2 -
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Unaudited - Dollars in thousands)
June 30, December 31,
2001 2000
----------- -----------
ASSETS
Cash and due from banks .......................... $ 130,481 $ 118,123
Federal funds sold and
interest bearing deposits with other banks ..... 1,360 901
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $559,903 and $503,238
at June 30, 2001 and December 31, 2000)...... 565,497 503,910
Securities held-to-maturity, at amortized cost
(fair value of $0 and $60,332 at
June 30, 2001 and December 31, 2000) ........ -- 59,212
----------- -----------
Total investment securities ...................... 565,497 563,122
Loans - net of unearned discount ................. 2,508,246 2,309,062
Reserve for loan losses ........................ (50,901) (44,644)
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Net loans ........................................ 2,457,345 2,264,418
Equipment owned under operating leases,
net of accumulated depreciation 98,185 84,892
Premises and equipment,
net of accumulated depreciation ............... 35,331 33,583
Other assets ..................................... 118,015 117,142
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Total assets ..................................... $ 3,406,214 $ 3,182,181
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ............................ $ 284,043 $ 293,564
Interest bearing ............................... 2,397,958 2,169,160
----------- -----------
Total deposits ................................... 2,682,001 2,462,724
Federal funds purchased and securities
sold under agreements to repurchase ............ 221,573 192,307
Other short-term borrowings ...................... 96,085 141,083
Other liabilities ................................ 53,679 58,685
Long-term debt ................................... 12,165 12,060
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Total liabilities ................................ 3,065,503 2,866,859
Guaranteed preferred beneficial interests
in 1st Source's subordinated debentures ........ 44,750 44,750
Shareholders' equity:
Common stock-no par value ...................... 7,227 7,227
Capital surplus ................................ 195,197 195,197
Retained earnings .............................. 99,488 80,881
Less cost of common stock in treasury .......... (12,898) (14,954)
Accumulated other comprehensive income ......... 6,947 2,221
----------- -----------
Total shareholders' equity ....................... 295,961 270,572
----------- -----------
Total liabilities and shareholders' equity ....... $ 3,406,214 $ 3,182,181
=========== ===========
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
------------------ ----------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest and fee income:
Loans ...................................................... $ 54,814 $ 50,467 $ 108,653 $ 96,425
Investment securities:
Taxable ................................................ 5,877 5,392 11,720 10,453
Tax-exempt ............................................. 1,752 2,053 3,504 3,994
Other .................................................. 114 153 277 242
------------ ------------ ------------ ------------
Total interest income ....................................... 62,557 58,065 124,154 111,114
Interest expense:
Deposits ................................................. 28,940 26,520 57,898 49,685
Short-term borrowings .................................... 3,740 4,833 8,991 9,297
Long-term debt ........................................... 219 224 437 445
------------ ------------ ------------ ------------
Total interest expense ...................................... 32,899 31,577 67,326 59,427
------------ ------------ ------------ ------------
Net interest income ......................................... 29,658 26,488 56,828 51,687
Provision for loan losses ................................... 4,464 4,678 11,759 8,596
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses ................................ 25,194 21,810 45,069 43,091
Noninterest income:
Trust fees ............................................... 2,463 2,509 4,931 4,830
Service charges on deposit accounts ...................... 2,837 1,915 5,276 3,724
Loan servicing and sale income ........................... 5,408 6,249 20,480 11,827
Equipment rental income .................................. 6,257 4,525 12,048 9,103
Other income ............................................. 2,861 2,860 6,263 5,191
Investment securities and other investment gains ......... 52 0 1,084 497
------------ ------------ ------------ ------------
Total noninterest income .................................... 19,878 18,058 50,082 35,172
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits ........................... 15,535 14,041 30,596 27,302
Net occupancy expense .................................... 1,477 1,325 3,039 2,707
Furniture and equipment expense .......................... 2,334 2,133 4,586 4,255
Depreciation - leased equipment .......................... 4,993 4,182 9,657 7,824
Supplies and communications .............................. 1,306 1,223 2,647 2,511
Business development and marketing expense ............... 1,240 1,086 2,082 1,829
Other expense ............................................ 2,985 2,153 5,280 4,001
------------ ------------ ------------ ------------
Total noninterest expense ................................... 29,870 26,143 57,887 50,429
------------ ------------ ------------ ------------
Income before income taxes and subsidiary trust distributions 15,202 13,725 37,264 27,834
Income taxes ................................................ 5,195 4,212 13,013 9,057
Distribution on preferred securities of
subsidiary trusts, net of income tax benefit .............. 560 607 1,161 1,186
------------ ------------ ------------ ------------
Net income .................................................. $ 9,447 $ 8,906 $ 23,090 $ 17,591
============ ============ ============ ============
Other comprehensive income, net of tax:
Change in unrealized appreciation (depreciation) of
available-for-sale securities ........................... 1,286 381 4,726 855
------------ ------------ ------------ ------------
Total comprehensive income .................................. $ 10,733 $ 9,287 $ 27,816 $ 18,446
============ ============ ============ ============
Per common share: (1)
Basic net income per common share ......................... $ 0.45 $ 0.42 $ 1.11 $ 0.84
============ ============ ============ ============
Diluted net income per common share ....................... $ 0.44 $ 0.42 $ 1.09 $ 0.83
============ ============ ============ ============
Dividends ................................................. $ 0.085 $ 0.082 $ 0.171 $ 0.163
============ ============ ============ ============
Basic weighted average common shares outstanding ............ 20,787,074 20,809,575 20,754,695 20,820,420
============ ============ ============ ============
Diluted weighted average common shares outstanding .......... 21,199,014 21,040,391 21,149,770 21,061,033
============ ============ ============ ============
(1) The computation of per share data gives retroactive recognition to a 5% stock dividend declared on April 24, 2001.
The accompanying notes are a part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Unaudited - Dollars in thousands)
Three Months Ended June 30
2001 2000
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Operating activities:
Net income .................................... $ 23,090 $ 17,591
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ..................... 11,759 8,596
Depreciation of premises and equipment ........ 12,016 9,967
Amortization of investment security premiums
and accretion of discounts, net ............. 537 553
Amortization of mortgage servicing rights ..... 2,100 2,864
Deferred income taxes ......................... 61 379
Realized investment securities gains .......... (1,084) (497)
Realized gains on securitized loans ........... (4,405) (5,123)
Decrease (increase) in interest receivable .... 294 (1,650)
(Decrease) increase in interest payable ....... (4,943) 7,241
Other ......................................... (14,543) (4,837)
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Net cash provided by operating activities ....... 24,882 35,084
Investing activities:
Proceeds from sales and maturities
of investment securities .................... 181,131 107,060
Purchases of investment securities ............ (177,977) (88,473)
Net increase in short-term investments ........ (669) (3,110)
Loans sold or participated to others .......... 122,384 154,092
Increase in loans net of principal collections. (327,123) (355,885)
Net increase in equipment owned
under operating leases ...................... (9,782) (16,097)
Purchases of premises and equipment ........... (3,052) (1,246)
Decrease in other assets ...................... 4,548 813
Other ......................................... (1,141) (643)
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Net cash used in investing activities ........... (211,681) (203,489)
Financing activities:
Net increase in demand deposits, NOW
accounts and savings accounts ............... 37,180 150,323
Net increase in certificates of deposit ....... 182,097 179,477
Net decrease in short-term borrowings ......... (15,732) (97,856)
Proceeds from issuance of long-term debt ...... 217 250
Payments on long-term debt .................... (88) (152)
Acquisition of treasury stock ................. (951) (3,721)
Cash dividends ................................ (3,566) (3,403)
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Net cash provided by financing activities ....... 199,157 224,918
Increase in cash and cash equivalents ........... 12,358 56,513
Cash and cash equivalents, beginning of period .. 118,123 101,911
--------- ---------
Cash and cash equivalents, end of period ........ $ 130,481 $ 158,424
========= =========
The accompanying notes are a part of the consolidated financial statements.
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1ST SOURCE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The unaudited consolidated condensed financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. The information furnished herein
reflects all adjustments (all of which are normal and recurring in nature) which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods for which this report is submitted. The 2000 1st
Source Corporation Annual Report on Form 10-K should be read in conjunction with
these statements.
Note 2. New Accounting Pronouncements
On January 1, 2001, 1st Source adopted Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities", as amended. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on the
intended use of the derivative and its resulting designation.
On adoption, it was permitted to transfer held-to-maturity debt securities
to available-for-sale or trading securities without calling into question the
intent of management to hold other debt securities to maturity in the future. In
conjunction with the adoption of SFAS No. 133, 1st Source transferred the
held-to-maturity portfolio with an amortized cost of $59.2 million and a gross
unrealized gain of $1.1 million into the available-for-sale portfolio at January
1, 2001.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", which
replaces SFAS No. 125. This statement revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but carries over most of the provisions of SFAS
No. 125 without reconsideration. SFAS No. 140 was effective for transfers
occurring after March 31, 2001 and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
This statement did not have a material effect on 1st Source's financial position
or results of operations.
In June 2001, the Financial Accounting Standards Board 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 other 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 will continue to be amortized over their useful lives.
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1st Source Corporation will apply the new rules on accounting for goodwill
and other intangible assets beginning in the first quarter of 2002. Application
of the nonamortization provisions of the Statement is expected to result in an
increase in net income of $215,725 ($0.01 per share) per year. During 2002, 1st
Source Corporation will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002 and has
not yet determined what the effect of these tests will be on the earnings and
financial position of the Company.
-7-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis are presented to provide
information concerning the financial condition of 1st Source as of June 30,
2001, as compared to June 30, 2000 and December 31, 2000, and the results of
operations for the six months ended June 30, 2001 and 2000.
This discussion and analysis should be read in conjunction with 1st
Source's consolidated condensed financial statements and the financial and
statistical data appearing elsewhere in this report and the 2000 1st Source
Corporation Annual Report on Form 10-K.
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 may involve risk and
uncertainties, including statements concerning future events, performance and
assumptions and other statements that are other than statements of historical
facts. 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 generally accepted accounting principles; 1st Source's
competitive position within the 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.
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FINANCIAL CONDITION
1st Source's assets at June 30, 2001 were $3.41 billion, up 9.0% from the
same time last year. Total loans were up 11.3% and total deposits increased 9.1%
over the comparable figures at the end of the second quarter of 2000.
Shareholders' equity was $296.0 million, up 17.3% from the $252.2 million one
year ago. As of June 30, 2001, the 1st Source equity-to-assets ratio was 8.7%,
compared to 8.1% a year ago.
Nonperforming assets at June 30, 2001, were $24,322,000 compared to
$24,462,000 at December 31, 2000, a decrease of 0.57%. At June 30, 2001,
nonperforming assets were 0.97% of net loans compared to 1.06% at December 31,
2000.
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 $123.8 million
and $62.1 million at June 30, 2001 and 2000, respectively.
Included in Other Assets are capitalized mortgage servicing rights. The
costs of purchasing the rights to service mortgage loans originated by others
are deferred and amortized as reductions of mortgage servicing fee income over
the estimated servicing period in proportion to the estimated servicing income
to be received. SFAS No. 140 allows companies that sell originated or purchased
loans and retain the related servicing rights, to allocate a portion of the
total costs of the loans to servicing rights, based on estimated fair value.
Fair value is estimated based on market prices, when available, or the present
value of future net servicing income, adjusted for such factors as discount and
prepayment rates.
In the first quarter of 2001, 1st Source completed the sale of $1.0 billion
in principal value of its mortgage servicing rights held by its Trustcorp
Mortgage Company subsidiary. This servicing sale was in addition to normal
quarterly sales levels, and was made possible by favorable market conditions.
Pre-tax income of $11.06 million ($6.87 million, net of tax) was recorded in the
first quarter, 2001 on this transaction. As of June 30, 2001 and 2000, the
carrying value of mortgage servicing rights was $15.0 million and $19.8 million,
respectively.
During the second quarter of 2001, 1st Source reached an agreement to
purchase two branches in Michigan City and LaPorte, Indiana from Citizens
Financial Services, F.S.B. The two branches hold approximately $40 million in
deposits.
1st Source previously agreed to purchase two branches in St. Joseph,
Michigan from Old Kent Financial Corporation pursuant to an agreement reached
during the first quarter, 2001. Those branches hold approximately $29 million in
loans and $60 million in deposits. That transaction was completed on July 27,
2001.
CAPITAL RESOURCES
The banking regulators have established guidelines for leverage capital
requirements, expressed in terms of Tier 1 or core capital as a percentage of
average assets, to measure the soundness of a financial institution. These
guidelines require all banks to maintain a minimum leverage capital ratio of
4.00% for adequately capitalized banks and 5.00% for well-capitalized banks. 1st
Source's leverage capital ratio was 9.94% at June 30, 2001.
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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 2001 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, 2001 was 11.83% and the
total risk-based capital ratio was 13.09%.
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, 2001, the consolidated statement of financial condition was rate sensitive
by $447,505,000 more liabilities than assets scheduled to reprice within one
year or 80%. Management adjusts the composition of its assets and liabilities to
manage the interest rate sensitivity gap based upon its expectations of interest
rate fluctuations.
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RESULTS OF OPERATIONS
NET INCOME
Net income for the three-month and six-month periods ended June 30, 2001,
was $9,447,000 and $23,090,000 respectively, compared to $8,906,000 and
$17,591,000 for the equivalent periods in 2000. The increase for the three-month
period ended June 30, 2001 was attributed to increases in net interest income
and noninterest income, offset by an increase in noninterest expense. For the
six-month period ended June 30, 2001, the primary reasons for the increase were
an increase in net interest income, the gain on the sale of the $1.0 billion
mortgage servicing rights in the first quarter, 2001, offset by increased loan
loss provisions and noninterest expense.
Diluted net income per common share increased to $0.44 and $1.09,
respectively, for the three-month and six-month periods ended June 30, 2001,
from $0.42 and $0.83 in 2000. Return on average common shareholders' equity was
16.36% for the six months ended June 30, 2001, compared to 14.45% in 2000. The
return on total average assets was 1.43% for the six months ended June 30, 2001,
compared to 1.20% in 2000.
NET INTEREST INCOME
The taxable equivalent net interest income for the three-month period ended
June 30, 2001, was $30,490,000, an increase of 11.16% over the same period in
2000. The net interest margin on a fully taxable equivalent basis was 4.02% for
the three-month period ended June 30, 2001, which remained unchanged compared to
the same period in 2000. The fully taxable equivalent net interest income for
the six-month period ended June 30, 2001, was $58,480,000, an increase of 9.23%
over 2000, resulting in a net yield of 3.97% compared to 4.03% in 2000. The net
interest margin has declined in the past year due to the cost of funds rising
more than the yield on interest earning assets; in part, due to the greater
reliance on brokered and jumbo certificates of deposits to meet funding needs.
Total average earning assets increased 10.66% and 11.35%, respectively, for
the three-month and six-month periods ended June 30,2001, over the compared
periods in 2000. Total average investment securities increased 1.78% and 2.71%,
respectively for the three-month and the six-month periods over one year ago
primarily due to an increase of investments in U.S. Government Securities.
Average loans increased by 12.85% and 13.40% for the three-month and six-month
periods, compared to the same periods in 2000, due to growth in loan volume in
commercial, consumer and commercial loans secured by transportation and
construction equipment. The taxable equivalent yields on total average earning
assets were 8.37% and 8.64% for the three-month periods ended June 30, 2001, and
2000, and 8.53% and 8.51% for the six month periods ended June 30, 2001, and
2000, respectively.
Average deposits increased 12.31% and 11.73% for the three-month and
six-month periods over the same periods from 2000. The cost rate on average
interest-bearing funds was 5.00% and 5.32% for the three months ended June 30,
2001, and 2000, and 5.27% and 5.15% for the six-month periods ended June 30,
2001 and 2000. The majority of the growth in deposits from last year has
occurred in certificates of deposits with maturities greater than one year,
brokered and jumbo certificates of deposits and NOW accounts.
The following table sets forth consolidated information regarding average
balances and rates.
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DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three Months Ended June 30
------------------------------------
2001 2000
--------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
ASSETS:
Investment securities:
Taxable ................. $ 395,988 $ 5,877 5.95% $ 368,426 $ 5,393 5.89%
Tax exempt (1)........... 154,249 2,523 6.56% 172,163 2,951 6.89%
Net loans (2)(3)........... 2,477,334 54,875 8.88% 2,195,220 50,510 9.25%
Other investments ......... 11,450 114 4.01% 10,432 152 5.86%
---------- -------- ----- ---------- -------- -----
Total earning assets 3,039,021 63,389 8.37% 2,746,241 59,006 8.64%
Cash and due from banks ... 100,722 95,137
Reserve for loan losses ... (49,449) (40,314)
Other assets .............. 249,489 215,694
---------- ----------
Total ..................... $3,339,783 $3,016,758
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $2,323,736 $28,940 5.00% $2,049,886 $26,520 5.20%
Short-term borrowings ... 305,761 3,741 4.91% 326,144 4,833 5.96%
Long-term debt .......... 12,163 218 7.20% 12,319 224 7.31%
---------- ------- ----- ---------- ------- -----
Total interest bearing
liabilities ............. 2,641,660 32,899 5.00% 2,388,349 31,577 5.32%
Noninterest bearing deposits 303,576 289,428
Other liabilities ....... 103,198 91,036
Shareholders' equity .... 291,349 247,945
---------- ----------
Total ..................... $3,339,783 $3,016,758
========== ==========
------- -------
Net interest income ....... $30,490 $27,429
======= =======
Net yield on earning assets on a taxable ----- -----
equivalent basis ........ 4.02% 4.02%
===== =====
Six Months Ended June 30
------------------------------------
2001 2000
--------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
ASSETS:
Investment securities:
Taxable ................. $ 390,809 $11,720 6.05% $ 361,733 $10,453 5.81%
Tax exempt (1)........... 153,045 5,030 6.63% 167,771 5,755 6.90%
Net loans (2)(3)........... 2,418,397 108,779 9.07% 2,132,554 96,514 9.10%
Other investments ......... 11,675 278 4.81% 8,803 242 5.53%
---------- -------- ----- ---------- -------- -----
Total earning assets 2,973,926 125,807 8.53% 2,670,861 112,964 8.51%
Cash and due from banks ... 95,103 98,803
Reserve for loan losses ... (47,719) (40,171)
Other assets .............. 243,615 210,336
---------- ----------
Total ..................... $3,264,925 $2,939,829
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $2,233,811 $57,899 5.23% $1,983,184 $49,685 5.04%
Short-term borrowings ... 332,592 8,991 5.45% 326,337 9,297 5.73%
Long-term debt .......... 12,161 437 7.24% 12,254 445 7.31%
---------- ------- ----- ---------- ------- -----
Total interest bearing
liabilities ............. 2,578,564 67,327 5.27% 2,321,775 59,427 5.15%
Noninterest bearing deposits 296,598 281,658
Other liabilities ....... 105,117 91,620
Shareholders' equity .... 284,646 244,776
---------- ----------
Total ..................... $3,264,925 $2,939,829
========== ==========
------- -------
Net interest income ....... $58,480 $53,537
======= =======
Net yield on earning assets on a taxable ----- -----
equivalent basis ........ 3.97% 4.03%
===== =====
(1) Interest income includes the effects of taxable equivalent adjustments,
using a 35% rate for 2001 and 2000. Tax equivalent adjustments for the
three-month periods were $771 in 2001 and $897 in 2000 and for the
six-month periods were $1,526 in 2001 and $1,760 in 2000.
(2) Loan income includes fees on loans for the three-month periods of $1,691 in
2001 and $1,726 in 2000 and for the six-month periods of $2,986 in 2001 and
$3,205 in 2000. Loan income also includes the effects of taxable equivalent
adjustments, using a 35% rate for 2001 and 2000. The tax equivalent
adjustments for the three-month periods were $61 in 2001 and $44 in 2000
and for the six-month periods were $126 in 2001 and $90 in 2000.
(3) For purposes of this computation, non-accruing loans are included in the
daily average loan amounts outstanding.
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PROVISION AND RESERVE FOR LOAN LOSSES
The provision for loan losses for the three-month period ended June 30,
2001, and 2000, was $4,464,000 and $4,678,000, respectively, and was $11,759,000
and $8,596,000 for the six-month periods ended June 30, 2001 and 2000. The
increase for the six-month period is primarily due to higher than normal
charge-offs and increased loan delinquencies to 1.88% on June 30, 2001 as
compared to 0.81% on June 30, 2000 and 1.03% at the end of 2000. Net Charge-offs
of $1,004,000 have been recorded for the second quarter 2001, compared to
$3,065,000 for the first quarter 2001 and $2,204,000 in the fourth quarter 2000.
Year-to-date Net Charge-offs of $4,069,000 have been recorded in 2001, compared
to Net Charge-offs of $4,951,000 through June 2000. A summary of loan loss
experience during the three and six months ended June 30, 2001 and 2000 is
provided below.
Summary of Allowance for Loan Losses
------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
--------- --------- --------- ---------
Reserve for loan losses - beginning balance $ 48,189 $ 39,910 $ 44,644 $ 40,210
Charge-offs (1,448) (1,777) (4,666) (5,263)
Recoveries 444 174 597 312
--------- --------- --------- ---------
Net charge-offs (1,004) (1,603) (4,069) (4,951)
Provision for loan losses 4,464 4,678 11,759 8,596
Recaptured reserve due to loan securitizations (748) (780) (1,433) (1,650)
--------- --------- --------- ---------
Reserve for loan losses - ending balance $ 50,901 $ 42,205 $ 50,901 $ 42,205
========= ========= ========= =========
Loans outstanding at end of period 2,508,246 2,252,739 2,508,246 2,252,739
Average loans outstanding during period 2,477,989 2,195,221 2,418,397 2,132,554
Reserve for loan losses as a percentage of
loans outstanding at end of period 2.03% 1.87% 2.03% 1,87%
Ratio of net charge-offs during period to
average loans outstanding 0.16% 0.29% 0.34% 0.47%
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, 2001.
NONINTEREST INCOME
Noninterest income for the three-month periods ended June 30, 2001, and
2000 was $19,878,000 and $18,058,000, respectively, and was $50,082,000 and
$35,172,000 for the six-month period ended June 30, 2001 and 2000, respectively.
For the six-month period, trust fees increased 2.09%, service charges on deposit
accounts increased 41.68%, loan servicing and sale income increased 73.16%,
equipment rental income increased 32.35% and other income increased 20.63% over
last year. For both the three-month and six-month periods ended June 30, 2001,
service charges on deposits increased due to the implementation of an overdraft
protection program during 2000, and equipment rental income increased primarily
due to growth in operating leases. For the six-month period June 30, 2001,
servicing and sale income increased due to the $1 billion sale of mortgage
servicing rights in the first quarter, 2001. Investment Security and other net
gains for the six-month ended June 30, 2001 were $1,084,000, compared to net
gains of $497,000 in 2000. The net gains for both years were primarily
attributed to certain partnership and venture capital investments.
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NONINTEREST EXPENSE
Noninterest expense for the three-month period ended June 30, 2001 and 2000
was $29,870,000 and $26,143,000, respectively, and was $57,887,000 and
$50,429,000 for the six-month period ended June 30, 2001 and 2000, respectively.
For the six-month period ended June 30, 2001, salaries and employee benefits
increased 12.07%, net occupancy expense increased 12.26%, furniture and
equipment expense increased 7.78%, depreciation on leased equipment increased
23.43%, supplies and communications expense increased 5.42%, business
development and marketing expense increased 13.83%, and miscellaneous other
expenses increased 31.98% over the same period in 2000. Salaries and employee
benefits increased primarily due to an increase in base salaries, mortgage loan
commissions, contract salaries and group insurance expense. The increase in
depreciation of leased equipment is due to the growth in operating leases from
the prior year. The miscellaneous other expense increase from one year ago is
attributed primarily to an increase in professional fees and check fraud losses.
INCOME TAXES
The provision for income taxes for the three-month and six-month periods
ended June 30, 2001, was $5,195,000 and $13,013,000, respectively, compared to
$4,212,000 and $9,057,000 for the comparable periods in 2000. The provision for
income taxes for the six months ended June 30, 2001, and 2000, 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 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, 2000. See the discussion of
interest rate sensitivity beginning on page 13 of the Annual Report to
Shareholders.
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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 2001, 1st Source Corporation's
shareholders re-elected Daniel B. Fitzpatrick, Wellington D. Jones
III, and Dane A. Miller, Ph.D. as directors at the April 24, 2001,
annual meeting. All directors were elected for terms ending in April,
2004. The election showed that 18,465,133 votes were cast
(representing 93.02% of all eligible shares) with all directors
receiving a majority of the votes cast.
1st Source Corporation's shareholders also elected to approve the 2001
Stock Option Plan. The election tally showed that 17,135,398 votes
were cast (representing 86.32% of all eligible shares) with the
proposal receiving a majority of the votes cast.
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
None
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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 8/10/01 /s/ Christopher J. Murphy III
---------- ----------------------------------------
(Signature)
Christopher J. Murphy III
Chairman of the Board, President and CEO
DATE 8/10/01 /s/ Larry E. Lentych
---------- ----------------------------------------
(Signature)
Larry E. Lentych
Treasurer and Chief Financial Officer
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