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