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, 2006
--------------
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) 235-2000
--------------
(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ___ Accelerated filer |X| Non-accelerated filer ____
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
Number of shares of common stock outstanding as of
April 25, 2006 - 20,478,532 shares
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Consolidated statements of financial condition --
March 31, 2006, and December 31, 2005 3
Consolidated statements of income --
three months ended March 31, 2006 and 2005 4
Consolidated statements of changes in shareholders' equity
three months ended March 31, 2006 and 2005 5
Consolidated statements of cash flows --
three months ended March 31, 2006 and 2005 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6 Exhibits 21
SIGNATURES 23
2
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited - Dollars in thousands)
March 31, December 31,
2006 2005
----------- ------------
ASSETS
Cash and due from banks $ 86,212 $ 124,817
Federal funds sold and
interest bearing deposits with other banks 27,001 68,578
Investment securities available-for-sale
(amortized cost of $652,202 and $637,878
at March 31, 2006 and December 31, 2005, respectively) 647,256 632,625
Mortgages held for sale 66,361 67,224
Loans and leases, net of unearned discount:
Commercial and agricultural loans 464,350 453,197
Auto, light truck and environmental equipment 311,560 310,786
Medium and heavy duty truck 299,421 302,137
Aircraft financing 445,664 459,645
Construction equipment financing 237,156 224,230
Loans secured by real estate 607,140 601,077
Consumer loans 114,213 112,359
----------- ------------
Total loans and leases 2,479,504 2,463,431
Reserve for loan and lease losses (59,097) (58,697)
----------- ------------
Net loans and leases 2,420,407 2,404,734
Equipment owned under operating leases, net 59,408 58,250
Net premises and equipment 37,482 37,710
Accrued income and other assets 115,783 117,339
----------- ------------
Total assets $ 3,459,910 $ 3,511,277
=========== ============
LIABILITIES
Deposits:
Noninterest bearing $ 391,002 $ 393,494
Interest bearing 2,287,419 2,352,093
----------- ------------
Total deposits 2,678,421 2,745,587
Federal funds purchased and securities
sold under agreements to repurchase 193,347 230,756
Other short-term borrowings 87,502 46,713
Long-term debt and mandatorily redeemable securities 33,501 23,237
Subordinated notes 59,022 59,022
Accrued expenses and other liabilities 60,767 60,386
----------- ------------
Total liabilities 3,112,560 3,165,701
SHAREHOLDERS' EQUITY
Preferred stock; no par value
Authorized 10,000,000 shares; none issued or outstanding - -
Common stock; no par value
Authorized 40,000,000 shares; issued 21,620,467 at March 31, 2006 and
21,617,073 at December 31, 2005, less unearned shares
(239,983 at March 31, 2006 and 236,589 at December 31, 2005) 7,578 7,578
Capital surplus 214,001 214,001
Retained earnings 146,803 139,601
Cost of common stock in treasury (903,461 shares at March 31, 2006, and
711,299 shares at December 31, 2005) (17,982) (12,364)
Accumulated other comprehensive loss (3,050) (3,240)
----------- ------------
Total shareholders' equity 347,350 345,576
----------- ------------
Total liabilities and shareholders' equity $ 3,459,910 $ 3,511,277
=========== ============
The accompanying notes are a part of the consolidated financial statements.
3
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
--------------------------
2006 2005
--------------------------
Interest income:
Loans and leases $ 40,888 $ 33,637
Investment securities, taxable 3,925 3,818
Investment securities, tax-exempt 1,267 1,264
Other 316 77
--------------------------
Total interest income 46,396 38,796
Interest expense:
Deposits 17,033 12,316
Short-term borrowings 2,760 1,702
Subordinated notes 1,050 964
Long-term debt and mandatorily redeemable securities 454 210
--------------------------
Total interest expense 21,297 15,192
--------------------------
Net interest income 25,099 23,604
Recovery of provision for loan and lease losses (300) (421)
--------------------------
Net interest income after
recovery of provision for loan and lease losses 25,399 24,025
Noninterest income:
Trust fees 3,391 3,246
Service charges on deposit accounts 4,386 3,963
Mortgage banking income 1,757 2,767
Insurance commissions 1,682 1,164
Equipment rental income 4,220 4,015
Other income 1,486 1,636
Investment securities and other investment gains 2,083 904
--------------------------
Total noninterest income 19,005 17,695
Noninterest expense:
Salaries and employee benefits 15,514 18,544
Net occupancy expense 1,867 2,102
Furniture and equipment expense 3,134 2,642
Depreciation - leased equipment 3,382 3,323
Supplies and communication 1,363 1,343
Other expense 4,146 3,720
--------------------------
Total noninterest expense 29,406 31,674
--------------------------
Income before income taxes 14,998 10,046
Income tax expense 5,065 3,102
--------------------------
Net income $ 9,933 $ 6,944
==========================
Other comprehensive income, net of tax:
Change in unrealized appreciation (depreciation) of
available-for-sale securities 190 (3,944)
--------------------------
Total comprehensive income $ 10,123 $ 3,000
==========================
Per common share:
Basic net income per common share $ 0.48 $ 0.34
==========================
Diluted net income per common share $ 0.48 $ 0.33
==========================
Dividends $ 0.140 $ 0.120
==========================
Basic weighted average common shares outstanding 20,588,714 20,718,976
==========================
Diluted weighted average common shares outstanding 20,872,676 21,001,772
==========================
The accompanying notes are a part of the consolidated financial statements.
4
1st SOURCE CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited - Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Appreciation
Cost of (Depreciation)
Common of Securities
Common Capital Retained Stock Available-
Total Stock Surplus Earnings in Treasury For-Sale
- -------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2005 $326,600 $7,578 $214,001 $115,830 ($10,512) ($297)
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income, net of tax:
Net Income 6,944 - - 6,944 - -
Change in unrealized appreciation
of available-for-sale securities, net of tax (3,944) - - - - (3,944)
---------
Total Comprehensive Income 3,000 - - - - -
Issuance of 15,866 common shares
under stock based compensation plans,
including related tax effects 326 - - 101 225 -
Cost of 35,675 shares of common
stock acquired for treasury (809) - - - (809) -
Cash dividend ($0.12 per share) (2,488) - - (2,488) - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2005 $326,629 $7,578 $214,001 $120,387 ($11,096) ($4,241)
===============================================================================================================================
Balance at January 1, 2006 $345,576 $7,578 $214,001 $139,601 ($12,364) ($3,240)
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income, net of tax:
Net Income 9,933 - - 9,933 - -
Change in unrealized appreciation
of available-for-sale securities, net of tax 190 - - - - 190
---------
Total Comprehensive Income 10,123 - - - - -
Issuance of 37,107 common shares
under stock based compensation plans,
including related tax effects 402 - - 163 239 -
Cost of 229,269 shares of common
stock acquired for treasury (5,857) - - - (5,857) -
Cash dividend ($0.14 per share) (2,894) - - (2,894) - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2006 $347,350 $7,578 $214,001 $146,803 ($17,982) ($3,050)
===============================================================================================================================
The accompanying notes are a part of the consolidated financial statements.
5
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Dollars in thousands)
Three Months Ended March 31,
2006 2005
--------------------------------
Operating activities:
Net income $ 9,933 $ 6,944
Adjustments to reconcile net income to net cash
provided by operating activities:
Recovery of provision for loan and lease losses (300) (421)
Depreciation of premises and equipment 1,263 1,336
Depreciation of equipment owned and leased to others 3,382 3,323
Amortization of investment security premiums
and accretion of discounts, net 358 1,388
Amortization of mortgage servicing rights 1,576 1,803
Mortgage servicing asset recoveries charges (9) (1,089)
Deferred income taxes (815) 7,007
Realized investment securities gains (2,083) (904)
Change in mortgages held for sale 862 (23,880)
Change in interest receivable 1,055 (296)
Change in interest payable 2,041 99
Change in other assets (1,066) 1,823
Change in other liabilities (962) (1,932)
Other 361 (47)
--------------------------------
Net cash from (used in) operating activities 15,596 (4,846)
Investing activities:
Proceeds from sales of investment securities 516 23,962
Proceeds from maturities of investment securities 64,567 66,951
Purchases of investment securities (77,682) (41,655)
Net change in short-term investments 41,577 193,879
Loans sold or participated to others 508 (18)
Net change in loans and leases (15,881) 587
Net change in equipment owned under operating leases (4,540) (618)
Purchases of premises and equipment (1,159) (1,664)
--------------------------------
Net cash from investing activities 7,906 241,424
Financing activities:
Net change in demand deposits, NOW
accounts and savings accounts (251,123) (205,568)
Net change in certificates of deposit 183,957 (11,496)
Net change in short-term borrowings 3,380 (8,014)
Proceeds from issuance of long-term debt 10,273 312
Payments on long-term debt (194) (95)
Net proceeds from issuance of treasury stock 402 326
Acquisition of treasury stock (5,856) (809)
Cash dividends (2,946) (2,534)
--------------------------------
Net cash used in financing activities (62,107) (227,878)
Net change in cash and cash equivalents (38,605) 8,700
Cash and cash equivalents, beginning of year 124,817 78,255
--------------------------------
Cash and cash equivalents, end of period $ 86,212 $ 86,955
================================
The accompanying notes are a part of the consolidated financial statements.
6
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, changes in shareholders' equity,
and cash flows for the periods presented. These unaudited consolidated financial
statements have been prepared according to the rules and regulations of the
Securities and Exchange Commission (SEC) and, therefore, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U. S. generally accepted accounting principles have been
omitted. The Notes to the Consolidated Financial Statements appearing in 1st
Source Corporation's Annual Report on Form 10-K (2005 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, 2005 has been derived from the audited financial statements at that
date but does not include all of the information and footnotes required by U. S.
generally accepted accounting principles for complete financial statements.
Certain amounts in the prior period consolidated financial statements have been
reclassified to conform with the current year presentation.
Note 2. Recent Accounting Pronouncements
SHARE-BASED PAYMENT: Effective January 1, 2006, we adopted the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS) No.
123 (revised 2004), "Share-Based Payment" (SFAS No.123(R)), using the modified
prospective transition method and, therefore, have not restated results for
prior periods. Under this transition method, stock-based compensation expense
for the first quarter of 2006 included compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No.123"). Stock-based compensation expense for all stock-based compensation
awards granted after January 1, 2006 is based on the grant-date fair value
estimated in accordance with the provisions of SFAS No.123(R). We recognize
these compensation costs on a straight-line basis over the requisite service
period of the award. Prior to the January 1, 2006 adoption of SFAS No.123(R), we
recognized stock-based compensation expense in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). In March 2005, the Securities and Exchange Commission
(the SEC) issued Staff Accounting Bulletin No. 107 (SAB No. 107) regarding the
SEC's interpretation of SFAS No.123(R) and the valuation of share-based payments
for public companies. We have applied the provisions of SAB No. 107 in its
adoption of SFAS No. 123(R). See Note 5 to the Unaudited Consolidated Financial
Statements for a further discussion on stock-based compensation.
ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS: In March 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 156, "Accounting for Servicing
of Financial Assets- an amendment of FASB Statement No. 140." SFAS No.156
requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
servicing contract in specific situations. Additionally, the servicing asset or
servicing liability shall be initially measured at fair value; however, an
7
entity may elect the "amortization method" or "fair value method" for subsequent
balance sheet reporting periods. SFAS No.156 is effective as of an entity's
first fiscal year beginning after September 15, 2006. Early adoption is
permitted as of the beginning of an entity's fiscal year, provided the entity
has not yet issued financial statements, including interim financial statements,
for any period of that fiscal year. We do not expect the adoption of this
statement to have a material impact on our financial condition, results of
operations or cash flows.
ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS: In February 2006, the
FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments -
an amendment of FASB Statements No. 133 and 140." SFAS No. 155 simplifies
accounting for certain hybrid instruments currently governed by SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," by allowing fair
value remeasurement of hybrid instruments that contain an embedded derivative
that otherwise would require bifurcation. SFAS No. 155 also eliminates the
guidance in SFAS No.133 Implementation Issue No. D1, "Application of Statement
133 to Beneficial Interests in Securitized Financial Assets," which provides
such beneficial interests are not subject to SFAS No.133. SFAS No. 155 amends
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a Replacement of FASB Statement No. 125," by
eliminating the restriction on passive derivative instruments that a qualifying
special-purpose entity may hold. This statement is effective for financial
instruments acquired or issued after the beginning of our fiscal year 2007. We
do not expect the adoption of this statement to have a material impact on our
financial condition, results of operations or cash flows.
MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT: In November 2005, the Financial
Accounting Standards Board (FASB) issued Staff Position (FSP) SFAS No. 115-1 and
124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments." The FSP addresses the determination of when an investment
is considered impaired, whether that impairment is other-than-temporary, and the
measurement of an impairment loss. The FSP also includes accounting
considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary impairments. The FSP amends SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
SFAS No. 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations," and APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." The FSP nullifies certain requirements of EITF
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments," and supersedes Emerging Issues Task Force
(EITF) Abstracts, Topic D-44, "Recognition of Other-Than-Temporary Impairment
upon the Planned Sale of a Security Whose Cost Exceeds Fair Value." The FSP was
required to be applied to reporting periods beginning after December 15, 2005.
The issuance of this FSP did not have a material impact on the financial
condition, the results of operations, or liquidity of 1st Source.
ACCOUNTING CHANGES AND ERROR CORRECTIONS: In May 2005, the FASB issued SFAS
No. 154, "Accounting for Changes and Error Corrections," which changes the
accounting for and reporting of a change in accounting principle. This statement
also applies to all voluntary changes in accounting principle and changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This statement
requires retrospective application to prior period financial statements of
changes in accounting principle, unless it is impractical to determine either
the period - specific or cumulative effects of the change. SFAS No. 154 was
effective for accounting changes made in fiscal years beginning after December
15, 2005. The adoption of this standard did not have a material effect on the
financial condition, the results of operations or liquidity of 1st Source.
8
Note 3. Reserve for Loan and Lease Losses
The reserve for loan and lease losses is maintained at a level believed to
be adequate by management to absorb probable losses inherent in the loan and
lease portfolio. The determination of the reserve requires significant judgment
reflecting management's best estimate of probable loan and lease losses related
to specifically identified loans and leases as well as probable losses in the
remainder of the various loan and lease portfolios. The methodology for
assessing the appropriateness of the reserve consists of several key elements,
which include: specific reserves for identified special attention loans and
leases (classified loans and leases and internal watch list credits), percentage
allocations for special attention loans and leases without specific reserves,
formula reserves for each business lending division portfolio, including a
higher percentage reserve allocation for special attention loans and leases
without a specific reserve, and reserves for pooled homogeneous loans and
leases. Management's evaluation is based upon a continuing review of these
portfolios, estimates of future customer performance, collateral values and
dispositions and forecasts of future economic and geopolitical events, all of
which are subject to judgment and will change.
Note 4. Financial Instruments with Off-Balance-Sheet Risk
To meet the financing needs of our customers, 1st Source Corporation and
its subsidiaries are parties to financial instruments with off-balance-sheet
risk in the normal course of business. These off-balance-sheet financial
instruments include commitments to originate, purchase and sell loans and
standby letters of credit. The instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition. Our exposure to credit loss in
the event of nonperformance by the other party to the financial instruments for
loan commitments and standby letters of credit is represented by the dollar
amount of those instruments. We use the same credit policies and collateral
requirements in making commitments and conditional obligations as we do for
on-balance-sheet instruments.
Trustcorp Mortgage Company and 1st Source Bank (Bank), subsidiaries of 1st
Source Corporation, grant mortgage loan commitments to borrowers, subject to
normal loan underwriting standards. The interest rate risk associated with these
loan commitments is managed by entering into contracts for future deliveries of
loans. Loan commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
We issue letters of credit which are conditional commitments that guarantee
the performance of a customer to a third party. The credit risk involved and
collateral obtained in issuing letters of credit is essentially the same as that
involved in extending loan commitments to customers.
As of March 31, 2006 and December 31, 2005, 1st Source had commitments
outstanding to originate and purchase mortgage loans aggregating $210.24 million
and $130.73 million, respectively. Outstanding commitments to sell mortgage
loans aggregated $114.76 million at March 31, 2006, and $98.39 million at
December 31, 2005. Standby letters of credit totaled $75.86 million and $76.43
million at March 31, 2006, and December 31, 2005, respectively. Standby letters
of credit have terms ranging from six months to one year.
9
Note 5. Stock-Based Compensation
As of March 31, 2006, we had five stock-based employee compensation plans,
which are more fully described in Note K of the Consolidated Financial
Statements in 1st Source's Annual Report on Form 10-K for the year ended
December 31, 2005. These plans include two stock option plans, the Employee
Stock Purchase Plan, the Executive Incentive Plan, and the Restricted Stock
Award Plan. The Employee Stock Purchase Plan is non-compensatory.
Effective January 1, 2006, we adopted the fair value recognition provisions
of SFAS No. 123(R), using the modified prospective transition method and,
therefore, have not restated results for prior periods. Under this transition
method, stock-based compensation expense for the first quarter of 2006 included
compensation expense for all stock-based compensation awards granted prior to,
but that remained unvested as of, January 1, 2006. Compensation expense was
based on the grant date fair value estimated in accordance with the original
provision of SFAS No. 123.
Prior to January 1, 2006, we accounted for stock-based compensation under
the recognition, measurement and pro forma disclosure provisions of APB No. 25,
the original provisions of SFAS No. 123, and SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" (SFAS 148). In accordance
with APB No. 25, we generally would have recognized compensation expense for
stock awards on the grant date and we generally would have recognized
compensation expense for stock options only when we granted options with a
discounted exercise price or modified the terms of previously issued options,
and would have recognized the related compensation expense ratably over the
associated service period, which was generally the option vesting term.
Stock-based compensation expense for all stock-based compensation awards
granted after January 1, 2006, is based on the grant-date fair value. For all
awards except stock option awards, the grant date fair value is either the fair
market value per share or book value per share (corresponding to the type of
stock awarded) as of the grant date. For stock option awards, the grant date
fair value is estimated using the Black-Scholes option pricing model. For all
awards we recognize these compensation costs only for those shares expected to
vest on a straight-line basis over the requisite service period of the award,
for which we use the related vesting term. We estimate forfeiture rates based on
historical employee option exercise and employee termination experience. We have
identified separate groups of awardees that exhibit similar option exercise
behavior and employee termination experience and have considered them as
separate groups in the valuation models and expense estimates.
As a result of our January 1, 2006, adoption of SFAS No.123(R), the
impact to the Consolidated Financial Statements for the three months ended March
31, 2006 on income before income taxes and on net income were additions of $1.15
million and $0.71 million, respectively. The cumulative effect of the change in
accounting was $0.66 million before income taxes and $0.40 million, after income
taxes. The impact on both basic and diluted earnings per share for the three
months ended March 31, 2006 was $0.02 per share. In addition, prior to the
adoption of SFAS No. 123(R), we presented the tax benefit of stock option
exercises as operating cash flows. Upon the adoption of SFAS No. 123(R), tax
benefits resulting from tax deductions in excess of the compensation cost
recognized for those options are classified as financing cash flows.
10
PRO FORMA INFORMATION UNDER SFAS NO. 123
Pro forma information regarding the effect on the net income and basic
and diluted income per share for the three months ended March 31, 2005, had we
applied the fair value recognition provisions of SFAS No. 123, are as follows:
Three Months Ended
March 31
-----------------------
2005
-----------------------
Net income, as reported (000's) $ 6,944
Add: Stock-based employee compensation cost
included in reported net income, net of related
tax effects 916
Deduct: Total stock-based employee compensation
cost determined under fair value based method
for all awards, net of related tax effects (938)
--------
Pro forma net income $ 6,922
========
Earnings per share:
Basic--as reported $0.34
=====
Basic--pro forma $0.33
=====
Diluted--as reported $0.33
=====
Diluted--pro forma $0.33
=====
The stock-based compensation expense recognized in the condensed
consolidated statement of operations for the three months ended March 31, 2006
is based on awards ultimately expected to vest, and accordingly has been
adjusted by the amount of estimated forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based partially on historical experience.
The aggregate intrinsic value in the table below represents the total
pretax intrinsic value (the difference between 1st Source's closing stock price
on the last trading day of the first quarter of 2006 (March 31, 2006) and the
exercise price, multiplied by the number of in-the-money options) that would
have been received by the option holders had all option holders exercised their
options on March 31, 2006, this amount changes based on the fair market value of
1st Source's stock. Total intrinsic value of options exercised for the three
months ended March 31, 2006 was $342 thousand. Total fair value of options
vested and expensed was $12 thousand, net of tax, for the three months ended
March 31, 2006. No options were granted during the three months ended March 31,
2006 or 2005.
11
March 31, 2006
----------------------------------
Average
Weighted Remaining Total
Average Contractual Intrinsic
Number of Grant-date Term Value
Shares Fair Value (in years) (in 000's)
- --------------------------------------------------- ---------------- --------------- ------------------ --------------
Options outstanding, beginning of quarter 528,039 $27.07
Granted - -
Exercised (24,377) 12.48
Forfeited - -
---------------- ---------------
Options outstanding, end of quarter 503,662 $27.30 2.8 $1,754
================ ===============
Vested and expected to vest at March 31, 2006 503,662 $27.30 2.8 $1,754
================
Exercisable at March 31, 2006 480,329 $27.81 2.6 $1,444
================
As of March 31, 2006, there was $321,772 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements.
That cost is expected to be recognized over a weighted-average period of 5.93
years.
The following table summarizes information about stock options
outstanding at March 31, 2006:
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise of shares Contractual Exercise of shares Exercise
Prices Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------
$12.44 to $19.99 85,666 3.56 $15.06 70,666 $15.44
$20.00 to $29.99 65,688 4.35 22.74 57,355 22.71
$30.00 to $31.99 352,308 2.31 31.12 352,308 31.12
The fair value of each stock option was estimated on the date of grant
using the Black-Scholes option-pricing model with the weighed average
assumptions included on the table above, under the header "Stock Based Option
Valuation and Expense Information under SFAS No.123(R)".
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,"
"should," 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. We caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made. We may make
other written or oral forward-looking statements from time to time. Readers are
12
advised that various important factors could cause our 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 U. S. generally accepted accounting
principles; our competitive position within the markets we serve; 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 we have credit concentrations; and other matters discussed
in our filings with the SEC, including our Annual Report on Form 10-K for 2005,
which filings are available from the SEC. We undertake no obligation to publicly
update or revise any forward-looking statements.
The following management's discussion and analysis is presented to provide
information concerning our financial condition as of March 31, 2006, as compared
to December 31, 2005, and the results of operations for the three months ended
March 31, 2006 and 2005. This discussion and analysis should be read in
conjunction with our consolidated financial statements and the financial and
statistical data appearing elsewhere in this report and our 2005 Annual Report.
FINANCIAL CONDITION
-------------------
Our total assets at March 31, 2006, were $3.46 billion, down 1.46% from
December 31, 2005. Total loans and leases increased slightly and total deposits
decreased 2.45% over the comparable figures at the end of 2005.
Nonperforming assets at March 31, 2006, were $21.07 million, a slight
improvement over the $22.04 million reported at December 31, 2005. Nonperforming
assets decreased primarily due to a decrease in aircraft and construction
equipment nonaccrual loans. At March 31, 2006, nonperforming assets were 0.83%
of net loans and leases compared to 0.87% at December 31, 2005.
Accrued income and other assets were as follows:
(Dollars in Thousands)
March 31, December 31,
2006 2005
--------------------------
Accrued income and other assets:
Bank owned life insurance cash surrender value $ 35,105 $ 34,772
Accrued interest receivable 13,326 14,381
Mortgage servicing assets 18,305 19,363
Other real estate 1,192 959
Repossessions 4,640 4,284
Intangible assets 20,715 21,381
All other assets 22,500 22,199
--------------------------
Total accrued income and other assets $ 115,783 $ 117,339
==========================
CAPITAL
-------
As of March 31, 2006, total shareholders' equity was $347.35 million, up
marginally from the $345.58 million at December 31, 2005. In addition to net
income of $9.93 million, other significant changes in shareholders' equity
during the first three months of 2006 included $5.86 million in treasury stock
purchases, and $2.89 million of dividends paid. The accumulated other
comprehensive loss component of shareholders' equity totaled $3.05 million at
March 31, 2006, compared to $3.24 million at December 31, 2005. The improvement
13
in accumulated other comprehensive loss for the first quarter of 2006 over the
same period of 2005 was primarily a result of changes in unrealized gain/loss on
securities in the available-for-sale portfolio. Our equity-to-assets ratio was
10.04% as of March 31, 2006, compared to 9.84% at December 31, 2005. Book value
per common share rose to $16.96 at March 31, 2006, up from $16.72 at December
31, 2005.
We declared and paid dividends per common share of $0.14 during the first
quarter of 2006. The trailing four quarters dividend payout ratio, representing
dividends per share divided by diluted earnings per share, was 29.14%. 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. In
addition, banking regulators have established risk-based capital guidelines for
U.S. banking organizations. The actual capital amounts and ratios of 1st Source
and our largest subsidiary, the Bank, as of March 31, 2006, are presented in the
table below:
To Be Well
Capitalized Under
Actual Minimum Capital Prompt Corrective
Adequacy Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------
Total Capital (To Risk-Weighted Assets):
1st Source $424,629 14.94 $227,376 8.00 $284,220 10.00
Bank 404,407 14.53 222,676 8.00 278,345 10.00
Tier 1 Capital (to Risk-Weighted Assets):
1st Source 386,936 13.61 113,688 4.00 170,532 6.00
Bank 368,629 13.24 111,338 4.00 167,007 6.00
Tier 1 Capital (to Average Assets):
1st Source 386,936 11.43 135,370 4.00 169,213 5.00
Bank 368,629 11.17 131,999 4.00 164,999 5.00
LIQUIDITY AND INTEREST RATE SENSITIVITY
---------------------------------------
The Bank's liquidity is monitored and closely managed by the
Asset/Liability Committee (ALCO), which is comprised of the Bank's senior
management. Asset and liability management includes the management of interest
rate sensitivity and the maintenance of an adequate liquidity position. The
purpose of interest rate sensitivity management is to stabilize net interest
income during periods of changing interest rates.
Liquidity management is the process by which the Bank ensures that adequate
liquid funds are available to meet financial commitments on a timely basis.
Financial institutions must maintain liquidity to meet day-to-day requirements
of depositors and borrowers, take advantage of market opportunities and provide
a cushion against unforeseen needs.
Liquidity of the Bank is derived primarily from core deposits, principal
payments received on loans, the sale and maturity of investment securities, net
cash provided by operating activities, and access to other funding sources. The
most stable source of liability funded liquidity is deposit growth and retention
of the core deposit base. The principal sources of asset funded liquidity are
available-for-sale investment securities, cash and due from banks, Federal funds
sold, securities purchased under agreements to resell, and loans and interest
bearing deposits with other banks maturing within one year. Additionally,
liquidity is provided by bank lines of credit, repurchase agreements, and the
ability to borrow from the Federal Reserve Bank and Federal Home Loan Bank.
The ALCO monitors and manages the relationship of earning assets to
14
interest bearing liabilities and the responsiveness of asset yields, interest
expense, and interest margins to changes in market interest rates. At March 31,
2006, the consolidated statement of financial condition was rate sensitive by
$223 million more liabilities than assets scheduled to reprice within one year,
or approximately 0.90%.
RESULTS OF OPERATIONS
---------------------
Net income for the three month period ended March 31, 2006, was $9.93
million, compared to $6.94 million for the same period in 2005. Diluted net
income per common share was $0.48 for the three month period ended March 31,
2006, compared to $0.33 for the same period in 2005. Return on average common
shareholders' equity was 11.53% for the three months ended March 31, 2006,
compared to 8.60% in 2005. The return on total average assets was 1.18% for the
three months ended March 31, 2006, compared to 0.84% in 2005.
The increase in net income for the three months ended March 31, 2006, over
the first three months of 2005, was primarily the result of an increase in net
interest income, gains in venture partnership investments, and a decrease in
salaries and employee benefit expense. These positive impacts to net income were
somewhat offset by an increase in the income tax provision. Details of the
changes in the various components of net income are discussed further below.
NET INTEREST INCOME
-------------------
The taxable equivalent net interest income for the three months ended
March 31, 2006, was $25.72 million, an increase of 6.06% over the same period in
2005. The increase primarily resulted from an increase in the net interest
margin. The net interest margin on a fully taxable equivalent basis was 3.29%
for the three months ended March 31, 2006, compared to 3.15% for the three
months ended March 31, 2005. The increase in the net interest margin was
primarily driven by an increase in the average yield on earning assets, which
increased from 5.12% for the three months ended March 31, 2005 to 6.01% for the
three months ended March 31, 2006. Total average earning assets increased 1.51%
for the three month period ended March 31, 2006, over the comparative period in
2005.
The increase in the average yield on earning assets was partially the
result of having a larger proportion of average earning assets invested in
higher-yielding loans and leases during the first quarter of 2006 as compared to
the first quarter of 2005. The increase was also partially attributable to
overall increases in market interest rates. Average loan and lease outstandings
also increased over all categories by 7.85% for the three month period, compared
to the same period in 2005. Total average investment securities decreased 18.48%
for the three month period over one year ago as excess funds were used to fund
loan growth rather than for investment purposes. Average mortgages held for sale
decreased 5.05%, due to timing differences in loan sales in the first quarter of
2006 as compared to the first quarter of 2005. Other investments, which include
federal funds sold, time deposits with other banks and trading account
securities, increased for the three month period over one year ago.
Average interest-bearing deposits increased 1.81% for the three month
period over the same period in 2005. The rate on average interest-bearing
deposits was 3.07% and 2.26% for the three month periods ended March 31, 2006
and 2005, respectively. The increase in the average cost of interest-bearing
deposits during the first three months of 2006 as compared to the first three
months of 2005 was primarily the result of increases in interest rates offered
on deposit products due to increases in market interest rates and increased
competition for deposits across all markets. These higher cost deposits were
pursued due to increased funding needs. The rate on average interest-bearing
funds was 3.28% and 2.39% for the three months ended March 31, 2006 and 2005,
respectively.
15
The following table provides an analysis of net interest income and
illustrates the interest earned and interest expense charged for each major
component of interest earning assets and interest bearing liabilities.
Yields/rates are computed on a tax-equivalent basis, using a 35% rate.
Nonaccrual loans and leases are included in the average loan and lease balance
outstanding.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three months ended March 31,
2006 2005
---------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------------------------
ASSETS:
Investment securities:
Taxable $ 458,812 $ 3,925 3.47% $ 596,070 $ 3,818 2.60%
Tax exempt 175,027 1,827 4.23% 181,472 1,851 4.14%
Mortgages - held for sale 52,425 827 6.40% 55,214 783 5.75%
Net loans and leases 2,457,080 40,125 6.62% 2,278,249 32,916 5.86%
Other investments 28,553 316 4.49% 13,744 77 2.27%
---------------------------------------------------------------------------------------
Total Earning Assets 3,171,897 47,020 6.01% 3,124,749 39,445 5.12%
Cash and due from banks 79,943 80,430
Reserve for loan and lease losses (58,702) (63,661)
Other assets 211,914 197,149
-------------- --------------
Total $ 3,405,052 $ 3,338,667
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 2,251,083 17,033 3.07% $ 2,211,167 $ 12,316 2.26%
Short-term borrowings 291,993 2,760 3.83% 292,806 1,702 2.36%
Subordinated notes 59,022 1,050 7.21% 59,022 964 6.62%
Long-term debt and
mandatorily redeemable securities 30,990 454 5.94% 17,923 210 4.75%
---------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 2,633,088 21,297 3.28% 2,580,918 15,192 2.39%
Noninterest-bearing deposits 363,201 377,925
Other liabilities 59,460 52,289
Shareholders' equity 349,303 327,535
-------------- --------------
Total $ 3,405,052 $ 3,338,667
============== ==============
--------- --------
Net Interest Income $ 25,723 $ 24,253
========= ========
Net Yield on Earning Assets on a Taxable
Equivalent Basis ------ -------
3.29% 3.15%
====== =======
16
PROVISION AND RESERVE FOR LOAN AND LEASE LOSSES
-----------------------------------------------
The recovery of provision for loan and lease losses for the three month
periods ended March 31, 2006 and 2005 was $0.30 million and $0.42 million,
respectively. Net recoveries of $0.70 million were recorded for the first
quarter 2006, compared to net charge-offs of $0.60 million for the same quarter
a year ago.
In the first quarter 2006, loan and lease delinquencies were 0.76% as
compared to 0.57% on March 31, 2005, and 0.38% at the end of 2005. The increase
in the first quarter of 2006 was primarily due to higher delinquencies in the
turbine aircraft portfolio. The reserve for loan and lease losses as a
percentage of loans and leases outstanding at the end of the period was 2.38% as
compared to 2.75% one year ago and 2.38% at December 31, 2005. A summary of loan
and lease loss experience during the three month periods ended March 31, 2006
and 2005 is provided below.
------------------------------
(Dollars in Thousands)
Three Months Ended
March 31,
------------------------------
2006 2005
------------------------------
Reserve for loan and lease losses - beginning balance $ 58,697 $ 63,672
Charge-offs (780) (2,203)
Recoveries 1,480 1,599
------------------------------
Net recoveries (charge-offs) 700 (604)
Recovery of provision for loan and lease losses (300) (421)
------------------------------
Reserve for loan and lease losses - ending balance $ 59,097 $ 62,647
==============================
Loans and leases outstanding at end of period $ 2,479,504 $ 2,278,995
Average loans and leases outstanding during period 2,457,080 2,278,249
Reserve for loan and lease losses as a percentage of
loans and leases outstanding at end of period 2.38 % 2.75%
Ratio of net (recoveries) charge-offs during period to
average loans and leases outstanding (0.12)% 0.11%
NONPERFORMING ASSETS
--------------------
Nonperforming assets were as follows:
(Dollars in thousands)
March 31, December 31, March 31,
2006 2005 2005
----------------------------------------------
Loans and leases past due 90 days or more $ 121 $ 245 $ 206
Nonaccrual and restructured loans and leases 15,071 16,552 21,281
Other real estate 1,192 960 1,438
Repossessions 4,640 4,284 1,459
Equipment owned under operating leases 48 - 1,282
----------------------------------------------
Total nonperforming assets $ 21,072 $ 22,041 $ 25,666
==============================================
17
Nonperforming assets totaled $21.07 million at March 31, 2006, a slight
improvement over the $22.04 million reported at December 31, 2005, and a 17.90%
improvement from the $25.67 million reported at March 31, 2005. The improvement
during the first quarter 2006 was primarily related to a decrease in nonaccrual
loans and leases in all areas with the exception of slight increases in loans
secured by real estate and consumer loans areas. Nonperforming assets as a
percentage of total loans and leases improved to 0.83% at March 31, 2006, from
0.87% at December 31, 2004, and 1.10% at March 31, 2005.
As of March 31, 2006, the Bank had a $3.32 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 of aircraft, automobiles, and light trucks at March
31, 2006. At the time of repossession, the recorded amount of the loan or lease
is written down, if necessary, to the estimated value of the equipment or
vehicle by a charge to the reserve for loan and lease losses, unless the
equipment is in the process of immediate sale. Any subsequent write-downs are
included in noninterest expense.
SUPPLEMENTAL LOAN AND LEASE INFORMATION AS OF MARCH 31, 2006
- ------------------------------------------------------------
(Dollars in thousands) Other real estate Year-to-date
Loans and leases owned and net credit losses/
outstanding Nonaccrual repossessions (recoveries)
------------------------------------------------------------------------
Commercial and agricultural loans $ 464,350 $ 3,321 $ - $ (189)
Auto, light truck and environmental equipment 311,560 760 50 (54)
Medium and heavy duty truck 299,421 - - (8)
Aircraft financing 445,664 5,010 4,523 (489)
Construction equipment financing 237,156 1,451 - (147)
Loans secured by real estate 607,140 2,137 1,192 2
Consumer loans 114,213 431 67 117
------------------------------------------------------------------------
Total $ 2,479,504 $ 13,110 $ 5,832 $ (768)
========================================================================
For financial statements purposes, nonaccrual loans and leases are included in
loan and lease outstandings, whereas repossessions and other real estate are
included in other assets. Net credit losses include net charge-offs on loans and
leases and valuation adjustments and gains and losses on disposition of
repossessions and defaulted operating leases.
NONINTEREST INCOME
------------------
Noninterest income for the three-month periods ended March 31, 2006 and
2005 was $19.01 million and $17.70 million, respectively. The predominant factor
behind the increase in 2006 was gains on venture capital investments, due to
market value adjustments.
18
(Dollars in thousands) Three Months Ended
March 31,
----------------------------
2006 2005
----------------------------
Noninterest income:
Trust fees $ 3,391 $ 3,246
Service charges on deposit accounts 4,386 3,963
Mortgage banking income 1,757 2,767
Insurance commissions 1,682 1,164
Equipment rental income 4,220 4,015
Other income 1,486 1,636
Investment securities and other investment gains 2,083 904
----------------------------
Total noninterest income $ 19,005 $ 17,695
============================
Gains on venture partnership investment totaled $2.05 million for the first
quarter of 2006 compared to gains of $0.74 million for the first quarter of
2005. Insurance commissions, service charges on deposit accounts, equipment
rental income, and trust fees increased during the first quarter of 2006 as
compared to the first quarter 2005.
Mortgage banking income decreased primarily due to minimal recoveries of
mortgage servicing rights in the first quarter of 2006 compared to significant
recoveries of mortgage servicing rights of $1.09 million in the first quarter of
2005.
NONINTEREST EXPENSE
-------------------
Noninterest expense for the three-month periods ended March 31, 2006 and
2005 was $29.41 million and $31.67 million, respectively.
(Dollars in thousands) Three Months Ended
March 31,
------------------------
2006 2005
------------------------
Noninterest expense:
Salaries and employee benefits $ 15,514 $ 18,544
Net occupancy expense 1,867 2,102
Furniture and equipment expense 3,134 2,642
Depreciation - leased equipment 3,382 3,323
Professional fees 885 799
Supplies and communication 1,363 1,343
Business development and marketing expense 642 608
Intangible asset amortization 666 658
Loan and lease collection and repossession expense 90 (134)
Other expense 1,863 1,789
------------------------
Total noninterest expense $ 29,406 $ 31,674
========================
The decrease in noninterest expense for the first quarter of 2006 was primarily
due to the reversal of previously recognized stock-based compensation expense
under historical accounting methods related to the estimated forfeiture of stock
awards. This one-time expense reversal, combined with the adoption of SFAS No.
123(R) estimated forfeiture accounting requirements, resulted in a reduction in
19
stock-based compensation of $2.07 million, pre-tax. Stock-based compensation is
discussed further in Note 5 of the Unaudited Notes to Consolidated Financial
Statements. Additionally, group insurance costs were lower for the first quarter
2006 versus the first quarter of 2005. These decreases were partially offset by
additional compensated absence expenses of $0.61 million for the first quarter
of 2006.
Net occupancy expense decreased for the first quarter of 2006 as compared
to the first quarter of 2005. During the first quarter 2005, 1st Source reviewed
its lease accounting practices in light of the views expressed by the Office of
the Chief Accountant of the SEC in a February 7, 2005 letter to the American
Institute of Certified Public Accountants. As a result of its review, 1st Source
recorded a one-time, net charge of $0.27 million to correct its accounting for
straight-line rent and depreciation of leasehold improvements.
Furniture and equipment expense increased on a year-over-year basis due to
increased software costs, expenses related to the core system conversion project
and other processing charges. Loan and lease collection and repossession expense
increased slightly on a year-over-year basis as gains on disposition of
repossessed assets decreased and valuation adjustments related to repossessed
assets increased. Professional fees increased marginally as of March 31, 2006,
as compared to March 31, 2005.
Supplies and communication, business development and marketing expense, and
other expense all remained comparable to 2005 levels. Leased equipment
depreciation increased due to the increase in the operating lease portfolio.
INCOME TAXES
------------
The provision for income taxes for the three months ended March 31, 2006,
was $5.07 million, compared to $3.10 million for the same period in 2005. The
effective tax rate was 33.77% for the quarter ended March 31, 2006, compared to
30.88% for the same quarter in 2005. The effective tax rate increased due to an
increase in pre-tax income. The provision for income taxes for the three months
ended March 31, 2006 and 2005, 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, 2005. For information regarding our market risk, refer to 1st
Source's Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 4.
CONTROLS AND PROCEDURES
As of the end of the period covered by this report an evaluation was
carried out, under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, at March 31,
2006, our disclosure controls and procedures were 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 our periodic SEC filings.
20
In addition, there were no changes in our internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f)) during the first fiscal
quarter of 2006 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
1st Source and its subsidiaries are involved in various legal proceedings
incidental to the conduct of our businesses. Management does not expect that the
outcome of any such proceedings will have a material adverse effect on our
consolidated financial position or results of operations.
ITEM 1A. Risk Factors.
There have been no material changes in risks faced by 1st Source since
December 31, 2005. For information regarding our risk factors, refer to 1st
Source's Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
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, 2006 11,717 26.19 11,717 525,467
February 01 - 28, 2006 217,552 26.52 217,552 307,915
March 01 - 31, 2006 - - - 307,915
(1) 1st Source maintains a stock repurchase plan that was authorized by the
Board of Directors on October 23, 2001. Under the terms of the plan, 1st
Source may repurchase up to 1,038,990 shares of its common stock when
favorable conditions exist on the open market or through private
transactions at various prices from time to time. Since the inception of
the plan, 1st Source has repurchased a total of 731,075 shares.
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
21
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.
22
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, 2006 /s/CHRISTOPHER J. MURPHY III
-------------- -----------------------------------
Christopher J. Murphy III
Chairman of the Board, President and CEO
DATE April 27, 2006 /s/LARRY E. LENTYCH
-------------- ------------------
Larry E. Lentych
Treasurer and Chief Financial Officer
Principal Accounting Officer
23