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 June 30, 2005 ------------- 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) 235-2700 (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 July 27, 2005 - 20,670,208 shares
TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Consolidated statements of financial condition -- June 30, 2005, and December 31, 2004 3 Consolidated statements of income -- three months and six months ended June 30, 2005 and 2004 4 Consolidated statements of changes in shareholders' equity six months ended June 30, 2005 and 2004 5 Consolidated statements of cash flows -- six months ended June 30, 2005 and 2004 6 Notes to the Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits 20 SIGNATURES 21 2
<TABLE> <CAPTION> 1ST SOURCE CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED - DOLLARS IN THOUSANDS) June 30, December 31, 2005 2004 -------------------------------- <S> <C> <C> ASSETS Cash and due from banks $ 95,215 $ 78,255 Federal funds sold and interest bearing deposits with other banks 19,122 220,131 Investment securities available-for-sale (amortized cost of $710,632 and $790,404 at June 30, 2005 and December 31, 2004, respectively) 707,494 789,923 Mortgages held for sale 104,537 55,711 Loans and leases - net of unearned discount Commercial and agricultural loans 438,880 425,018 Auto, light truck and environmental equipment 311,746 263,637 Medium and heavy duty truck 290,597 267,834 Aircraft financing 447,089 444,481 Construction equipment financing 209,785 196,516 Loans secured by real estate 575,125 583,437 Consumer loans 107,392 99,245 ----------------------------- Total loans and leases 2,380,614 2,280,168 Reserve for loan and lease losses (59,547) (63,672) ----------------------------- Net loans and leases 2,321,067 2,216,496 Equipment owned under operating leases, net of accumulated depreciation 47,232 47,257 Net premises and equipment 38,214 37,314 Accrued income and other assets 118,250 118,628 ----------------------------- Total assets $3,451,131 $3,563,715 ============================= LIABILITIES Deposits: Noninterest bearing $ 409,450 $ 378,867 Interest bearing 2,327,879 2,428,136 ----------------------------- Total deposits 2,737,329 2,807,003 Federal funds purchased and securities sold under agreements to repurchase 186,837 216,751 Other short-term borrowings 56,602 82,911 Long-term debt and mandatorily redeemable securities 18,119 17,964 Subordinated notes 59,022 59,022 Accrued expenses and other liabilities 59,609 53,464 ----------------------------- Total liabilities 3,117,518 3,237,115 SHAREHOLDERS' EQUITY Preferred stock; no par value - - Common stock; no par value Authorized 40,000,000 shares; issued 21,617,073 at June 30, 2005, and 21,617,057 at December 31, 2005 7,578 7,578 Capital surplus 214,001 214,001 Retained earnings 126,183 115,830 Cost of common stock in treasury (12,213) (10,512) Accumulated other comprehensive loss (1,936) (297) ----------------------------- Total shareholders' equity 333,613 326,600 ----------------------------- Total liabilities and shareholders' equity $3,451,131 $3,563,715 ============================= </TABLE> The accompanying notes are a part of the consolidated financial statements. 3
<TABLE> <CAPTION> 1ST SOURCE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended Six Months Ended June 30, June 30, ------------------------------ ------------------------------- 2005 2004 2005 2004 ------------------------------ ------------------------------- <S> <C> <C> <C> <C> Interest income: Loans and leases $ 35,465 $ 31,904 $ 69,102 $ 64,358 Investment securities, taxable 3,915 4,106 7,733 8,395 Investment securities, tax-exempt 1,336 1,258 2,600 2,575 Other 127 46 204 111 ------------------------------ ------------------------------- TOTAL INTEREST INCOME 40,843 37,314 79,639 75,439 Interest expense: Deposits 13,330 9,597 25,646 19,420 Short-term borrowings 2,006 1,283 3,708 2,540 Subordinated notes 1,000 962 1,964 1,923 Long-term debt and mandatorily redeemable securities 305 138 515 460 ------------------------------ ------------------------------- TOTAL INTEREST EXPENSE 16,641 11,980 31,833 24,343 ------------------------------ ------------------------------- NET INTEREST INCOME 24,202 25,334 47,806 51,096 (Recovery of)/provision for loan and lease losses (3,411) 482 (3,832) 583 ------------------------------ ------------------------------- NET INTEREST INCOME AFTER (RECOVERY OF)/PROVISION FOR LOAN AND LEASE LOSSES 27,613 24,852 51,638 50,513 Noninterest income: Trust fees 3,285 3,140 6,531 6,230 Service charges on deposit accounts 4,251 4,115 8,214 7,821 Mortgage banking income 1,551 6,236 4,318 5,345 Equipment rental income 3,927 4,927 7,942 10,751 Other income 2,379 1,841 5,179 4,383 Investment securities and other investment gains (losses) 5 (38) 909 (290) ------------------------------ ------------------------------- TOTAL NONINTEREST INCOME 15,398 20,221 33,093 34,240 ------------------------------ ------------------------------- Noninterest expense: Salaries and employee benefits 17,090 15,866 35,634 31,620 Net occupancy expense 1,732 1,725 3,834 3,558 Furniture and equipment expense 2,844 2,697 5,486 5,281 Depreciation - leased equipment 3,194 3,883 6,517 8,419 Supplies and communication 1,321 1,451 2,664 2,883 Loan and lease collection and repossession expense 318 821 184 1,876 Other expense 4,127 5,502 7,981 10,650 ------------------------------ ------------------------------- TOTAL NONINTEREST EXPENSE 30,626 31,945 62,300 64,287 ------------------------------ ------------------------------- Income before income taxes 12,385 13,128 22,431 20,466 Income tax expense 4,158 4,410 7,260 6,669 ------------------------------ ------------------------------- NET INCOME $ 8,227 $ 8,718 $ 15,171 $ 13,797 ============================== =============================== Other comprehensive income/(loss), net of tax: Change in unrealized (depreciation) appreciation of available-for-sale securities 2,305 (9,503) (1,639) (7,594) ------------------------------ ------------------------------- Total comprehensive income/(loss) $ 10,532 $ (785) $ 13,532 $ 6,203 ============================== =============================== Per common share: Basic net income per common share $ 0.39 $ 0.42 $ 0.73 $ 0.67 ============================== =============================== Diluted net income per common share $ 0.39 $ 0.42 $ 0.72 $ 0.66 ============================== =============================== Dividends $ 0.120 $ 0.100 $ 0.240 $ 0.200 ============================== =============================== Basic weighted average common shares outstanding 20,685,755 20,700,516 20,702,274 20,713,775 ============================== =============================== Diluted weighted average common shares outstanding 20,952,085 20,969,669 20,974,398 20,993,471 ============================== =============================== </TABLE> The accompanying notes are a part of the consolidated financial statements. 4
<TABLE> <CAPTION> 1ST SOURCE CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------------------------------ Net Unrealized Appreciation Cost of (Depreciation) Common of Securities Common Capital Retained Stock Available- Total Stock Surplus Earnings in Treasury For-Sale - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 2004 $314,691 $7,578 $214,001 $100,534 ($9,777) $2,355 - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income, net of tax: Net Income 13,797 - - 13,797 - - Change in unrealized appreciation of available-for-sale securities, net of tax (7,594) - - - - (7,594) --------- Total Comprehensive Income 6,203 - - - - - Issuance of 38,937 common shares under stock based compensation plans, including related tax effects 578 - - 16 562 - Cost of 110,902 shares of common stock acquired for treasury (2,388) - - - (2,388) - Cash dividend ($0.20 per share) (4,148) - - (4,148) - - - ------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2004 $314,936 $7,578 $214,001 $110,199 ($11,603) ($5,239) ============================================================================================================================== Balance at January 1, 2005 $326,600 $7,578 $214,001 $115,830 ($10,512) ($ 297) - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income, net of tax: Net Income 15,171 - - 15,171 - - Change in unrealized appreciation of available-for-sale securities, net of tax (1,639) - - - - (1,639) --------- Total Comprehensive Income 13,532 - - - - - Issuance of 40,237 common shares under stock based compensation plans, including related tax effects 499 - - 154 345 - Cost of 99,256 shares of common stock acquired for treasury (2,046) - - - (2,046) - Cash dividend ($0.24 per share) (4,972) - - (4,972) - - - ------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2005 $333,613 $7,578 $214,001 $126,183 ($12,213) ($1,936) ============================================================================================================================== </TABLE> The accompanying notes are a part of the consolidated financial statements. 5
<TABLE> <CAPTION> 1ST SOURCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - DOLLARS IN THOUSANDS) Six Months Ended June 30, ----------------------------- 2005 2004 ---------- --------- <S> <C> <C> Operating activities: Net income $ 15,171 $ 13,797 Adjustments to reconcile net income to net cash (used in)/from operating activities: Provision for loan and lease (recoveries) losses (3,832) 583 Depreciation of premises and equipment 9,065 10,912 Amortization of investment security premiums and accretion of discounts, net 2,513 2,965 Amortization of mortgage servicing rights 3,588 3,832 Mortgage servicing asset impairment recoveries (613) (553) Deferred income taxes 4,292 513 Realized investment securities (gains) losses (909) 290 Change in mortgages held for sale (48,826) (6,081) Change in trading account securities 0 (4,516) Change in interest receivable (313) 1,034 Change in interest payable 74 (64) Change in other assets (2,286) (3,523) Change in other liabilities 2,797 (1,346) Other 136 (1,868) ---------- ---------- Net cash (used in)/from operating activities (19,143) 15,975 Investing activities: Proceeds from sales and maturities of investment securities 177,799 126,466 Purchases of investment securities (99,631) (160,794) Net change in short-term investments 201,009 186 Loans sold or participated to others (18) 0 Net change in loans and leases (100,720) (12) Net change in equipment owned under operating leases (6,492) 5,700 Purchases of premises and equipment (3,529) (1,562) --------- ---------- Net cash from/(used in) investing activities 168,418 (30,016) Financing activities: Net change in demand deposits, NOW accounts and savings accounts (100,686) (110,530) Net change in certificates of deposit 31,013 8,178 Net change in short-term borrowings (56,223) 92,720 Proceeds from issuance of long-term debt 355 415 Payments on long-term debt (163) (166) Net proceeds from issuance of treasury stock 498 109 Acquisition of treasury stock (2,046) (154) Cash dividends (5,063) (4,187) --------- ---------- Net cash used in financing activities (132,315) (13,615) Net change in cash and cash equivalents 16,960 (27,656) Cash and cash equivalents, beginning of year 78,255 109,787 --------- ---------- Cash and cash equivalents, end of period $ 95,215 $ 82,131 ========= ========== </TABLE> 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) that 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 (1st Source) Annual Report on Form 10-K (2004 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, 2004, 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. 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 December 16, 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123(R) supersedes APB No. 25, "Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Originally, SFAS No. 123(R) was required to be adopted no later than July 1, 2005. On April 14, 2005, the SEC issued an amendment to SFAS No. 123(R), which allows companies to implement SFAS 123(R) at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The new rule does not change the accounting required by SFAS No. 123(R), it only changes the dates for compliance with the standard. Early adoption is permitted 7
in periods in which financial statements have not yet been issued. 1st Source expects to adopt SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods: 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date, and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented, or (b) prior interim periods of the year of adoption. 1st Source has not made a determination as to which method it will utilize upon adoption of SFAS No. 123(R). As permitted by SFAS No. 123, 1st Source currently accounts for share-based payments to employees using APB Opinion No. 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method may have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of the standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 5 of the consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. 1st Source cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options). 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 (substandard 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 homogenous 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 consideration of current economic trends, all of which are subject to judgment and will change. 8
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 the Bank 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 June 30, 2005, and December 31, 2004, 1st Source had commitments outstanding to originate and purchase mortgage loans aggregating $216.64 million and $106.61 million, respectively. Outstanding commitments to sell mortgage loans aggregated $147.91 million at June 30, 2005, and $83.82 million at December 31, 2004. Standby letters of credit totaled $78.78 million and $90.67 million at June 30, 2005, and December 31, 2004, 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 and six month periods ended June 30, 2005, and 2004 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 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. 9
<TABLE> <CAPTION> ------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ---------------- ------------------------------- ------------ 2005 2004 2005 2004 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income, as reported (000's) $ 8,227 $ 8,718 $ 15,171 $ 13,797 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 626 313 1,542 736 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (695) (423) (1,632) (874) -------- -------- --------- -------- Pro forma net income $ 8,158 $ 8,608 $15,081 $13,659 ========= ========= ======== ======== Earnings per share: Basic--as reported $0.39 $0.42 $0.73 $0.67 ===== ===== ===== ===== Basic--pro forma $0.39 $0.42 $0.73 $0.66 ===== ===== ===== ===== Diluted--as reported $0.39 $0.42 $0.72 $0.66 ===== ===== ===== ===== Diluted--pro forma $0.39 $0.41 $0.72 $0.65 ===== ===== ===== ===== </TABLE> 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 U. S. generally accepted accounting principles; 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 2004, 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 June 30, 2005, as compared to December 31, 2004, and the results of operations for the three and six months ended June 30, 2005, and 2004. 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 2004 Annual Report. 10
FINANCIAL CONDITION 1st Source's assets at June 30, 2005, were $3.45 billion, down 3.16% from December 31, 2004. Total loans and leases increased 4.41% and total deposits decreased 2.48% over the comparable figures at the end of 2004. Nonperforming assets at June 30, 2005, were $22.07 million compared to $33.21 million at December 31, 2004, a decrease of 33.56%. Nonperforming assets decreased primarily due to decreases in commercial and agricultural nonaccrual loans, aircraft nonaccrual loans, and repossessed assets. At June 30, 2005, nonperforming assets were 0.91% of net loans and leases compared to 1.42% at December 31, 2004. Accrued income and other assets were as follows: (Dollars in Thousands) June 30, December 31, 2005 2004 ------------ ------------ Accrued income and other assets: Bank owned life insurance cash surrender value $ 34,089 $ 33,552 Accrued interest receivable 12,818 12,505 Mortgage servicing assets 20,642 21,414 Other real estate 1,064 1,878 Repossessions 411 4,382 Intangible assets 22,755 23,588 All other assets 26,471 21,309 ------------ ------------ Total accrued income and other assets $ 118,250 $ 118,628 ============ ============ CAPITAL As of June 30, 2005, total shareholders' equity was $333.61 million, up 2.15% from the $326.60 million at December 31, 2004. In addition to net income of $15.17 million, other significant changes in shareholders' equity during the first six months of 2005 included $2.05 million in treasury stock purchases, and $4.97 million of dividends paid. The accumulated other comprehensive income component of shareholders' equity totaled ($1.94) million at June 30, 2005, compared to ($0.30) million at December 31, 2004. The decrease in accumulated other comprehensive income was a result of changes in unrealized gain or loss on securities in the available-for-sale portfolio. The 1st Source equity-to-assets ratio was 9.67% as of June 30, 2005, compared to 9.16% at December 31, 2004. Book value per common share rose to $16.14 at June 30, 2005, up from $15.76 at December 31, 2004. 1st Source declared and paid dividends per common share of $0.12 during the second quarter of 2005. The trailing four quarters dividend payout ratio, representing dividends per share divided by diluted earnings per share, was 35.94%. 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 and required capital amounts and ratios of 1st Source and the Bank, as of June 30, 2005, are presented in the table below: 11
<TABLE> <CAPTION> To Be Well Capitalized Under Minimum Capital Prompt Corrective Actual Adequacy Action Provisions (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Total Capital (To Risk-Weighted Assets): 1st Source $405,787 14.72 % $220,610 8.00 $275,763 10.00 Bank 380,952 14.15 215,379 8.00 269,223 10.00 Tier 1 Capital (to Risk-Weighted Assets): 1st Source 370,044 13.42 110,305 4.00 165,458 6.00 Bank 346,979 12.89 107,689 4.00 161,534 6.00 Tier 1 Capital (to Average Assets): 1st Source 370,044 11.09 133,485 4.00 166,856 5.00 Bank 346,979 10.65 130,299 4.00 162,874 5.00 </TABLE> LIQUIDITY AND INTEREST RATE SENSITIVITY The Bank's liquidity is closely monitored and 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. 1st Source's ALCO monitors and manages the relationship of earning assets to interest bearing liabilities and the responsiveness of asset yields, interest expense, and interest margins to changes in market interest rates. At June 30, 2005, the consolidated statement of financial condition was rate sensitive by $12.3 million more assets than liabilities scheduled to reprice within one year or approximately 1.01%. RESULTS OF OPERATIONS Net income for the three and six month periods ended June 30, 2005, was $8.23 million and $15.17 million respectively, compared to $8.72 million and $13.80 million for the same periods in 2004. Diluted net income per common share was $0.39 and $0.72 respectively, for the three and six month periods ended June 30, 2005, compared to $0.42 and $0.66 for the same periods in 2004. Return on average common shareholders' equity was 9.33% for the six months ended June 30, 2005, compared to 8.73% in 2004. The return on total average assets was 0.91% for the six months ended June 30, 2005, compared to 0.85% in 2004. The increase in net income for the six months ended June 30, 2005, over the first six months of 2004, was primarily the result of a $3.83 million recovery 12
in the provision for loan losses and a $1.99 million decrease in noninterest expense offset by a $3.29 million decrease in net interest income and a $1.15 million decrease in noninterest 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 June 30, 2005, was $24.88 million, a decrease of 4.36% over the same period in 2004. The net interest margin on a fully taxable equivalent basis was 3.18% for the three months ended June 30, 2005, compared to 3.45% for the three months ended June 30, 2004. The taxable equivalent net interest income for the six month period ended June 30, 2005, was $49.14 million, a decrease of 6.39% over 2004, resulting in a net yield of 3.16%, compared to a net yield of 3.49% for the same period in 2004. Total average earning assets increased 3.70% and 3.65%, respectively, for the three and six month periods ended June 30, 2005, over the comparative periods in 2004. Average loans and leases outstanding increased 6.11% and 4.86% for the three and six month periods, compared to the same periods in 2004, due primarily to increased loan outstandings in auto and light truck financings, medium and heavy duty truck financings, construction equipment financings, and consumer loans, offset slightly by decreases in loans secured by real estate. Total average investment securities decreased 2.00% for the three month period and increased 1.47% for six month period over one year ago due to an increase in municipal and mortgage-backed securities. For the six month period, average mortgages held for sale decreased 9.16%, as demand for mortgage loans was lower in 2005. Other investments, which include federal funds sold, time deposits with other banks and trading account securities, decreased for the three and six month periods over 2004 as availability of excess funds used for investment purposes decreased due to loan growth. The taxable equivalent yields on total average earning assets were 5.30% and 5.04% for the three month periods ended June 30, 2005 and 2004, respectively, and 5.21% and 5.11% for the six month periods ended June 30, 2005 and 2004, respectively. Average interest bearing deposits increased 8.25% and 7.95% for the three and six month periods ended June 30, 2005, respectively, over the same periods in 2004. The rates on average interest-bearing funds were 2.59% and 1.94% for the three months ended June 30, 2005 and 2004, and 2.49% and 1.96% for the six month periods ended June 30, 2005 and 2004, respectively. The cost of deposits was 2.42% for the second quarter of 2005, an increase of approximately 44 basis points as compared to year-end 2004 levels, and approximately 53 basis points as compared to the second quarter of 2004. The cost of borrowed Federal Funds was 2.71% for the second quarter of 2005, an increase of approximately 100 basis points as compared to year-end 2004 levels, and approximately 132 basis points as compared to the second quarter of 2004. During the past six and twelve months, the Federal Reserve Board has increased the short term rates by 100 basis points and 225 basis points, respectively. The following table sets forth consolidated information regarding average balances and rates. 13
<TABLE> <CAPTION> DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL (DOLLARS IN THOUSANDS) Three months ended June 30, ----------------------------------- 2005 2004 ------------------------------- ------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------------------------------- ------------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS: Investment securities: Taxable $ 534,446 $ 3,915 2.94% $ 569,776 $ 4,106 2.90% Tax exempt (1) 188,716 1,951 4.15% 168,124 1,870 4.47% Mortgages - held for sale 76,839 1,151 6.01% 77,051 1,072 5.60% Net loans and leases (2 & 3) 2,325,183 34,379 5.93% 2,191,348 30,901 5.67% Other investments 17,064 127 2.98% 23,945 46 0.77% ------------------------------- ------------------------------- Total Earning Assets 3,142,248 41,523 5.30% 3,030,244 37,995 5.04% Cash and due from banks 85,701 78,131 Reserve for loan and lease losses (62,613) (70,077) Other assets 194,544 219,497 ------------- ----------- Total $ 3,359,880 $3,257,795 ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $ 2,206,994 $ 13,330 2.42% $2,038,843 $ 9,597 1.89% Short-term borrowings 296,979 2,006 2.71% 371,522 1,283 1.39% Subordinated notes 59,022 1,000 6.80% 56,444 962 6.85% Long-term debt and mandatorily redeemable securities 18,026 305 6.79% 23,091 138 2.40% ------------------------------- ------------------------------- Total Interest-Bearing Liabilities 2,581,021 16,641 2.59% 2,489,900 11,980 1.94% Noninterest-bearing deposits 396,596 393,282 Other liabilities 53,916 56,808 Shareholders' equity 328,347 317,805 ------------- ----------- Total $ 3,359,880 $3,257,795 ============= =========== -------- -------- Net Interest Income $ 24,882 $ 26,015 ======== ======== Net Yield on Earning Assets on a Taxable ----- ----- Equivalent Basis 3.18% 3.45% ===== ===== </TABLE> <TABLE> <CAPTION> DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL (DOLLARS IN THOUSANDS) Six months ended June 30, ----------------------------- 2005 2004 --------------------------------- ---------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate --------------------------------- ---------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS: Investment securities: Taxable $ 565,088 $ 7,733 2.76% $ 569,705 $ 8,395 2.96% Tax exempt (1) 185,114 3,802 4.14% 169,647 3,827 4.54% Mortgages - held for sale 66,086 1,934 5.90% 72,747 1,979 5.47% Net loans and leases (2 & 3) 2,301,846 67,295 5.90% 2,195,194 62,521 5.73% Other investments 15,413 204 2.67% 15,894 111 1.40% --------------------------------- ---------------------------- Total Earning Assets 3,133,547 80,968 5.21% 3,023,187 76,833 5.11% Cash and due from banks 83,080 77,703 Reserve for loan and lease losses (63,134) (70,109) Other assets 195,839 223,396 ------------- ----------- Total $ 3,349,332 $3,254,177 ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $ 2,209,069 $ 25,646 2.34% $2,046,342 $19,420 1.91% Short-term borrowings 294,904 3,708 2.54% 376,108 2,540 1.36% Subordinated notes 59,022 1,964 6.71% 56,444 1,923 6.85% Long-term debt and mandatorily redeemable securities 17,975 515 5.78% 23,076 460 4.01% --------------------------------- ---------------------------- Total Interest-Bearing Liabilities 2,580,970 31,833 2.49% 2,501,970 24,343 1.96% Noninterest-bearing deposits 387,312 376,617 Other liabilities 53,107 57,902 Shareholders' equity 327,943 317,688 ------------- ----------- Total $ 3,349,332 $3,254,177 ============= =========== --------- ------- Net Interest Income $ 49,135 $52,490 ========= ======= Net Yield on Earning Assets on a Taxable ----- ----- Equivalent Basis 3.16% 3.49% ===== ===== </TABLE> (1) Interest income includes the effects of taxable equivalent adjustments, using a 35% rate. Tax equivalent adjustments for the three month period were $615 in 2005 and $612 in 2004 and for the six month period were $1,202 in 2005 and $1,252 in 2004. (2) Loan and lease income includes fees on loans and leases for the three month period of ($331) in 2005 and $503 in 2004 and for the six month period of ($527) in 2005 and $1,329 in 2004. Loan and lease income also includes the effects of taxable equivalent adjustments, using 35% rate for 2005 and 2004. The tax equivalent adjustments for the three month period were $65 in 2005 and $69 in 2004 and for the six month period were $127 in 2005 and $142 in 2004. (3) For purposes of this computation, nonaccruing loans and leases are included in the daily average loan and lease amounts outstanding. 14
PROVISION AND RESERVE FOR LOAN AND LEASE LOSSES The provision for loan and lease losses for the three month periods ended June 30, 2005 and 2004 was ($3.41) million and $0.48 million, respectively, and ($3.83) million and $0.58 million for the six month periods ended June 30, 2005 and 2004, respectively. Net recoveries of $0.31 million were recorded for the second quarter 2005, compared to net charge-offs of $0.48 million for the same quarter a year ago. Year-to-date net charge-offs of $0.29 million have been recorded in 2005, compared to net charge-offs of $0.58 million through June 2004. In the second quarter 2005, 1st Source continued to experience improvement in credit quality. Loan and lease delinquencies were 0.53% on June 30, 2005, as compared to 0.64% on June 30, 2004, and 0.70% at the end of 2004. The reserve for loan and lease losses as a percentage of loans and leases outstanding at the end of the period was 2.50% as compared to 3.14% one year ago and 2.79% at December 31, 2004. A summary of loan and lease loss experienced during the three and six month periods ended June 30, 2005 and 2004, is provided below. <TABLE> <CAPTION> Summary of Reserve for Loan and Lease Losses ------------------------------------------------------------------- (Dollars in Thousands) Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------------------------- 2005 2004 2005 2004 --------------- ----------------- ------------- ------------- <S> <C> <C> <C> <C> Reserve for loan and lease losses - beginning balance $ 62,647 $ 70,045 $ 63,672 $ 70,045 Charge-offs (853) (2,854) (3,056) (4,427) Recoveries 1,164 2,372 2,763 3,844 --------------- ----------------- ------------- ------------- Net recoveries/(charge-offs) 311 (482) (293) (583) (Recovery of)/provision for loan and lease losses (3,411) 482 (3,832) 583 --------------- ----------------- ------------- ------------- Reserve for loan and lease losses - ending balance $ 59,547 $ 70,045 $ 59,547 $ 70,045 =============== ================= ============= ============= Loans and leases outstanding at end of period $ 2,380,614 $ 2,230,429 $ 2,380,614 $ 2,230,429 Average loans and leases outstanding during period 2,325,183 2,191,348 2,301,846 2,195,194 Reserve for loan and lease losses as a percentage of loans and leases outstanding at end of period 2.50% 3.14% 2.50% 3.14% Ratio of net recoveries/(charge-offs) during period to average loans and leases outstanding (0.05%) 0.09% 0.03% 0.05% </TABLE> 15
NONPERFORMING ASSETS Nonperforming assets were as follows: <TABLE> <CAPTION> (Dollars in thousands) June 30, December 31, June 30, 2005 2004 2004 --------- ----------- -------- <S> <C> <C> <C> Loans and leases past due 90 days or more $ 52 $ 481 $ 164 Nonaccrual and restructured loans and leases 19,447 25,253 22,210 Other real estate 1,067 1,307 2,184 Repossessions 411 4,382 3,222 Equipment owned under operating leases 1,088 1,785 118 --------- ----------- --------- Total nonperforming assets $ 22,065 $ 33,208 $ 27,898 ========= =========== ========= </TABLE> Nonperforming assets totaled $22.07 million at June 30, 2005, decreasing 33.56% from $33.21 million at December 31, 2004 and decreasing 20.91% from $27.90 million at June 30, 2004. The decrease during the first six months of 2005 was primarily related to a decrease in aircraft and commercial and agricultural nonaccrual loans and the liquidation of repossessions. Nonperforming assets as a percentage of total loans and leases improved to 0.91% at June 30, 2005, from 1.42% at December 31, 2004 and 1.22% at June 30, 2004. As of June 30, 2005, the Bank had a $3.69 million standby letter of credit outstanding that 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. As of June 30, 2005, repossessions consisted of automobiles, light trucks, construction equipment, and environmental equipment. As of December 31, 2004 and June 30, 2004, repossessions also included aircraft and aircraft parts. At the time of repossession, unless the equipment is in the process of immediate sale, 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. Any subsequent write-downs are included in noninterest expense. <TABLE> <CAPTION> SUPPLEMENTAL LOAN INFORMATION AS OF JUNE 30, 2005 (Dollars in thousands) Nonaccrual Other real estate Year-to-date Loans and leases and owned and net credit losses/ outstanding restructured loans repossessions recoveries ---------------- ------------------ ----------------- --------------- <S> <C> <C> <C> <C> Commercial and agricultural loans $ 438,880 $ 5,280 $ - $ (103) Auto, light truck and environmental equipment 311,746 2,180 305 (53) Medium and heavy duty truck 290,597 75 15 (61) Aircraft financing 447,089 7,263 - 222 Construction equipment financing 209,785 3,313 52 (619) Loans secured by real estate 575,125 878 1,067 39 Consumer loans 107,392 458 39 94 ------------- ------------------ ----------------- --------------- Total $2,380,614 $ 19,447 $ 1,478 $ (481) ============= ================== ================= =============== </TABLE> 16
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 gains and 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 June 30, 2005 and 2004 was $15.40 million and $20.22 million, respectively, and $33.09 million and $34.24 million for the six month periods ended June 30, 2005 and 2004, respectively. The predominant factor behind the decrease in 2005 was a reduction in mortgage banking income. <TABLE> <CAPTION> (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ---------------------- ------------------------- 2005 2004 2005 2004 <S> <C> <C> <C> <C> Noninterest income: Trust fees $ 3,285 $ 3,140 $ 6,531 $ 6,230 Service charges on deposit accounts 4,251 4,115 8,214 7,821 Mortgage banking income 1,551 6,236 4,318 5,345 Insurance commissions 833 763 1,997 1,725 Equipment rental income 3,927 4,927 7,942 10,751 Other income 1,546 1,078 3,182 2,658 Investment securities and other investment gains (losses) 5 (38) 909 (290) --------- --------- --------- -------- Total noninterest income $ 15,398 $ 20,221 $ 33,093 $ 34,240 ========= ========= ========= ========= </TABLE> During the second quarter of 2005, mortgage banking income decreased primarily due to mortgage servicing rights impairment of $0.48 million as compared to mortgage servicing rights impairment recovery of $3.78 million for the same period in 2004. Mortgage servicing rights impairments were comparable on a year-over-year basis. Additionally, mortgage banking income was negatively impacted during the second quarter, and year-to-date, by a continued decline in origination volume and decreased gains on sales of loans into the secondary market as compared to the second quarter of 2004. Trust fees, insurance commissions and service charges on deposit accounts increased in both the three and six month periods ended June 30, 2005, over the same periods in 2004. Trust fees increased due to growth in assets under management and improvement in the equity markets. Insurance commissions increased due to growth in commercial lines and higher premiums. For both the three and six month periods ended June 30, 2005 as compared to the same periods in 2004, equipment rental income decreased due to the decrease in the operating lease portfolio and other income increased due to decreased trading security losses. Investment security and other investment gains were mainly due to the effects of market value adjustments of venture capital investments. NONINTEREST EXPENSE Noninterest expense for the three month periods ended June 30, 2005 and 2004 was $30.63 million and $31.95 million, respectively, and $62.30 million and $64.29 million for the six month periods ended June 30, 2005 and 2004, respectively. The decrease in noninterest expense in 2005 was primarily due to 17
decreased loan and lease collection and repossession expense, depreciation on leased equipment, and professional fees. The decrease in noninterest expense was partially offset by increased salaries and employee benefits. <TABLE> <CAPTION> (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ------------------------ --------------------------- 2005 2004 2005 2004 <S> <C> <C> <C> <C> Noninterest expense: Salaries and employee benefits $ 17,090 $ 15,866 $ 35,634 $ 31,620 Net occupancy expense 1,732 1,725 3,834 3,558 Furniture and equipment expense 2,844 2,697 5,486 5,281 Depreciation - leased equipment 3,194 3,883 6,517 8,419 Professional fees 685 2,405 1,484 3,966 Supplies and communication 1,321 1,451 2,664 2,883 Business development and marketing expense 910 1,023 1,520 1,655 Intangible asset amortization 670 657 1,328 1,315 Loan and lease collection and repossession expense 318 821 184 1,876 Other expense 1,862 1,417 3,649 3,714 ----------- ----------- ----------- -------------- Total noninterest expense $ 30,626 $ 31,945 $ 62,300 $ 64,287 =========== =========== =========== ============== </TABLE> The increase in salaries and employee benefits was caused primarily by higher executive incentive and compensated absences accruals and increased group insurance costs for the first six months of 2005 as compared to the first six months of 2004. Professional fees decreased as of June 30, 2005, as compared to June 30, 2004. The decrease was primarily due to the settlement, during the fourth quarter of 2004, of the lawsuit described in the 2003 Form 10-K Item 3, Legal Proceedings and a reduction of associated legal fees. Loan and lease collection and repossession expense decreased on a year-over-year basis as gains on disposition of repossessed assets increased and valuation adjustments related to repossessed assets decreased. Second quarter and year-to-date net occupancy expense, furniture and equipment expense, supplies and communication, and business development and marketing expense, all remained comparable to 2004 levels. Leased equipment depreciation decreased due to the decrease in the operating lease portfolio. INCOME TAXES 1st Source recognized income tax expense for the three and six months ended June 30, 2005, of $4.16 million and $7.26 million, for effective rates of 33.57% and 32.37%, compared to $4.41 million and $6.67 million, for effective rates of 33.59% and 32.59%, for the three and six months ended June 30, 2004. The effective income tax rate rose as a result of the increase in pretax income. 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, 2004. 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, 2004. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, 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 18
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 June 30, 2005, 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. In addition, there were no changes in 1st Source's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the second fiscal quarter of 2005 that have materially affected, or are reasonably likely to materially affect, 1st Source's 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 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. ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds <TABLE> <CAPTION> 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 (1) the plans or programs - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> April 01 - 30, 2005 0 0 0 612,984 May 01 - 31, 2005 63,581 22.44 63,581 549,403 June 01 - 30, 2005 0 0 0 549,403 </TABLE> (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 489,587 shares. ITEM 3. Defaults Upon Senior Securities. None 19
ITEM 4. Submission of Matters to a Vote of Security Holders. The following actions were taken by the shareholders of 1st Source at the annual shareholders' meeting held April 28, 2005: 1. Election of Directors The directors named below were elected to the board of directors for terms expiring in April 2008, as follows: Nominee Votes For Votes Withheld ------- --------- -------------- Lawrence E. Hiler 20,316,135 71,664 Rex Martin 20,316,220 32,506 Christopher J. Murphy III 20,315,927 185,501 Timothy K. Ozark 20,316,220 70,983 In addition, the following directors continued in office after the 2005 annual meeting: Terms Expiring in April 2006: Terms Expiring in April 2007: Terry L. Gerber David C. Bowers William P. Johnson Daniel B. Fitzpatrick Craig A. Kapson Wellington D. Jones III John T. Phair Dane A. Miller Mark D. Schwabero Toby S. Wilt ITEM 5. Other Information. None ITEM 6. Exhibits 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. 20
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 July 28, 2005 /s/CHRISTOPHER J. MURPHY III ------------- ----------------------------------- Christopher J. Murphy III Chairman of the Board, President and CEO DATE July 28, 2005 /s/LARRY E. LENTYCH ------------- ------------------- Larry E. Lentych Treasurer and Chief Financial Officer Principal Accounting Officer 21