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, 2003 ---------------------------- OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________to________________ Commission file number 0-6233 1st SOURCE CORPORATION ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) INDIANA 35-1068133 - -------------------------------- -------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 North Michigan Street South Bend, Indiana 46601 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (574) 235-2702 (Registrant's telephone number, including area code) Not Applicable ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No______ 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 March 31, 2003 - 21,071,759 shares.
<TABLE> <CAPTION> INDEX PART I. FINANCIAL INFORMATION Page ---- <S> <C> <C> Item 1. Financial Statements (Unaudited) Consolidated statements of financial condition -- March 31, 2003, and December 31, 2002 3 Consolidated statements of income -- three months ended March 31, 2003 and 2002 4 Consolidated statements of cash flows -- three months ended March 31, 2003 and 2002 5 Notes to the Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Controls and Procedures 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6(a). Exhibits 16 Exhibit 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 Exhibit 99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 Item 6(b). Reports on Form 8-K 16 SIGNATURES 17 CERTIFICATIONS 18 </TABLE> 2
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 1st Source Corporation and Subsidiaries (Unaudited - Dollars in thousands) March 31, December 31, ASSETS 2003 2002 ----------- ---------- <S> <C> <C> Cash and due from banks $ 125,880 $ 120,894 Federal funds sold and interest bearing deposits with other banks 1,693 81,881 Investment securities available-for-sale, at fair value: (amortized cost of $651,935 and $640,224 at March 31, 2003 and December 31, 2002) 659,010 647,617 Trading account securities 13,539 13,347 Loans - net of unearned discount Commercial and agricultural 430,379 428,367 Truck and automobile financing 450,574 445,195 Aircraft financing 295,428 323,802 Construction equipment financing 290,341 303,126 Loans secured by real estate 548,487 567,950 Mortgages held for sale 146,932 146,640 Consumer loans 101,704 111,012 ------------ ------------ Total Loans 2,263,845 2,326,092 Reserve for loan losses (61,843) (59,218) ----------- ----------- Net loans 2,202,002 2,266,874 Equipment owned under operating leases, net of accumulated depreciation 87,157 93,893 Net premises and equipment 40,120 40,899 Other assets 146,445 142,063 ------------ ------------ Total assets $3,275,846 $3,407,468 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing $ 425,924 $ 419,289 Interest bearing 2,171,132 2,293,616 ---------- ---------- Total deposits 2,597,056 2,712,905 Federal funds purchased and securities sold under agreements to repurchase 199,538 212,040 Other short-term borrowings 40,327 48,638 Long-term debt 17,390 16,878 Guaranteed preferred beneficial interests in the Company's subordinated debentures 54,750 54,750 Other liabilities 53,243 52,828 ------------- ------------ Total liabilities 2,962,304 3,098,039 Shareholders' equity: Preferred stock-no par value - - Common stock-no par value 7,578 7,579 Capital surplus 214,001 214,001 Retained earnings 93,123 90,897 Cost of common stock in treasury (5,552) (7,637) Accumulated other comprehensive income 4,392 4,589 -------------- ------------ Total shareholders' equity 313,542 309,429 ------------ ------------ Total liabilities and shareholders' equity $3,275,846 $3,407,468 ========== ========== The accompanying notes are a part of the consolidated financial statements. </TABLE> 3
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME 1st Source Corporation and Subsidiaries (Unaudited - Dollars in thousands, except per share amounts) Three Months Ended March 31, 2003 2002 ---------- ---------- <S> <C> <C> Interest and fee income: Loans $ 36,610 $ 45,190 Investment securities: Taxable 4,534 5,736 Tax-exempt 1,435 1,542 Other 150 71 ---------- ---------- Total interest income 42,729 52,539 Interest expense: Deposits 13,771 19,679 Short-term borrowings 1,264 1,317 Guaranteed preferred beneficial interests in the Company's subordinated debentures 940 791 Long-term debt 198 211 ---------- ---------- Total interest expense 16,173 21,998 ---------- ---------- Net interest income 26,556 30,541 Provision for loan losses 5,550 11,809 ---------- ---------- Net interest income after provision for loan losses 21,006 18,732 Noninterest income: Trust fees 2,640 2,660 Service charges on deposit accounts 3,724 3,471 Loan servicing and sale income 3,206 2,455 Equipment rental income 6,771 7,280 Other income 3,978 3,304 Investment securities and other investment (losses) (280) (488) ---------- ---------- Total noninterest income 20,039 18,682 ---------- ---------- Noninterest expense: Salaries and employee benefits 17,247 16,578 Net occupancy expense 1,864 1,702 Furniture and equipment expense 2,641 2,729 Depreciation - leased equipment 5,358 6,147 Supplies and communications 1,511 1,667 Business development and marketing expense 709 600 Other expense 5,472 2,822 ---------- ---------- Total noninterest expense 34,802 32,245 ---------- ---------- Income before income taxes 6,243 5,169 Income taxes 1,783 961 ---------- ---------- Net income $ 4,460 $ 4,208 ============= ============ Other comprehensive income, net of tax: Change in unrealized appreciation (depreciation) of available-for-sale securities (197) (2,353) ---------- ---------- Total comprehensive income $ 4,263 $ 1,855 ============= ============ Per common share: Basic net income per common share $ 0.21 $ 0.20 ============== ============== Diluted net income per common share $ 0.21 $ 0.20 ============== ============== Dividends $ 0.090 $ 0.090 ============= ============= Basic weighted average common shares outstanding 21,000,317 20,867,694 ========== ========== Diluted weighted average common shares outstanding 21,331,419 21,242,149 ========== ========== The accompanying notes are a part of the consolidated financial statements. </TABLE> 4
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS 1st Source Corporation and Subsidiaries (Unaudited - Dollars in thousands) Three Months Ended March 31, 2003 2002 ----------- --------- <S> <C> <C> <C> <C> Operating activities: Net income $ 4,460 $ 4,208 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,550 11,809 Depreciation of premises and equipment 6,682 7,492 Amortization of investment security premiums and accretion of discounts, net 1,287 1,097 Amortization of mortgage servicing rights 1,870 1,388 Mortgage servicing asset impairment charges 1,777 - Deferred income taxes (352) 1,514 Realized investment securities losses 280 488 Realized gains on securitized loans (1,016) (1,834) Change in trading account securities (192) - Change in interest receivable 381 106 Change in interest payable 648 (2,679) Other (2,747) (2,764) ------------ ----------- Net cash from operating activities 18,628 20,825 Investing activities: Proceeds from sales and maturities of investment securities 88,687 77,232 Purchases of investment securities (101,965) (83,996) Net decrease in short-term investments 80,188 16,417 Loans sold or participated to others 179,175 107,000 Increase in loans net of principal collections (119,853) (112,927) Net decrease (increase) in equipment owned under operating leases 1,378 (4,297) Purchases of premises and equipment (795) (1,319) Increase in other assets (2,515) (1,205) Other 249 416 ----------- ----------- Net cash from investing activities 124,549 (2,679) Financing activities: Net decrease in demand deposits, NOW accounts and savings accounts (89,332) (108,349) Net decrease in certificates of deposits (26,517) (55,469) Net (decrease) increase in short-term borrowings (20,813) 84,993 Proceeds from issuance of long-term debt 527 16 Payments on long-term debt (16) (72) Acquisition of treasury stock (154) (1,820) Cash dividends (1,886) (1,877) ------------ ------------ Net cash from financing activities (138,191) (82,578) Net change in cash and cash equivalents (4,986) (64,432) Cash and cash equivalents, beginning of period 120,894 129,431 ------------ ------------ Cash and cash equivalents, end of period $ 125,880 $ 64,999 =========== ========== The accompanying notes are a part of the consolidated financial statements. </TABLE> 5
1ST SOURCE CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements reflect all adjustments ( all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. The Notes to the Consolidated Financial Statements appearing in 1st Source Corporation's Annual Report on Form 10-K (2002 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, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on total assets, shareholders' equity or net income as previously reported. 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 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 below use the fair value method of SFAS 123 to measure compensation expense for stock-based employee compensation plans. 6
<TABLE> <CAPTION> Three Months Ended March 31, 2003 2002 ------- ------- <S> <C> <C> Net Income, as reported (dollars in thousands) $ 4,460 $ 4,208 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects - 394 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (37) (462) ------- ------ Pro forma net income $ 4,423 $4,140 ======= ====== Earnings per share: Basic - as reported $ 0.21 $ 0.20 Basic - pro forma 0.21 0.20 Diluted - as reported 0.21 0.20 Diluted - pro forma 0.21 0.20 </TABLE> Note 2. Recent Accounting Pronouncements Consolidation of Variable Interest Entities: In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities." The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the entity's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of this interpretation became effective upon issuance. As of March 31, 2003 and December 31, 2002, 1st Source had a variable interest in a securitization trust. This trust is a qualifying special purpose entity, which is exempt from the consolidation requirements of FIN 46. 1st Source does not expect the requirements of FIN 46 to have a material impact on the results of operations, financial position, or liquidity. Guarantees: In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002, and were adopted in 1st Source's 2002 Annual Report. Implementation of the remaining provisions of FIN 45 during the first quarter of 2003 did not have a significant impact on the financial statements. 7
Note 3. Reserve for Loan Losses The reserve for loan losses is maintained at a level believed to be adequate by management to absorb probable losses inherent in the loan portfolio. The determination of the reserve requires significant judgement reflecting management's best estimate of probable loan losses related to specifically identified loans as well as probable losses in the remainder of the various loan portfolios. The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for identified special attention loans (classified loans and leases and internal watch list credits), percentage allocations for special attention loans without specific reserves, formula reserves for each business lending division portfolio including a higher percentage reserve allocation for special attention loans without a specific reserve and reserves for pooled homogenous loans. Management's evaluation is based upon a continuing review of these portfolios, estimates of future customer performance, collateral values and disposition and forecasts of future economic and geopolitical events, all of which are subject to judgement and will change. Note 4. Financial Instruments with Off-Balance-Sheet Risk To meet the financing needs of its customers, 1st Source and its subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business. These off-balance-sheet financial instruments include commitments to originate, purchase and sell loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. 1st Source's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments and standby letters of credit is represented by the dollar amount of those instruments. 1st Source uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments. Trustcorp Mortgage Company and 1st Source Bank, subsidiaries of 1st Source, grant mortgage loan commitments to borrowers, subject to normal loan underwriting standards. The interest rate risk associated with these loan commitments is managed by entering into contracts for future deliveries of loans. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional commitments issued by 1st Source to guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. As of March 31, 2003 and December 31, 2002, 1st Source and its subsidiaries had commitments outstanding to originate and purchase loans aggregating $429.00 million and $364.00 million, respectively. Outstanding commitments to sell loans aggregated $284.00 million at March 31, 2003 and $240.00 million at December 31, 2002. Standby letters of credit totaled $118.94 million and $117.21 million at March 31, 2003 and December 31, 2002, respectively. Standby letters of credit have terms ranging from six months to one year. 8
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 laws; regulations or accounting principles generally accepted in the United States; 1st Source's competitive position within its markets served; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen 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 Securities and Exchange Commission, including its Annual Report on Form 10-K, which filings are available from the SEC. 1st Source undertakes no obligation to publicly update or revise any forward-looking statements. The following management's discussion and analysis is presented to provide information concerning the financial condition of 1st Source as of March 31, 2003, as compared to December 31, 2002, and the results of operations for the three months ended March 31, 2003 and 2002. 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 2002 Annual Report. FINANCIAL CONDITION 1st Source's assets at March 31, 2003 were $3.28 billion, down 3.9% from December 31, 2002. Total loans were down 2.7% and total deposits decreased 4.3% over the comparable figures at the end of 2002. Nonperforming assets at March 31, 2003, were $69.8 million compared to $64.1 million at December 31, 2002, an increase of 8.9%. At March 31, 2003, nonperforming assets were 2.97% of net loans and leases compared to 2.65% at December 31, 2002. Loans are reported at the principal amount outstanding, net of unearned income. Loans identified as held-for-sale are carried at the lower of cost or market determined on an aggregate basis. As of March 31, 2003 and December 31, 2002, the carrying value of mortgage servicing rights was $20.6 million and $20.8 million, respectively. 9
CAPITAL RESOURCES Shareholders' equity was $313.5 million, up 1.3% from the $309.4 million at December 31, 2002. As of March 31, 2003, the 1st Source equity-to-assets ratio was 9.6%, compared to 9.1% at the end of 2002. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution. These guidelines require all banks to maintain a minimum leverage capital ratio of 4.00% for adequately capitalized banks and 5.00% for well-capitalized banks. 1st Source's leverage capital ratio was 10.36% at March 31, 2003. The Federal Reserve Board has established risk-based capital guidelines for U.S. banking organizations. The guidelines established a conceptual framework calling for risk weights to be assigned to on and off-balance sheet items in arriving at risk-adjusted total assets, with the resulting ratio compared to a minimum standard to determine whether a bank has adequate capital. The minimum standard risk-based capital ratios effective in 2003 are 4.00% for adequately capitalized banks and 6.00% for well-capitalized banks for Tier 1 risk-based capital and 8.00% and 10.00%, respectively, for total risk-based capital. 1st Source's Tier 1 risk-based capital ratio on March 31, 2003 was 12.21% and the total risk-based capital ratio was 13.53%. LIQUIDITY AND INTEREST RATE SENSITIVITY Asset and liability management includes the management of interest rate sensitivity and the maintenance of an adequate liquidity position. The purpose of liquidity management is to match the sources and uses of funds to anticipated customers' deposits and withdrawals, to anticipate borrowing requirements and to provide for the cash flow needs of 1st Source. The purpose of interest rate sensitivity management is to stabilize net interest income during periods of changing interest rates. Close attention is given to various interest rate sensitivity gaps and interest rate spreads. Maturities of rate sensitive assets are relative to the maturities of rate sensitive liabilities and interest rate forecasts. At March 31, 2003, the consolidated statement of financial condition was rate sensitive by $154.34 million more assets than liabilities scheduled to reprice within one year or approximately 1.09%. RESULTS OF OPERATIONS --------------------- NET INCOME Net income for the three months ended March 31, 2003, was $4.46 million compared to $4.21 million for the equivalent period in 2002. The increase in net income for the three months ended March 31, 2003 was attributed to a lower provision for loan losses, offset by a decrease in net interest income and an increase in collection and repossession expense. Diluted net income per common share was $0.21 for the three months ended March 31, 2003, compared to $0.20 for the same period in 2002. Return on average common shareholders' equity was 5.80% for the three months ended March 31, 2003, compared to 5.47% in 2002. The return on total average assets was 0.55% for the three months ended March 31, 2003, compared to 0.49% in 2002. 10
NET INTEREST INCOME The taxable equivalent net interest income for the three months ended March 31, 2003, was $27.31 million a decrease of 12.85% over the same period in 2002. The net interest margin on a fully taxable equivalent basis was 3.72% for the three months ended March 31, 2003 compared to 4.00% for the three months ended March 31, 2002. The decrease in net interest margin was due to reduced earning assets and reduced asset yields, reflecting the effect of fewer loans in our Specialty Finance Group and lower market interest rates. Total average earning assets decreased 6.24% for the three months ended March 31, 2003, over the comparative period in 2002. Average loan outstandings decreased by 9.66% for the three-month period, compared to the same period in 2002, due primarily to decreased loan volume in commercial loans secured by transportation and construction equipment. Total average investment securities increased 1.09% for the three-month period over one year ago primarily due to an increase in municipal securities partially offset by a decrease of investments in U.S. Government Securities. The taxable equivalent yields on total average earning assets were 5.92% and 6.81% for the three-month periods ended March 31, 2003 and 2002, respectively. Average interest bearing deposits decreased 9.89% for the three-month period over the same period from 2002 due to a decrease in public funds and brokered deposits. These higher cost deposits were not pursued due to lower funding needs. The rate on average interest-bearing funds was 2.61% and 3.21% for the three months ended March 31, 2003 and 2002. The following table sets forth consolidated information regarding average balances and rates. 11
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31, 2003 2002 --------------------------------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate --------------------------------------- --------------------------------------- ASSETS: <S> <C> <C> <C> <C> <C> <C> Investment securities: Taxable $ 492,416 $4,534 3.73% $ 502,930 $ 5,736 4.63% Tax exempt (1) 163,765 2,114 5.24% 146,186 2,262 6.28% Net loans (2 & 3) 2,277,072 36,687 6.53% 2,520,565 45,269 7.28% Other investments 43,546 150 1.39% 5,186 71 5.55% ----------- --------- ----- ----------- --------- ----- Total Earning Assets 2,976,799 43,485 5.92% 3,174,867 53,338 6.81% Cash and due from banks 85,977 87,320 Reserve for loan losses (61,091) (58,768) Other assets 272,195 285,900 ----------- ----------- Total $3,273,880 $3,489,319 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $2,191,132 $13,771 2.55% $2,431,634 $19,679 3.28% Short-term borrowings 252,967 1,264 2.03% 292,976 1,317 1.82% Guaranteed preferred beneficial interest in the Company's subordinated debentures 54,750 940 6.96% 44,750 791 7.17% Long-term debt 17,496 198 4.59% 11,905 211 7.19% ----------- --------- ----- ----------- -------- ----- Total Interest Bearing Liabilities 2,516,345 16,173 2.61% 2,781,265 21,998 3.21% Noninterest bearing deposits 391,860 336,784 Other liabilities 53,857 59,561 Shareholders' equity 311,818 311,709 ----------- ----------- Total $3,273,880 $3,489,319 ========== ========== Net Interest Income $27,312 $31,340 ======= ======= Net Yield on Earning Assets on a Taxable Equivalent Basis 3.72% 4.00% ===== ===== </TABLE> (1) Interest income includes the effects of taxable equivalent adjustments, using a 35% rate. Tax equivalent adjustments were $679 in 2003 and $720 in 2002. (2) Loan income includes fees of $1,196 in 2003 and $1,528 in 2002. Loan income also includes the effects of taxable equivalent adjustments, using a 35% rate for 2003 and 2002. The tax equivalent adjustments were $77 in 2003 and $79 in 2002. (3) For purposes of this computation, non-accruing loans are included in the daily average loan amounts outstanding. 12
PROVISION AND RESERVE FOR LOAN LOSSES The provision for loan losses for the first quarter of 2003 decreased to $5.55 million compared to $11.81 million for the first quarter of 2002. Net charge-offs of $2.93 million have been recorded for the period ended March 31, 2003, as compared to $11.54 million for the same period of 2002 and $38.06 million for the year ended December 31, 2002. Loan delinquencies have decreased to 1.29% on March 31, 2003 as compared to 2.35% on March 31, 2002 and 1.85% at the end of 2002. The Specialty Finance Group's focus on the transportation industry exposes 1st Source to a series of cyclical businesses which can have the potential to experience periods of high losses. During the first quarter of 2003, credit quality stabilized resulting in lower provision for loan losses and lower charge-offs. A summary of loan loss experience during the three months ended March 31, 2003 and 2002 and for the year ended December 31, 2002 is provided below. <TABLE> <CAPTION> Summary of Reserve for Loan Losses (Dollars in Thousands) Three Months Year Ended Ended March 31, December 31, --------------------------------- ------------ 2003 2002 2002 ---------- ---------- ------------ <S> <C> <C> <C> Reserve for loan losses - beginning balance $ 59,218 $ 57,624 $57,624 Charge-offs (3,670) (12,739) (41,721) Recoveries 745 1,198 3,658 ---------- ---------- --------- Net charge-offs (2,925) (11,541) (38,063) Provision for loan losses 5,550 11,809 39,657 --------- --------- --------- Reserve for loan losses - ending balance $ 61,843 $ 57,892 $ 59,218 ======== ======== ======== Loans outstanding at end of period $2,263,845 $2,529,006 $2,326,092 Average loans outstanding during period 2,277,072 2,520,565 2,451,538 Reserve for loan losses as a percentage of loans outstanding at end of period 2.73% 2.29% 2.55% Ratio of net charge-offs during period to average loans outstanding 0.52% 1.86% 1.55% </TABLE> It is management's opinion that the reserve for loan losses is adequate to absorb losses inherent in the loan portfolio as of March 31, 2003. 13
<TABLE> <CAPTION> NONPERFORMING ASSETS Nonperforming assets were as follows: March 31, March 31, December 31, 2003 2002 2002 ---------- ---------- ------------ <S> <C> <C> <C> Loans past due 90 days or more $ 569 $ 515 $ 154 Non-accrual and restructured loans 39,297 40,686 35,664 Other real estate owned 5,667 4,196 4,362 Repossessions 22,734 6,461 21,343 Operating Leases 1,563 1,361 2,594 ---------- -------- ------- Total nonperforming assets $ 69,830 $ 53,219 $ 64,117 ======== ======== ========= </TABLE> Nonperforming assets totaled $69.8 million at March 31, 2003, increasing 8.91% from $64.1 million at December 31, 2002 and increasing 31.2% from $53.2 million at March 31, 2002. Nonperforming assets as a percentage of total loans and leases increased to 2.97% at March 31, 2003 from 2.65% at December 31, 2002 and 2.01% at March 31, 2002. The increase during the first quarter was primarily related to aircraft and truck loans. Repossessions continue to primarily consist of aircraft. These aircraft have come from defaulted loans to the air cargo operators and aircraft dealers. There are also automobiles, light trucks, construction equipment and environmental equipment in repossessed assets at March 31, 2003. At the time of repossession, the recorded amount of the loan is written down, if necessary, to the estimated value of the equipment or vehicle by a charge to the reserve for loan losses, unless the equipment is in the process of immediate sale. Subsequent write-downs are included in noninterest expense. Repossessed assets have a valuation completed by either the sales officer or a third party. The estimated value is determined on an orderly liquidation basis. Sources typically include vehicle and equipment dealers, valuation guides and other third parties, including appraisers. A number of variables can lead to a decrease in value after the asset is repossessed. These include deterioration in the market, discovery of new/additional information, and validity or invalidity of prior liens. Valuation adjustments of $787,000 were recorded in the three-month period ended March 31, 2003. NONINTEREST INCOME Noninterest income for the three-month periods ended March 31, 2003, and 2002, was $20.04 million and $18.68 million, respectively, an increase of 7.26%. The increase in noninterest income is attributed to higher mortgage revenue as mortgage refinancings continued and marketing gains more than offset mortgage servicing rights impairment. For the first quarter of 2003 loan servicing and sale income increased 30.59%. Trust fees decreased 0.75%, service charges on deposit accounts increased 7.29%, equipment rental income decreased 6.99% and other income increased 20.40%. Generally, overdraft fees and debit card fees accounted for the increase in service charges on deposit accounts, and equipment rental income decreased due to the decrease in the operating lease portfolio. The increase in other income is due to increased insurance commissions and trading security income. Investment security and other investment losses of $280,000 were recorded in the first quarter of 2003 compared to net losses of $488,000 in the first quarter of 2002. 14
NONINTEREST EXPENSE Noninterest expense for the three-month periods ended March 31, 2003, and 2002, was $34.80 million and $32.25 million, respectively, an increase of 7.93%. Salaries and employee benefits increased 4.04% for the three months ended March 31, 2003 over the same period in 2002. The increase was due to an increase in group insurance expense and mortgage commission expense. Net occupancy expense increased 9.52%, due to the accrual of lease termination payments for three branches that were closed as of March 31, 2003. Furniture and equipment expense decreased 3.22%, depreciation on leased equipment decreased 12.84%, supplies and communications expense decreased 9.36%, business development and marketing expense increased 18.17% and other expense increased 93.91%. The decrease in depreciation of leased equipment is due to the decrease in the operating lease portfolio from the prior year. The increase in other expense is attributed primarily to repossession and collection expenses and the amortization of the core deposit premium relating to the branch acquisitions occurring in late 2001. INCOME TAXES The provision for income taxes for the three months ended March 31, 2003, was $1.78 million, compared to $0.96 million for the comparable period in 2002. The provision for income taxes for the three months ended March 31, 2003, and 2002, 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 significant changes in market risks faced by 1st Source since December 31, 2002. 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, 2002. ITEM 4. CONTROLS AND PROCEDURES (a) Within 90 days prior to the date of 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 disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that 1st Source's disclosure controls and procedures are effective in timely alerting them to material information relating to 1st Source (including its consolidated subsidiaries) required to be included in 1st Source's periodic SEC filings. (b) Subsequent to the date of this evaluation, there have been no changes in 1st Source's internal controls or in other factors that could significantly affect these controls, and no discoveries of any significant deficiencies or material weaknesses in such controls that would require 1st Source to take corrective actions. 15
PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. 1st Source and its subsidiaries are defendants in various legal proceedings arising in the normal course of business. In the opinion of management, based upon present information including the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on 1st Source's financial condition or results of operations. ITEM 2. Changes in Securities. None 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(a).Exhibits Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. ITEM 6(b). Reports on Form 8-K. A report on Form 8-K, dated February 10, 2003, was filed under report item numbers 5 and 7, concerning 1st Source's results of operations for the year ended December 31, 2002. 16
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 04/30/03 /s/ Christopher J. Murphy III ----------- ---------------------------------- Christopher J. Murphy III Chairman of the Board, President and CEO DATE 04/30/03 /s/ Larry E. Lentych ------------ ---------------------------------- Larry E. Lentych Treasurer and Chief Financial Officer Principal Accounting Officer 17
CERTIFICATIONS I, Christopher J. Murphy III, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of 1st Source Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 30, 2003 /s/ Christopher J. Murphy III - ------------------------------ Christopher J. Murphy III Chief Executive Officer 18
I, Larry E. Lentych, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of 1st Source Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 30, 2003 /s/ Larry E. Lentych - ---------------------- Larry E. Lentych Chief Financial Officer 19
EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of 1st Source Corporation (the "Company") on Form 10-Q for the quarterly period ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christopher J. Murphy III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Christopher J. Murphy III --------------------------------- Christopher J. Murphy III Chief Executive Officer April 30, 2003 A signed original of this written statement required by Section 906 has been provided to 1st Source and will be retained by 1st Source and furnished to the Securities and Exchange Commission or its staff upon request. 20
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of 1st Source Corporation (the "Company") on Form 10-Q for the quarterly period ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Larry E. Lentych, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Larry E. Lentych -------------------------------------------- Larry E. Lentych Chief Financial Officer April 30, 2003 A signed original of this written statement required by Section 906 has been provided to 1st Source and will be retained by 1st Source and furnished to the Securities and Exchange Commission or its staff upon request. 21