FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ------------------ 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) (219) 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 ----- ----- Number of shares of common stock outstanding as of June 30, 2001 - 20,779,870 shares.
INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Page Consolidated statements of financial condition -- 3 June 30, 2001, and December 31, 2000 Consolidated statements of income -- 4 three months and six months ended June 30, 2001 and 2000 Consolidated statements of cash flows -- 5 six months ended June 30, 2001 and 2000 Notes to the Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II.OTHER INFORMATION 15 SIGNATURES 16 - 2 -
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 1st Source Corporation and Subsidiaries (Unaudited - Dollars in thousands) June 30, December 31, 2001 2000 ----------- ----------- ASSETS Cash and due from banks .......................... $ 130,481 $ 118,123 Federal funds sold and interest bearing deposits with other banks ..... 1,360 901 Investment securities: Securities available-for-sale, at fair value (amortized cost of $559,903 and $503,238 at June 30, 2001 and December 31, 2000)...... 565,497 503,910 Securities held-to-maturity, at amortized cost (fair value of $0 and $60,332 at June 30, 2001 and December 31, 2000) ........ -- 59,212 ----------- ----------- Total investment securities ...................... 565,497 563,122 Loans - net of unearned discount ................. 2,508,246 2,309,062 Reserve for loan losses ........................ (50,901) (44,644) ----------- ----------- Net loans ........................................ 2,457,345 2,264,418 Equipment owned under operating leases, net of accumulated depreciation 98,185 84,892 Premises and equipment, net of accumulated depreciation ............... 35,331 33,583 Other assets ..................................... 118,015 117,142 ----------- ----------- Total assets ..................................... $ 3,406,214 $ 3,182,181 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing ............................ $ 284,043 $ 293,564 Interest bearing ............................... 2,397,958 2,169,160 ----------- ----------- Total deposits ................................... 2,682,001 2,462,724 Federal funds purchased and securities sold under agreements to repurchase ............ 221,573 192,307 Other short-term borrowings ...................... 96,085 141,083 Other liabilities ................................ 53,679 58,685 Long-term debt ................................... 12,165 12,060 ----------- ----------- Total liabilities ................................ 3,065,503 2,866,859 Guaranteed preferred beneficial interests in 1st Source's subordinated debentures ........ 44,750 44,750 Shareholders' equity: Common stock-no par value ...................... 7,227 7,227 Capital surplus ................................ 195,197 195,197 Retained earnings .............................. 99,488 80,881 Less cost of common stock in treasury .......... (12,898) (14,954) Accumulated other comprehensive income ......... 6,947 2,221 ----------- ----------- Total shareholders' equity ....................... 295,961 270,572 ----------- ----------- Total liabilities and shareholders' equity ....... $ 3,406,214 $ 3,182,181 =========== =========== The accompanying notes are a part of the consolidated financial statements. - 3 -
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME 1st Source Corporation and Subsidiaries (Unaudited - Dollars in thousands, except per share amounts) Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Interest and fee income: Loans ...................................................... $ 54,814 $ 50,467 $ 108,653 $ 96,425 Investment securities: Taxable ................................................ 5,877 5,392 11,720 10,453 Tax-exempt ............................................. 1,752 2,053 3,504 3,994 Other .................................................. 114 153 277 242 ------------ ------------ ------------ ------------ Total interest income ....................................... 62,557 58,065 124,154 111,114 Interest expense: Deposits ................................................. 28,940 26,520 57,898 49,685 Short-term borrowings .................................... 3,740 4,833 8,991 9,297 Long-term debt ........................................... 219 224 437 445 ------------ ------------ ------------ ------------ Total interest expense ...................................... 32,899 31,577 67,326 59,427 ------------ ------------ ------------ ------------ Net interest income ......................................... 29,658 26,488 56,828 51,687 Provision for loan losses ................................... 4,464 4,678 11,759 8,596 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses ................................ 25,194 21,810 45,069 43,091 Noninterest income: Trust fees ............................................... 2,463 2,509 4,931 4,830 Service charges on deposit accounts ...................... 2,837 1,915 5,276 3,724 Loan servicing and sale income ........................... 5,408 6,249 20,480 11,827 Equipment rental income .................................. 6,257 4,525 12,048 9,103 Other income ............................................. 2,861 2,860 6,263 5,191 Investment securities and other investment gains ......... 52 0 1,084 497 ------------ ------------ ------------ ------------ Total noninterest income .................................... 19,878 18,058 50,082 35,172 ------------ ------------ ------------ ------------ Noninterest expense: Salaries and employee benefits ........................... 15,535 14,041 30,596 27,302 Net occupancy expense .................................... 1,477 1,325 3,039 2,707 Furniture and equipment expense .......................... 2,334 2,133 4,586 4,255 Depreciation - leased equipment .......................... 4,993 4,182 9,657 7,824 Supplies and communications .............................. 1,306 1,223 2,647 2,511 Business development and marketing expense ............... 1,240 1,086 2,082 1,829 Other expense ............................................ 2,985 2,153 5,280 4,001 ------------ ------------ ------------ ------------ Total noninterest expense ................................... 29,870 26,143 57,887 50,429 ------------ ------------ ------------ ------------ Income before income taxes and subsidiary trust distributions 15,202 13,725 37,264 27,834 Income taxes ................................................ 5,195 4,212 13,013 9,057 Distribution on preferred securities of subsidiary trusts, net of income tax benefit .............. 560 607 1,161 1,186 ------------ ------------ ------------ ------------ Net income .................................................. $ 9,447 $ 8,906 $ 23,090 $ 17,591 ============ ============ ============ ============ Other comprehensive income, net of tax: Change in unrealized appreciation (depreciation) of available-for-sale securities ........................... 1,286 381 4,726 855 ------------ ------------ ------------ ------------ Total comprehensive income .................................. $ 10,733 $ 9,287 $ 27,816 $ 18,446 ============ ============ ============ ============ Per common share: (1) Basic net income per common share ......................... $ 0.45 $ 0.42 $ 1.11 $ 0.84 ============ ============ ============ ============ Diluted net income per common share ....................... $ 0.44 $ 0.42 $ 1.09 $ 0.83 ============ ============ ============ ============ Dividends ................................................. $ 0.085 $ 0.082 $ 0.171 $ 0.163 ============ ============ ============ ============ Basic weighted average common shares outstanding ............ 20,787,074 20,809,575 20,754,695 20,820,420 ============ ============ ============ ============ Diluted weighted average common shares outstanding .......... 21,199,014 21,040,391 21,149,770 21,061,033 ============ ============ ============ ============ (1) The computation of per share data gives retroactive recognition to a 5% stock dividend declared on April 24, 2001. The accompanying notes are a part of the consolidated financial statements. </TABLE> - 4 -
CONSOLIDATED STATEMENTS OF CASH FLOWS 1st Source Corporation and Subsidiaries (Unaudited - Dollars in thousands) Three Months Ended June 30 2001 2000 --------- --------- Operating activities: Net income .................................... $ 23,090 $ 17,591 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ..................... 11,759 8,596 Depreciation of premises and equipment ........ 12,016 9,967 Amortization of investment security premiums and accretion of discounts, net ............. 537 553 Amortization of mortgage servicing rights ..... 2,100 2,864 Deferred income taxes ......................... 61 379 Realized investment securities gains .......... (1,084) (497) Realized gains on securitized loans ........... (4,405) (5,123) Decrease (increase) in interest receivable .... 294 (1,650) (Decrease) increase in interest payable ....... (4,943) 7,241 Other ......................................... (14,543) (4,837) --------- --------- Net cash provided by operating activities ....... 24,882 35,084 Investing activities: Proceeds from sales and maturities of investment securities .................... 181,131 107,060 Purchases of investment securities ............ (177,977) (88,473) Net increase in short-term investments ........ (669) (3,110) Loans sold or participated to others .......... 122,384 154,092 Increase in loans net of principal collections. (327,123) (355,885) Net increase in equipment owned under operating leases ...................... (9,782) (16,097) Purchases of premises and equipment ........... (3,052) (1,246) Decrease in other assets ...................... 4,548 813 Other ......................................... (1,141) (643) --------- --------- Net cash used in investing activities ........... (211,681) (203,489) Financing activities: Net increase in demand deposits, NOW accounts and savings accounts ............... 37,180 150,323 Net increase in certificates of deposit ....... 182,097 179,477 Net decrease in short-term borrowings ......... (15,732) (97,856) Proceeds from issuance of long-term debt ...... 217 250 Payments on long-term debt .................... (88) (152) Acquisition of treasury stock ................. (951) (3,721) Cash dividends ................................ (3,566) (3,403) --------- --------- Net cash provided by financing activities ....... 199,157 224,918 Increase in cash and cash equivalents ........... 12,358 56,513 Cash and cash equivalents, beginning of period .. 118,123 101,911 --------- --------- Cash and cash equivalents, end of period ........ $ 130,481 $ 158,424 ========= ========= The accompanying notes are a part of the consolidated financial statements. - 5 -
1ST SOURCE CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The unaudited consolidated condensed financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The information furnished herein reflects all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods for which this report is submitted. The 2000 1st Source Corporation Annual Report on Form 10-K should be read in conjunction with these statements. Note 2. New Accounting Pronouncements On January 1, 2001, 1st Source adopted Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the intended use of the derivative and its resulting designation. On adoption, it was permitted to transfer held-to-maturity debt securities to available-for-sale or trading securities without calling into question the intent of management to hold other debt securities to maturity in the future. In conjunction with the adoption of SFAS No. 133, 1st Source transferred the held-to-maturity portfolio with an amortized cost of $59.2 million and a gross unrealized gain of $1.1 million into the available-for-sale portfolio at January 1, 2001. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which replaces SFAS No. 125. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of SFAS No. 125 without reconsideration. SFAS No. 140 was effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This statement did not have a material effect on 1st Source's financial position or results of operations. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and other intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. - 6 -
1st Source Corporation will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $215,725 ($0.01 per share) per year. During 2002, 1st Source Corporation will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. -7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis are presented to provide information concerning the financial condition of 1st Source as of June 30, 2001, as compared to June 30, 2000 and December 31, 2000, and the results of operations for the six months ended June 30, 2001 and 2000. This discussion and analysis should be read in conjunction with 1st Source's consolidated condensed financial statements and the financial and statistical data appearing elsewhere in this report and the 2000 1st Source Corporation Annual Report on Form 10-K. Except for historical information contained herein, the matters discussed in this document, and other information contained in 1st Source's SEC filings, may express "forward-looking statements." Those statements may involve risk and uncertainties, including statements concerning future events, performance and assumptions and other statements that are other than statements of historical facts. 1st Source cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. Readers are advised that various factors - including, but not limited to, changes in laws, regulations or generally accepted accounting principles; 1st Source's competitive position within the markets served; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen downturns in the local, regional or national economies - could cause 1st Source's actual results or circumstances for future periods to differ materially from those anticipated or projected. 1st Source does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date of such statements. - 8 -
FINANCIAL CONDITION 1st Source's assets at June 30, 2001 were $3.41 billion, up 9.0% from the same time last year. Total loans were up 11.3% and total deposits increased 9.1% over the comparable figures at the end of the second quarter of 2000. Shareholders' equity was $296.0 million, up 17.3% from the $252.2 million one year ago. As of June 30, 2001, the 1st Source equity-to-assets ratio was 8.7%, compared to 8.1% a year ago. Nonperforming assets at June 30, 2001, were $24,322,000 compared to $24,462,000 at December 31, 2000, a decrease of 0.57%. At June 30, 2001, nonperforming assets were 0.97% of net loans compared to 1.06% at December 31, 2000. Loans are reported at the principal amount outstanding, net of unearned income. Loans identified as held-for-sale are carried at the lower of cost or market determined on an aggregate basis. Loans held-for-sale were $123.8 million and $62.1 million at June 30, 2001 and 2000, respectively. Included in Other Assets are capitalized mortgage servicing rights. The costs of purchasing the rights to service mortgage loans originated by others are deferred and amortized as reductions of mortgage servicing fee income over the estimated servicing period in proportion to the estimated servicing income to be received. SFAS No. 140 allows companies that sell originated or purchased loans and retain the related servicing rights, to allocate a portion of the total costs of the loans to servicing rights, based on estimated fair value. Fair value is estimated based on market prices, when available, or the present value of future net servicing income, adjusted for such factors as discount and prepayment rates. In the first quarter of 2001, 1st Source completed the sale of $1.0 billion in principal value of its mortgage servicing rights held by its Trustcorp Mortgage Company subsidiary. This servicing sale was in addition to normal quarterly sales levels, and was made possible by favorable market conditions. Pre-tax income of $11.06 million ($6.87 million, net of tax) was recorded in the first quarter, 2001 on this transaction. As of June 30, 2001 and 2000, the carrying value of mortgage servicing rights was $15.0 million and $19.8 million, respectively. During the second quarter of 2001, 1st Source reached an agreement to purchase two branches in Michigan City and LaPorte, Indiana from Citizens Financial Services, F.S.B. The two branches hold approximately $40 million in deposits. 1st Source previously agreed to purchase two branches in St. Joseph, Michigan from Old Kent Financial Corporation pursuant to an agreement reached during the first quarter, 2001. Those branches hold approximately $29 million in loans and $60 million in deposits. That transaction was completed on July 27, 2001. CAPITAL RESOURCES The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution. These guidelines require all banks to maintain a minimum leverage capital ratio of 4.00% for adequately capitalized banks and 5.00% for well-capitalized banks. 1st Source's leverage capital ratio was 9.94% at June 30, 2001. - 9 -
The Federal Reserve Board has established risk-based capital guidelines for U.S. banking organizations. The guidelines established a conceptual framework calling for risk weights to be assigned to on and off-balance sheet items in arriving at risk-adjusted total assets, with the resulting ratio compared to a minimum standard to determine whether a bank has adequate capital. The minimum standard risk-based capital ratios effective in 2001 are 4.00% for adequately capitalized banks and 6.00% for well-capitalized banks for Tier 1 risk-based capital and 8.00% and 10.00%, respectively, for total risk-based capital. 1st Source's Tier 1 risk-based capital ratio on June 30, 2001 was 11.83% and the total risk-based capital ratio was 13.09%. LIQUIDITY AND INTEREST RATE SENSITIVITY Asset and liability management includes the management of interest rate sensitivity and the maintenance of an adequate liquidity position. The purpose of liquidity management is to match the sources and uses of funds to anticipated customers' deposits and withdrawals, to anticipate borrowing requirements and to provide for the cash flow needs of 1st Source. The purpose of interest rate sensitivity management is to stabilize net interest income during periods of changing interest rates. Close attention is given to various interest rate sensitivity gaps and interest rate spreads. Maturities of rate sensitive assets are relative to the maturities of rate sensitive liabilities and interest rate forecasts. At June 30, 2001, the consolidated statement of financial condition was rate sensitive by $447,505,000 more liabilities than assets scheduled to reprice within one year or 80%. Management adjusts the composition of its assets and liabilities to manage the interest rate sensitivity gap based upon its expectations of interest rate fluctuations. - 10 -
RESULTS OF OPERATIONS NET INCOME Net income for the three-month and six-month periods ended June 30, 2001, was $9,447,000 and $23,090,000 respectively, compared to $8,906,000 and $17,591,000 for the equivalent periods in 2000. The increase for the three-month period ended June 30, 2001 was attributed to increases in net interest income and noninterest income, offset by an increase in noninterest expense. For the six-month period ended June 30, 2001, the primary reasons for the increase were an increase in net interest income, the gain on the sale of the $1.0 billion mortgage servicing rights in the first quarter, 2001, offset by increased loan loss provisions and noninterest expense. Diluted net income per common share increased to $0.44 and $1.09, respectively, for the three-month and six-month periods ended June 30, 2001, from $0.42 and $0.83 in 2000. Return on average common shareholders' equity was 16.36% for the six months ended June 30, 2001, compared to 14.45% in 2000. The return on total average assets was 1.43% for the six months ended June 30, 2001, compared to 1.20% in 2000. NET INTEREST INCOME The taxable equivalent net interest income for the three-month period ended June 30, 2001, was $30,490,000, an increase of 11.16% over the same period in 2000. The net interest margin on a fully taxable equivalent basis was 4.02% for the three-month period ended June 30, 2001, which remained unchanged compared to the same period in 2000. The fully taxable equivalent net interest income for the six-month period ended June 30, 2001, was $58,480,000, an increase of 9.23% over 2000, resulting in a net yield of 3.97% compared to 4.03% in 2000. The net interest margin has declined in the past year due to the cost of funds rising more than the yield on interest earning assets; in part, due to the greater reliance on brokered and jumbo certificates of deposits to meet funding needs. Total average earning assets increased 10.66% and 11.35%, respectively, for the three-month and six-month periods ended June 30,2001, over the compared periods in 2000. Total average investment securities increased 1.78% and 2.71%, respectively for the three-month and the six-month periods over one year ago primarily due to an increase of investments in U.S. Government Securities. Average loans increased by 12.85% and 13.40% for the three-month and six-month periods, compared to the same periods in 2000, due to growth in loan volume in commercial, consumer and commercial loans secured by transportation and construction equipment. The taxable equivalent yields on total average earning assets were 8.37% and 8.64% for the three-month periods ended June 30, 2001, and 2000, and 8.53% and 8.51% for the six month periods ended June 30, 2001, and 2000, respectively. Average deposits increased 12.31% and 11.73% for the three-month and six-month periods over the same periods from 2000. The cost rate on average interest-bearing funds was 5.00% and 5.32% for the three months ended June 30, 2001, and 2000, and 5.27% and 5.15% for the six-month periods ended June 30, 2001 and 2000. The majority of the growth in deposits from last year has occurred in certificates of deposits with maturities greater than one year, brokered and jumbo certificates of deposits and NOW accounts. The following table sets forth consolidated information regarding average balances and rates. - 11 -
<TABLE> <CAPTION> DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL (Dollars in thousands) Three Months Ended June 30 ------------------------------------ 2001 2000 -------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ASSETS: <S> <C> <C> <C> <C> <C> <C> Investment securities: Taxable ................. $ 395,988 $ 5,877 5.95% $ 368,426 $ 5,393 5.89% Tax exempt (1)........... 154,249 2,523 6.56% 172,163 2,951 6.89% Net loans (2)(3)........... 2,477,334 54,875 8.88% 2,195,220 50,510 9.25% Other investments ......... 11,450 114 4.01% 10,432 152 5.86% ---------- -------- ----- ---------- -------- ----- Total earning assets 3,039,021 63,389 8.37% 2,746,241 59,006 8.64% Cash and due from banks ... 100,722 95,137 Reserve for loan losses ... (49,449) (40,314) Other assets .............. 249,489 215,694 ---------- ---------- Total ..................... $3,339,783 $3,016,758 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $2,323,736 $28,940 5.00% $2,049,886 $26,520 5.20% Short-term borrowings ... 305,761 3,741 4.91% 326,144 4,833 5.96% Long-term debt .......... 12,163 218 7.20% 12,319 224 7.31% ---------- ------- ----- ---------- ------- ----- Total interest bearing liabilities ............. 2,641,660 32,899 5.00% 2,388,349 31,577 5.32% Noninterest bearing deposits 303,576 289,428 Other liabilities ....... 103,198 91,036 Shareholders' equity .... 291,349 247,945 ---------- ---------- Total ..................... $3,339,783 $3,016,758 ========== ========== ------- ------- Net interest income ....... $30,490 $27,429 ======= ======= Net yield on earning assets on a taxable ----- ----- equivalent basis ........ 4.02% 4.02% ===== ===== Six Months Ended June 30 ------------------------------------ 2001 2000 -------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ASSETS: Investment securities: Taxable ................. $ 390,809 $11,720 6.05% $ 361,733 $10,453 5.81% Tax exempt (1)........... 153,045 5,030 6.63% 167,771 5,755 6.90% Net loans (2)(3)........... 2,418,397 108,779 9.07% 2,132,554 96,514 9.10% Other investments ......... 11,675 278 4.81% 8,803 242 5.53% ---------- -------- ----- ---------- -------- ----- Total earning assets 2,973,926 125,807 8.53% 2,670,861 112,964 8.51% Cash and due from banks ... 95,103 98,803 Reserve for loan losses ... (47,719) (40,171) Other assets .............. 243,615 210,336 ---------- ---------- Total ..................... $3,264,925 $2,939,829 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $2,233,811 $57,899 5.23% $1,983,184 $49,685 5.04% Short-term borrowings ... 332,592 8,991 5.45% 326,337 9,297 5.73% Long-term debt .......... 12,161 437 7.24% 12,254 445 7.31% ---------- ------- ----- ---------- ------- ----- Total interest bearing liabilities ............. 2,578,564 67,327 5.27% 2,321,775 59,427 5.15% Noninterest bearing deposits 296,598 281,658 Other liabilities ....... 105,117 91,620 Shareholders' equity .... 284,646 244,776 ---------- ---------- Total ..................... $3,264,925 $2,939,829 ========== ========== ------- ------- Net interest income ....... $58,480 $53,537 ======= ======= Net yield on earning assets on a taxable ----- ----- equivalent basis ........ 3.97% 4.03% ===== ===== (1) Interest income includes the effects of taxable equivalent adjustments, using a 35% rate for 2001 and 2000. Tax equivalent adjustments for the three-month periods were $771 in 2001 and $897 in 2000 and for the six-month periods were $1,526 in 2001 and $1,760 in 2000. (2) Loan income includes fees on loans for the three-month periods of $1,691 in 2001 and $1,726 in 2000 and for the six-month periods of $2,986 in 2001 and $3,205 in 2000. Loan income also includes the effects of taxable equivalent adjustments, using a 35% rate for 2001 and 2000. The tax equivalent adjustments for the three-month periods were $61 in 2001 and $44 in 2000 and for the six-month periods were $126 in 2001 and $90 in 2000. (3) For purposes of this computation, non-accruing loans are included in the daily average loan amounts outstanding. </TABLE> - 12 -
PROVISION AND RESERVE FOR LOAN LOSSES The provision for loan losses for the three-month period ended June 30, 2001, and 2000, was $4,464,000 and $4,678,000, respectively, and was $11,759,000 and $8,596,000 for the six-month periods ended June 30, 2001 and 2000. The increase for the six-month period is primarily due to higher than normal charge-offs and increased loan delinquencies to 1.88% on June 30, 2001 as compared to 0.81% on June 30, 2000 and 1.03% at the end of 2000. Net Charge-offs of $1,004,000 have been recorded for the second quarter 2001, compared to $3,065,000 for the first quarter 2001 and $2,204,000 in the fourth quarter 2000. Year-to-date Net Charge-offs of $4,069,000 have been recorded in 2001, compared to Net Charge-offs of $4,951,000 through June 2000. A summary of loan loss experience during the three and six months ended June 30, 2001 and 2000 is provided below. <TABLE> <CAPTION> Summary of Allowance for Loan Losses ------------------------------------ Three Months Ended Six Months Ended June 30 June 30 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Reserve for loan losses - beginning balance $ 48,189 $ 39,910 $ 44,644 $ 40,210 Charge-offs (1,448) (1,777) (4,666) (5,263) Recoveries 444 174 597 312 --------- --------- --------- --------- Net charge-offs (1,004) (1,603) (4,069) (4,951) Provision for loan losses 4,464 4,678 11,759 8,596 Recaptured reserve due to loan securitizations (748) (780) (1,433) (1,650) --------- --------- --------- --------- Reserve for loan losses - ending balance $ 50,901 $ 42,205 $ 50,901 $ 42,205 ========= ========= ========= ========= Loans outstanding at end of period 2,508,246 2,252,739 2,508,246 2,252,739 Average loans outstanding during period 2,477,989 2,195,221 2,418,397 2,132,554 Reserve for loan losses as a percentage of loans outstanding at end of period 2.03% 1.87% 2.03% 1,87% Ratio of net charge-offs during period to average loans outstanding 0.16% 0.29% 0.34% 0.47% </TABLE> It is management's opinion that the reserve for loan losses is adequate to absorb losses inherent in the loan portfolio as of June 30, 2001. NONINTEREST INCOME Noninterest income for the three-month periods ended June 30, 2001, and 2000 was $19,878,000 and $18,058,000, respectively, and was $50,082,000 and $35,172,000 for the six-month period ended June 30, 2001 and 2000, respectively. For the six-month period, trust fees increased 2.09%, service charges on deposit accounts increased 41.68%, loan servicing and sale income increased 73.16%, equipment rental income increased 32.35% and other income increased 20.63% over last year. For both the three-month and six-month periods ended June 30, 2001, service charges on deposits increased due to the implementation of an overdraft protection program during 2000, and equipment rental income increased primarily due to growth in operating leases. For the six-month period June 30, 2001, servicing and sale income increased due to the $1 billion sale of mortgage servicing rights in the first quarter, 2001. Investment Security and other net gains for the six-month ended June 30, 2001 were $1,084,000, compared to net gains of $497,000 in 2000. The net gains for both years were primarily attributed to certain partnership and venture capital investments. - 13 -
NONINTEREST EXPENSE Noninterest expense for the three-month period ended June 30, 2001 and 2000 was $29,870,000 and $26,143,000, respectively, and was $57,887,000 and $50,429,000 for the six-month period ended June 30, 2001 and 2000, respectively. For the six-month period ended June 30, 2001, salaries and employee benefits increased 12.07%, net occupancy expense increased 12.26%, furniture and equipment expense increased 7.78%, depreciation on leased equipment increased 23.43%, supplies and communications expense increased 5.42%, business development and marketing expense increased 13.83%, and miscellaneous other expenses increased 31.98% over the same period in 2000. Salaries and employee benefits increased primarily due to an increase in base salaries, mortgage loan commissions, contract salaries and group insurance expense. The increase in depreciation of leased equipment is due to the growth in operating leases from the prior year. The miscellaneous other expense increase from one year ago is attributed primarily to an increase in professional fees and check fraud losses. INCOME TAXES The provision for income taxes for the three-month and six-month periods ended June 30, 2001, was $5,195,000 and $13,013,000, respectively, compared to $4,212,000 and $9,057,000 for the comparable periods in 2000. The provision for income taxes for the six months ended June 30, 2001, and 2000, is at a rate which management believes approximates the effective rate for the year. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risk exposures that affect the "Quantitative and Qualitative Disclosures" presented in 1st Source's annual report on Form 10-K for the year ended December 31, 2000. See the discussion of interest rate sensitivity beginning on page 13 of the Annual Report to Shareholders. - 14 -
PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. None ITEM 2. Changes in Securities. None ITEM 3. Defaults Upon Senior Securities. None ITEM 4. Submission of Matters to a Vote of Security Holders During the second quarter of 2001, 1st Source Corporation's shareholders re-elected Daniel B. Fitzpatrick, Wellington D. Jones III, and Dane A. Miller, Ph.D. as directors at the April 24, 2001, annual meeting. All directors were elected for terms ending in April, 2004. The election showed that 18,465,133 votes were cast (representing 93.02% of all eligible shares) with all directors receiving a majority of the votes cast. 1st Source Corporation's shareholders also elected to approve the 2001 Stock Option Plan. The election tally showed that 17,135,398 votes were cast (representing 86.32% of all eligible shares) with the proposal receiving a majority of the votes cast. ITEM 5. Other Information. None ITEM 6. Exhibits and Reports on Form 8-K. None - 15 -
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 1st Source Corporation ------------------- DATE 8/10/01 /s/ Christopher J. Murphy III ---------- ---------------------------------------- (Signature) Christopher J. Murphy III Chairman of the Board, President and CEO DATE 8/10/01 /s/ Larry E. Lentych ---------- ---------------------------------------- (Signature) Larry E. Lentych Treasurer and Chief Financial Officer - 16 -