form10_q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 
  x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended     June 30, 2009

OR
 
 
 o
 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

 
(Exact name of registrant as specified in its charter)

              INDIANA                                                                                                                                                                                        35-1068133      
    (State or other jurisdiction of                                                                                                                                                         (I.R.S. Employer
incorporation or organization)                                                                                                                                                          Identification No.)

100 North Michigan Street                                                                                                                    South Bend, Indiana                                                                                                     46601    
(Address of principal executive offices)                                                                                                                                                                                                                                  (Zip Code)
 
 (574) 235-2000
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o    No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o   Yes o   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
    o  Large accelerated filer                                                                                                                     x    Accelerated filer
 
    o  Non-accelerated filer (Do not check if a smaller reporting company)                                      o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes         x   No

Number of shares of common stock outstanding as of July 24, 2009 –  24,180,849 shares

-1-

TABLE OF CONTENTS


PART I.  FINANCIAL INFORMATION
                                                    Page
Item 1.                 Financial Statements (Unaudited)
Consolidated statements of financial condition --
June 30, 2009, and December 31, 2008                                                          3
Consolidated statements of income -- three and six
months ended June 30, 2009 and 2008                                                                     4
Consolidated statements of changes in shareholders’ equity
-- six months ended June 30, 2009 and 2008                                                                    5
Consolidated statements of cash flows --
six months ended June 30, 2009 and 2008                                                                       6
Notes to the Consolidated Financial Statements                                                                   7
Item 2.                 Management’s Discussion and Analysis of Financial Condition
and Results of Operations                                                                                                       20
Item 3.                 Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                      30
Item 4.                 Controls and Procedures                                                         30




 
PART II.  OTHER INFORMATION
 
Item 1.                 Legal Proceedings                                                                                                                                                                                                                                                                30
Item 1A.              Risks Factors                                                                                                                                                                                                                                                                        30
Item 2.                 Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                      31
Item 3.                 Defaults Upon Senior Securities                                                                                                                                                                                                                                        31
Item 4.                 Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                    31
Item 5.                 Other Information                                                                                                                                                                                                                                                                 32
Item 6                  Exhibits                                                                                                                                                                                                                                                                                   32
 
 
SIGNATURES                                                                                                                                                                                                                                                                                                    33
 
CERTIFICATIONS    
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2                                                                                                                                           
 
-2-

1st SOURCE CORPORATION
           
           
(Unaudited - Dollars in thousands, except share amounts)
           
   
June 30,
   
December 31,
 
   
2009
   
2008
 
ASSETS
           
Cash and due from banks
  $ 70,798     $ 119,771  
Federal funds sold and
               
   interest bearing deposits with other banks
    29,545       6,951  
Investment securities available-for-sale
               
     (amortized cost of $874,562 and $715,380
               
     at June 30, 2009 and December 31, 2008, respectively)
    883,047       724,754  
Other investments
    18,612       18,612  
Trading account securities
    104       100  
Mortgages held for sale
    136,505       46,686  
                 
Loans and leases - net of unearned discount
               
   Commercial and agricultural loans
    593,914       643,440  
   Auto, light truck and environmental equipment
    338,774       353,838  
   Medium and heavy duty truck
    225,345       243,375  
   Aircraft financing
    619,797       632,121  
   Construction equipment financing
    345,928       375,983  
   Loans secured by real estate
    910,728       918,749  
   Consumer loans
    119,930       130,706  
Total loans and leases
    3,154,416       3,298,212  
   Reserve for loan and lease losses
    (83,124 )     (79,776 )
Net loans and leases
    3,071,292       3,218,436  
Equipment owned under operating leases, net
    87,094       83,062  
Net premises and equipment
    38,837       40,491  
Goodwill and intangible assets
    91,009       91,691  
Accrued income and other assets
    117,526       113,620  
Total assets
  $ 4,544,369     $ 4,464,174  
                 
LIABILITIES
               
Deposits:
               
  Noninterest bearing
  $ 434,729     $ 416,960  
  Interest bearing
    3,180,314       3,097,582  
Total deposits
    3,615,043       3,514,542  
Federal funds purchased and securities
               
  sold under agreements to repurchase
    146,529       272,529  
Other short-term borrowings
    27,464       23,646  
Long-term debt and mandatorily redeemable securities
    19,947       29,832  
Subordinated notes
    89,692       89,692  
Accrued expenses and other liabilities
    76,804       80,269  
Total liabilities
    3,975,479       4,010,510  
                 
SHAREHOLDERS' EQUITY
               
Preferred stock; no par value
               
    Authorized 10,000,000 shares; issued 111,000 at June 30, 2009
               
    and none at December 31, 2008
    104,298       -  
Common stock; no par value
               
    Authorized 40,000,000 shares; issued 25,886,413 at June 30, 2009
               
    and 25,895,505 at December 31, 2008, less unearned shares
               
    (242,907 at June 30, 2009 and 251,999 at December 31, 2008)
    350,263       342,982  
Retained earnings
    140,355       136,877  
Cost of common stock in treasury (1,462,857 shares at June 30, 2009, and
               
     1,532,576 shares at December 31, 2008)
    (31,314 )     (32,019 )
Accumulated other comprehensive income
    5,288       5,824  
Total shareholders' equity
    568,890       453,664  
Total liabilities and shareholders' equity
  $ 4,544,369     $ 4,464,174  
                 
The accompanying notes are a part of the consolidated financial statements.
               
-3-

1st SOURCE CORPORATION
                       
                       
(Unaudited - Dollars in thousands, except per share amounts)
                       
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Interest income:
                       
Loans and leases
  $ 44,474     $ 50,348     $ 89,071     $ 103,611  
Investment securities, taxable
    4,207       5,945       8,243       12,392  
Investment securities, tax-exempt
    1,685       1,926       3,395       4,031  
Other
    264       360       597       669  
Total interest income
    50,630       58,579       101,306       120,703  
Interest expense:
                               
Deposits
    16,596       21,649       34,202       46,769  
Short-term borrowings
    295       1,798       644       4,179  
Subordinated notes
    1,647       1,647       3,294       3,419  
Long-term debt and mandatorily redeemable securities
    179       361       531       915  
Total interest expense
    18,717       25,455       38,671       55,282  
Net interest income
    31,913       33,124       62,635       65,421  
Provision for loan and lease losses
    8,487       4,493       16,272       6,032  
Net interest income after provision for
                               
loan and lease losses
    23,426       28,631       46,363       59,389  
Noninterest income:
                               
Trust fees
    3,887       4,954       7,691       9,216  
Service charges on deposit accounts
    5,219       5,764       9,965       10,872  
Mortgage banking income
    3,339       1,417       5,909       2,534  
Insurance commissions
    1,076       1,092       2,592       3,038  
Equipment rental income
    6,402       5,760       12,549       11,509  
Other income
    2,356       2,446       4,591       4,668  
Investment securities and other investment gains (losses)
    426       (1,066 )     (43 )     (443 )
Total noninterest income
    22,705       20,367       43,254       41,394  
Noninterest expense:
                               
Salaries and employee benefits
    16,829       19,065       36,915       39,699  
Net occupancy expense
    2,273       2,481       4,874       4,957  
Furniture and equipment expense
    3,765       3,883       7,246       7,861  
Depreciation - leased equipment
    5,088       4,609       10,044       9,225  
Professional fees
    815       2,522       1,877       3,680  
Supplies and communication
    1,428       1,682       2,995       3,351  
FDIC and other insurance
    3,719       334       5,269       683  
Other expense
    3,432       3,819       6,769       6,840  
Total noninterest expense
    37,349       38,395       75,989       76,296  
Income before income taxes
    8,782       10,603       13,628       24,487  
Income tax expense
    2,499       3,358       1,094       7,888  
                                 
Net income
    6,283       7,245       12,534       16,599  
Preferred stock dividends and discount accretion
    (1,696 )     -       (3,009 )     -  
Net income available to common shareholders
  $ 4,587     $ 7,245     $ 9,525     $ 16,599  
                                 
Per common share
                               
Basic net income per common share
  $ 0.19     $ 0.30     $ 0.39     $ 0.69  
Diluted net income per common share
  $ 0.19     $ 0.30     $ 0.39     $ 0.68  
Dividends
  $ 0.14     $ 0.14     $ 0.28     $ 0.28  
Basic weighted average common shares outstanding
    24,185,415       24,105,746       24,167,905       24,101,010  
Diluted weighted average common shares outstanding
    24,226,542       24,374,273       24,208,966       24,372,225   
                                 
The accompanying notes are a part of the consolidated financial statements.
                               
 
 
 
-4-

 
1st SOURCE CORPORATION
                                   
                               
(Unaudited - Dollars in thousands, except per share amounts)
                               
                                     
                                 
Net
 
                                 
Unrealized
 
                                 
Appreciation
 
                           
Cost of
   
(Depreciation)
 
                           
Common
   
of Securities
 
         
Preferred
   
Common
   
Retained
   
Stock
   
Available-
 
   
Total
   
Stock
   
Stock
   
Earnings
   
in Treasury
   
For-Sale
 
Balance at January 1, 2008
  $ 430,504     $ -     $ 342,840     $ 117,373     $ (32,231 )   $ 2,522  
Comprehensive Income, net of tax:
                                               
Net Income
    16,599       -       -       16,599       -       -  
   Change in unrealized appreciation
                                               
   of available-for-sale securities, net of tax
    (1,173 )     -       -       -       -       (1,173 )
Total Comprehensive Income
    15,426       -       -       -       -       -  
Issuance of 17,758 common shares
                                               
 under stock based compensation awards,
                                               
 including related tax effects
    319       -       -       119       200       -  
Stock-based compensation
    136       -       136       -       -       -  
Common stock dividend ($0.28 per share)
    (6,763 )     -       -       (6,763 )     -       -  
Balance at June 30, 2008
  $ 439,622     $ -     $ 342,976     $ 127,328     $ (32,031 )   $ 1,349  
                                                 
Balance at January 1, 2009
  $ 453,664     $ -     $ 342,982     $ 136,877     $ (32,019 )   $ 5,824  
Comprehensive Income, net of tax:
                                               
Net Income
    12,534       -       -       12,534       -       -  
   Change in unrealized appreciation
                                               
   of available-for-sale securities, net of tax
    (536 )     -       -       -       -       (536 )
Total Comprehensive Income
    11,998       -       -       -       -       -  
Issuance of 83,202 common shares
                                               
   under stock based compensation awards,
                                               
   including related tax effects
    1,659       -       -       723       936       -  
Cost of 13,483 shares of common stock
                                               
   acquired for treasury
    (231 )     -       -       -       (231 )     -  
Issuance of preferred stock
    103,725       103,725       -       -       -       -  
Preferred stock discount accretion
    -       573       -       (573 )     -       -  
Issuance of warrants to purchase common stock
    7,275       -       7,275       -       -       -  
Preferred stock dividend paid and/or accrued
    (2,436 )     -       -       (2,436 )     -       -  
Common stock dividend ($0.28 per share)
    (6,770 )     -       -       (6,770 )     -       -  
Stock based compensation
    6       -       6       -       -       -  
Balance at June 30, 2009
  $ 568,890     $ 104,298     $ 350,263     $ 140,355     $ (31,314 )   $ 5,288  
                                                 
The accompanying notes are a part of the consolidated financial statements.
                                 
 
 
 
-5-

           
           
(Unaudited - Dollars in thousands)
           
   
Six Months Ended June 30,
 
   
2009
   
2008
 
Operating activities:
           
Net income
  $ 12,534     $ 16,599  
Adjustments to reconcile net income to net cash
               
provided (used) by operating activities:
               
Provision for loan and lease losses
    16,272       6,032  
Depreciation of premises and equipment
    2,428       2,848  
Depreciation of equipment owned and leased to others
    10,044       9,225  
Amortization of investment security premiums
               
and accretion of discounts, net
    3,337       654  
Amortization of mortgage servicing rights
    1,572       1,552  
Mortgage servicing asset impairment (recovery) charges
    (1,507 )     69  
Deferred income taxes
    597       (5,405 )
Realized investment securities losses
    43       443  
Originations/purchases of loans held for sale, net of principal collected
    (388,345 )     (209,797 )
Proceeds from the sales of loans held for sale
    300,667       200,656  
Net gain on sale of loans held for sale
    (2,141 )     (821 )
Change in trading account securities
    (4 )     (150 )
Change in interest receivable
    911       1,528  
Change in interest payable
    6,010       (4,132 )
Change in other assets
    (4,447 )     2,456  
Change in other liabilities
    (10,184 )     (1,733 )
Other
    566       3,105  
Net change in operating activities
    (51,647 )     23,129  
                 
Investing activities:
               
Proceeds from sales of investment securities
    103,203       5,579  
Proceeds from maturities of investment securities
    259,862       287,077  
Purchases of investment securities
    (525,625 )     (228,095 )
Net change in short-term investments
    (22,594 )     (6,974 )
Loans sold or participated to others
    8,982       -  
Net change in loans and leases
    121,890       (123,137 )
Net change in equipment owned under operating leases
    (14,077 )     (9,782 )
Purchases of premises and equipment
    (953 )     (1,073 )
Net change in investing activities
    (69,312 )     (76,405 )
                 
Financing activities:
               
Net change in demand deposits, NOW
               
accounts and savings accounts
    144,403       (73,017 )
Net change in certificates of deposit
    (43,902 )     (31,580 )
Net change in short-term borrowings
    (122,182 )     148,162  
Proceeds from issuance of long-term debt
    166       10,022  
Payments on subordinated notes
    -       (10,310 )
Payments on long-term debt
    (10,310 )     (10,370 )
Net proceeds from issuance of treasury stock
    1,659       319  
Acquisition of treasury stock
    (231 )     -  
Proceeds from issuance of preferred stock & common stock warrants
    111,000       -  
Cash dividends
    (8,617 )     (6,879 )
Net change in financing activities
    71,986       26,347  
                 
Net change in cash and cash equivalents
    (48,973 )     (26,929 )