10-Q 1 q1_10q02.txt FIRST QTR 10-Q 2002 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 period ended March 31, 2002 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 2-78658 INTRUST Financial Corporation (Exact name of registrant as specified in its charter) Kansas 48-0937376 ------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 105 North Main Street Box One Wichita, Kansas 67201 --------------- ----- (Address of principal (Zip Code) executive offices) Registrant's telephone number including area code: (316) 383-1111 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 [ ] At April 23, 2002, there were 2,339,293 shares of the registrant's common stock, par value $5 per share, outstanding. Part 1. Financial Information INTRUST Financial Corporation Consolidated Condensed Statements of Financial Condition (Unaudited - dollars in thousands except per share data) March 31, December 31, Assets 2002 2001 -------------------------------------------------------------------------------- Cash and cash equivalents: Cash and due from banks $ 96,004 $ 159,708 Federal funds sold 64,070 78,300 -------------------------------------------------------------------------------- Total cash and cash equivalents 160,074 238,008 -------------------------------------------------------------------------------- Investment securities: Held-to-maturity (fair value, $27,619 for 2002 and $30,106 for 2001) 27,109 29,538 Available-for-sale, at fair value 455,888 417,738 -------------------------------------------------------------------------------- Total investment securities 482,997 447,276 -------------------------------------------------------------------------------- Loans held-for-sale 432 4,876 Loans, net of allowance for loan losses of $27,887 in 2002 and $25,904 in 2001 1,759,817 1,743,838 Land, buildings and equipment, net 47,327 47,794 Intangible assets 26,651 27,135 Other assets 44,096 46,570 -------------------------------------------------------------------------------- Total assets $2,521,394 $2,555,497 -------------------------------------------------------========================= Liabilities and Stockholders' Equity -------------------------------------------------------------------------------- Deposits $1,934,184 $1,969,137 Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 288,303 289,991 Other 7,312 9,357 -------------------------------------------------------------------------------- Total short-term borrowings 295,615 299,348 -------------------------------------------------------------------------------- Accounts payable and accrued liabilities 38,177 35,766 Notes payable 5,000 5,000 Guaranteed preferred beneficial interests in the Company's subordinated debentures 57,500 57,500 -------------------------------------------------------------------------------- Total liabilities 2,330,476 2,366,751 -------------------------------------------------------------------------------- Stockholders' equity: Common stock, $5 par value; 10,000,000 shares authorized, 2,783,650 shares issued in 2002 and 2001 13,918 13,918 Capital surplus 21,725 21,725 Retained earnings 198,253 193,675 Treasury stock, at cost (444,206 shares in 2002 and 440,466 shares in 2001) (43,493) (43,002) Accumulated other comprehensive income, net of tax 515 2,430 -------------------------------------------------------------------------------- Total stockholders' equity 190,918 188,746 -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,521,394 $2,555,497 -------------------------------------------------------========================= The accompanying notes are an integral part of these consolidated financial statements. INTRUST Financial Corporation Consolidated Condensed Statements of Income and Comprehensive Income (Unaudited - dollars in thousands except per share data) Three Months Ended March 31, ------------------- 2002 2001 -------------------------------------------------------------------------------- Interest income: Loans $28,043 $39,077 Investment securities 5,543 6,830 Federal funds sold and other 393 445 -------------------------------------------------------------------------------- Total interest income 33,979 46,352 -------------------------------------------------------------------------------- Interest expense: Deposits 9,969 16,292 Federal funds purchased and securities sold under agreement to repurchase 782 4,058 Subordinated debentures 1,185 1,184 Other borrowings 62 281 -------------------------------------------------------------------------------- Total interest expense 11,998 21,815 -------------------------------------------------------------------------------- Net interest income 21,981 24,537 Provision for loan losses 3,000 2,670 -------------------------------------------------------------------------------- Net interest income after provision for loan losses 18,981 21,867 -------------------------------------------------------------------------------- Noninterest income: Service charges on deposit accounts 4,674 3,679 Fiduciary income 2,896 2,983 Credit card fees 2,177 2,837 Other service charges, fees and income 4,138 3,584 -------------------------------------------------------------------------------- Total noninterest income 13,885 13,083 -------------------------------------------------------------------------------- Noninterest expenses: Salaries and employee benefits 11,942 11,689 Net occupancy and equipment expense 3,165 3,251 Professional services 1,730 792 Data processing expense 1,245 1,423 Advertising and promotional activities 964 1,052 Postage and dispatch 604 760 Supplies 576 676 Goodwill amortization 265 610 Intangible assets amortization 219 250 Other 2,101 2,357 -------------------------------------------------------------------------------- Total noninterest expense 22,811 22,860 -------------------------------------------------------------------------------- Income before provision for income taxes 10,055 12,090 Provision for income taxes 3,602 4,700 -------------------------------------------------------------------------------- Net income 6,453 7,390 Other comprehensive income (loss) - unrealized gains (losses) on securities (1,915) 1,676 -------------------------------------------------------------------------------- Comprehensive income $ 4,538 $ 9,066 -------------------------------------------------------------=================== Per share data: Basic earnings per share $2.76 $3.15 -------------------------------------------------------------=================== Diluted earnings per share $2.73 $3.12 -------------------------------------------------------------=================== Cash dividends per share $0.80 $0.80 -------------------------------------------------------------=================== The accompanying notes are an integral part of these consolidated financial statements. INTRUST Financial Corporation Consolidated Condensed Statements of Cash Flows (Unaudited) (in thousands of dollars) Three Months Ended March 31, ---------------------- 2002 2001 -------------------------------------------------------------------------------- Cash provided (absorbed) by operating activities: Net income $ 6,453 $ 7,390 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,000 2,670 Provision for depreciation and amortization 2,253 2,447 Amortization of premium and accretion of discount on investment securities 514 (1,153) Originations of loans held-for-sale (18,446) (13,482) Proceeds from sales of loans held-for-sale 22,890 12,255 Changes in assets and liabilities: Prepaid expenses and other assets 1,448 (618) Income taxes 3,602 4,867 Interest receivable (255) 123 Interest payable 1,922 1,384 Other liabilities (568) (1,096) Other 24 (9) -------------------------------------------------------------------------------- Net cash provided by operating activities 22,837 14,778 -------------------------------------------------------------------------------- Cash provided (absorbed) by investing activities: Purchase of investment securities (136,780) (159,948) Investment securities matured or called 95,911 147,380 Proceeds from sale of investment securities available for sale 1,440 2,335 Net increase in loans (19,296) (58,542) Purchases of land, buildings and equipment (1,046) (2,649) Proceeds from sale of equipment 14 14 Proceeds from sale of other real estate and repossessions 382 681 Other (344) (13) -------------------------------------------------------------------------------- Net cash absorbed by investing activities (59,719) (70,742) -------------------------------------------------------------------------------- Cash provided (absorbed) by financing activities: Net increase (decrease) in deposits (34,953) 46,521 Net increase (decrease) in short-term borrowings (3,733) 10,114 Cash dividends (1,875) (1,882) Purchase of treasury stock (491) (885) -------------------------------------------------------------------------------- Net cash provided (absorbed) by financing activities (41,052) 53,868 -------------------------------------------------------------------------------- Decrease in cash and cash equivalents (77,934) (2,096) Cash and cash equivalents at beginning of period 238,008 132,535 -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 160,074 $ 130,439 ----------------------------------------------------------====================== Supplemental disclosures Interest paid $10,076 $20,431 Income tax paid (refunded) $ 0 $ (167) The accompanying notes are an integral part of these consolidated financial statements. INTRUST Financial Corporation Notes to Consolidated Condensed Financial Statements (Unaudited) 1. Principles of Consolidation and Presentation -------------------------------------------- The accompanying consolidated condensed financial statements include the accounts of INTRUST Financial Corporation and subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the consolidated condensed financial statements reflect all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented. The significant accounting policies followed in the preparation of the quarterly financial statements are the same as those disclosed in the 2001 INTRUST Financial Corporation Annual Report on Form 10-K, except that the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" as of January 1, 2002. SFAS No. 142 generally provides that goodwill will no longer be amortized, but does require that goodwill be assessed for impairment (see footnote 5). Reference is made to the "Notes to Consolidated Financial Statements" under Item 8 of the 2001 Form 10-K for additional disclosure. 2. Allowance for Loan Losses ------------------------- The following is a summary of the allowance for loan losses for the three months ended March 31, 2002 and 2001 (in thousands): 2002 2001 -------------------------------------------------------------------------------- Balance, January 1 $25,904 $28,972 Additions: Provision for loan losses 3,000 2,670 -------------------------------------------------------------------------------- 28,904 31,642 Deductions: Loans charged off 1,915 2,002 Less recoveries on loans previously charged off 898 845 -------------------------------------------------------------------------------- Net loan losses 1,017 1,157 -------------------------------------------------------------------------------- Balance, March 31 $27,887 $30,485 ----------------------------------------------------------====================== The following table discloses information about the recorded investment in loans that the Company has classified as impaired (in thousands of dollars): (A) (B) (C) (D) Amount in (A) for Which Allowance Amount in (A) for Total There Is a Related Associated Which There Is No Impaired Allowance for Loan With Amounts Related Allowance March 31 Loans Losses in (B) for Loan Losses -------- -------- ----------------------- ------------ ----------------- 2002 $17,477 $17,192 $5,194 $285 2001 $ 2,052 $ 2,052 $ 819 $ 0 The average recorded investment in impaired loans for the three months ended March 31, 2002 and 2001, was $17,677,000 and $2,187,000, respectively. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions of principal. Such amount of interest income is not material to the Company's financial statements. 3. Earnings Per Share Calculations ------------------------------- Basic earnings per share is computed based upon the weighted average number of shares outstanding. Diluted earnings per share includes shares issuable upon exercise of stock options. The following is a reconciliation of the numerators and denominators of basic and diluted earnings per share: Three Months Ended March 31 -------------------------------------------------------------------------------- 2002 2001 -------------------------------------------------------------------------------- Net income for earnings per share (in thousands of dollars) $6,453 $7,390 ------------------------------------------------------------==================== Weighted average shares for basic earnings per share 2,341,318 2,348,677 Shares issuable upon exercise of stock options 20,604 22,322 -------------------------------------------------------------------------------- Weighted average shares for diluted earnings per share 2,361,922 2,370,999 ------------------------------------------------------------==================== 4. Segment Reporting ----------------- Listed below is a presentation of revenues and profits for all segments. Taxes are not allocated to segment operations, and the Company did not have discontinued operations, extraordinary items or accounting changes for any of the segments. There has been no material change in the measurement of profit or loss since the last annual report. However, as a result of merging the Company's Oklahoma subsidiary, Will Rogers Bank, into INTRUST Bank, N. A., Oklahoma operations that were previously reported in the community banking segment are now allocated to remaining segments and the corporate nonsegment level. The community banking segment has, therefore, been eliminated. The following segment information, for 2001, has been restated to reflect this change. Three Months Ended March 31, (in thousands of dollars) 2002 2001 ------------------------------------------------------------------------------ Revenues from external customers Consumer banking $19,526 $20,938 Commercial banking 13,737 12,999 Wealth management 3,808 3,709 Intercompany revenues Consumer banking $ (34) (16) Commercial banking 0 0 Wealth management 130 131 Segment profit Consumer banking $ 3,177 $ 5,084 Commercial banking 8,260 7,696 Wealth management 203 416 ------------------------------------------------------------------------------ Profit from segments 11,640 13,196 Expenses at corporate level not allocated to segments (1,585) (1,106) ------------------------------------------------------------------------------ Consolidated income before provision for income taxes $10,055 $12,090 -------------------------------------------------------------================= 5. Intangible Assets ----------------- At March 31, 2002 the company had recorded intangible asset balances of $26,651,000 on its statement of financial condition. This amount is comprised of the following components: SFAS No. 72 goodwill $12,487,000 Other goodwill 8,392,000 Credit card royalty costs 5,772,000 -------------------------------------------------------------------------------- $26,651,000 --------------------------------------------------------------------============ SFAS No.72 goodwill primarily represents excess purchase price incurred in the company's acquisition of certain branches of another financial institution in September 1999. In accordance with the provisions of SFAS No. 142 and SFAS No. 72, the company continues to amortize this goodwill over a fifteen-year period. Approximately $4,800,000 of the SFAS No. 72 goodwill is assigned to branches that are presently being marketed by the Company - see footnote 6. This goodwill will be considered as part of the carrying cost of net assets in determining the gain or loss on disposition of the branches if and when these branches are ultimately sold. The credit card royalty costs represent advance payments made by the Company to certain affinity groups in order to obtain exclusive marketing rights to the members of those groups for an extended period of time. These costs are amortized over the life of the contract. The other goodwill amount of $8,392,000 represents goodwill acquired in prior purchase business combinations. This goodwill is subject to impairment evaluation in accordance with the provisions of SFAS No. 142. The Company performed this assessment in the first quarter of 2002. The Company presently has a market capitalization of approximately $300,000,000 based on the current market price of its common stock. The Company's net book value at March 31, 2002 was $190,918,000. The Company evaluated the $8,392,000 of goodwill relative to its excess market valuation of $109,000,000 and determined that no impairment loss existed at March 31, 2002. SFAS No. 142 requires that goodwill be pushed down to each reporting unit for purposes of impairment valuation. The Company has determined that its operating segments constitute its reporting units. The consumer banking segment is comprised of the Company's retail branches, consumer lending and credit card operations. The commercial banking segment consists of those areas of the Company that provide commercial lending services and other commercial banking products. The wealth management segment provides personal and institutional trust and support services. After performing the initial analysis of the expected cash flows from each of the reporting units and comparing these expected cash flows to the amount of goodwill subject to impairment valuation, the Company believes that allocating goodwill among its three reporting units will not enhance the analysis of financial information and related disclosures. The Financial Accounting Standards Board ("FASB") presently has a narrow scope project underway to review the accounting treatment associated with SFAS No. 72 goodwill. Based on the current project plan, an exposure draft is to be issued in the second quarter of 2002, with issuance of a final Statement expected in the fourth quarter. The Company is uncertain of the financial statement effect, if any, that would result from adoption of this proposed Statement. As of March 31, 2002 Gross Carrying Accumulated (in thousands of dollars) Amount Amortization -------------------------------------------------------------------------------- Amortized Intangible Assets Credit card royalty costs $ 9,392 $3,620 SFAS No. 72 goodwill 15,438 2,951 -------------------------------------------------------------------------------- Total $24,830 $6,571 ---------------------------------------------------============================= Aggregate Amortization Expense: For the period ended March 31, 2002 $484 Estimated Amortization Expense: For the year ended December 31, 2002 $1,989 For the year ended December 31, 2003 $1,936 For the year ended December 31, 2004 $1,881 For the year ended December 31, 2005 $1,793 For the year ended December 31, 2006 $1,685 For the year ended December 31, 2007 $1,618 Goodwill The carrying amount of goodwill for the period ended March 31, 2002 is $8,392,000. There were no changes in the carrying amount of goodwill during the quarter ended March 31, 2002. Goodwill - Adoption of Statement 142 For the Period Ended March 31, (dollars in thousands except per share data) 2002 2001 -------------------------------------------------------------------------------- Net income $6,453 $7,390 Add back goodwill amortization --- 326 -------------------------------------------------------------------------------- Adjusted net income $6,453 $7,716 --------------------------------------------------============================== Basic earnings per share: Net income $2.76 $3.15 Goodwill amortization --- .14 -------------------------------------------------------------------------------- Adjusted net income $2.76 $3.29 --------------------------------------------------============================== Diluted earnings per share: Net income $2.73 $3.12 Goodwill amortization --- .13 -------------------------------------------------------------------------------- Adjusted net income $2.73 $3.25 --------------------------------------------------============================== 6. Proposed Branch Divestiture --------------------------- On April 17, 2002 one of the Company's subsidiaries announced its intention to sell seven branch banking facilities. Total deposits at these branches aggregate approximately $125 million. The Company anticipates that the sale of these branches would be concluded in the third quarter, subject to the receipt of acceptable offers and the satisfaction of regulatory requirements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unaudited consolidated net income of INTRUST Financial Corporation for the three months ended March 31, 2002 was $6,453,000, a decline of 12.7% from the comparable prior amount. The extremely low interest rate environment has negatively affected the Company's net interest income, and the general weakness in the economy has resulted in a year-over-year increase in the provision for loan losses. First quarter 2002 net income did however, increase $1,461,000 over fourth quarter 2001 levels. NET INTEREST INCOME As has been discussed in previous filings, the unprecedented easing by the Federal Reserve in 2001 has negatively impacted the Company's net interest income. The Company's balance sheet is structured such that the dollar amount of assets that reprice in a twelve month period is only slightly less than the dollar amount of liabilities that are subject to repricing in that same period. Over the last year, both assets and liabilities have repriced downward, but the interest margin has experienced compression as competitive factors have prevented the Company from reducing rates on its interest-bearing liabilities to the same degree that rates on earning assets have declined. This has resulted in the Company recording a year-over-year decline in the yield on interest-earning assets of 264 basis points, while the cost of interest-bearing liabilities has fallen 209 basis points over the same period. The income statement effect of this compression in the interest margin was a year-over-year reduction in first quarter net interest income of $2,556,000. Interest income of $33,979,000 was recorded in the first quarter of the current year. This is a decline of $2,766,000 from the amount recorded in the previous quarter and a reduction of $12,373,000 from the same period last year. First quarter average interest-earning assets have increased approximately 4.3% over the comparable period of 2001. Approximately one-fourth of the increase is due to the termination of the Company's credit card securitization and bringing those outstanding receivable balances back on the balance sheet. However, the increase in interest income attributable to this volume increase is significantly less than the decrease resulting from a 264 basis point reduction in the yield on over $2 billion in earning assets. The overall composition of interest-earning assets has changed modestly over the last twelve months. The slowing of the economy has resulted in a moderation in the rate of growth in the Company's loan portfolio. Loans comprised 75.6% of average interest-earning assets in the current quarter. The comparable percentage in the first quarter of 2001 was 78.2%. As loans typically carry a higher-rate of interest than other interest-earning assets, having a smaller percentage of interest-earning assets comprised of loans does serve to reduce the overall yield on interest-earning assets. As noted above, funding costs have also declined over the last year, but by a lesser amount than the yield on earning assets. Average interest-bearing liabilities increased 2.17% over comparable prior year levels, resulting in increased interest expense of approximately $250,000. This was more than offset by the 209 basis point decline in the quarterly cost of funds, which served to reduce 2002 interest expense by slightly less than $10 million from comparable 2001 levels. The Company's funding costs also benefited from an increase in non-interest bearing demand deposits. These deposits comprised 21% of average total deposits for the quarter ended March 31, 2002, increasing 1.6% over the comparable prior year percentage. The Company does not expect significant action by the Federal Reserve in the second quarter or the remainder of 2002, but it does believe its principal markets will continue to remain quite competitive and sensitive to interest rate movement. It expects the low interest rate environment to remain throughout 2002, and does not anticipate significant improvement in the interest margin this year. PROVISION FOR LOAN LOSSES The Company recorded a provision for loan losses of $3,000,000, an increase of $330,000 over the amount recorded in the comparable period in 2001. First quarter net charge-offs totaled $1,017,000, declining $140,000 from prior year amounts. As noted above, the Company terminated its credit card securitization in the first quarter of this year. The Company now recognizes charge-offs on those accounts that had been previously securitized and sold. Net credit card charge-offs in 2002 were $1,099,000, compared to $977,000 in 2001. Nonaccrual loans have increased from $16,747,000 at December 31, 2001 to $20,482,000 at March 31, 2002. This increase is attributable to one agribusiness credit in southern Kansas, in which the Company has a participating interest. 40% of the Company's nonaccrual loans are the result of participating in loans where another financial institution is the lead lender. The Company has disclosed in previous filings that one loan presently in nonaccrual status and on which the Company had recorded a significant charge-off was in the process of being restructured. The company to which the loan had been extended has since received a purchase offer that must be approved by its shareholders. It remains to be seen whether the shareholders will approve the proposed purchase, but if the offer is approved and the purchase takes place, the Company anticipates recording a recovery of approximately $2,000,000. The Company's allowance for loan losses at March 31, 2002 was equal to 1.56% of total loans and 128% of nonaccrual, past due and restructured loans. Comparable amounts at December 31, 2001 and March 31, 2001 were 1.46% and 144%, and 1.71% and 608%, respectively. While it is possible that the potential recovery discussed above could favorably impact the amount recorded in the provision for loan losses in future quarters, the Company is also mindful of the continued weakness that is present in the economy and continues to closely monitor potential changes in the financial condition of its customer base. Summary of Loan Loss Experience (in thousands of dollars) -------------------------------------------------------------------------------- March 31, 2002 2001 -------------------------------------------------------------------------------- Amount of loans at period-end $1,787,704 $1,785,482 --------------------------------------------------------======================== YTD Average loans outstanding $1,761,034 $1,746,160 --------------------------------------------------------======================== Beginning balance of allowance for loan losses $25,904 $28,972 Loans charged-off Commercial, Financial and Agricultural 146 362 Credit Card 1,328 1,263 Installment 441 377 -------------------------------------------------------------------------------- Total loans charged off 1,915 2,002 -------------------------------------------------------------------------------- Recoveries on charge-offs Commercial, Financial and Agricultural 515 463 Real Estate-Mortgage 0 1 Credit Card 229 286 Installment 154 95 -------------------------------------------------------------------------------- Total recoveries 898 845 -------------------------------------------------------------------------------- Net loans charged off 1,017 1,157 Provision charged to expense 3,000 2,670 -------------------------------------------------------------------------------- Ending balance of allowance for loan losses $27,887 $30,485 --------------------------------------------------------======================== Net charge-offs/average loans 0.06% 0.07% --------------------------------------------------------======================== Allowance for loan losses/loans at period-end 1.56% 1.71% --------------------------------------------------------======================== The accompanying table summarizes, by type, the Company's outstanding loans, excluding loans held-for-sale. Installment loans are principally comprised of loans secured by automobiles (in thousands of dollars). March 31, 2002 December 31, 2001 -------------------------------------------------------------------------------- Percent Percent Amount of Total Amount of Total -------------------------------------------------------------------------------- Commercial, Financial and Agricultural $ 868,560 48.5% $ 851,191 48.1% Real Estate-Construction 66,371 3.7 55,060 3.1 Real Estate-Mortgage 525,072 29.4 534,662 30.2 Installment, excluding credit card 165,731 9.3 180,545 10.2 Credit card 161,970 9.1 148,284 8.4 -------------------------------------------------------------------------------- Subtotal 1,787,704 100.0% 1,769,742 100.0% Allowance for loan losses (27,887) (25,904) -------------------------------------------------------------------------------- Total $1,759,817 $1,743,838 ---------------------------------------========================================= As noted above, loans considered risk elements, as presented in the following table did increase this quarter. These loans comprised 1.21% of total loans at March 31, 2002, compared to 1.01% of total loans at December 31, 2001 and .28% of total loans March 31, 2001. Management is not aware of issues other than those described above that would significantly impact the credit quality of the loan portfolio in 2002. Management believes the allowance for loan losses to be adequate at this time. March, 31 December 31, (in thousands of dollars) 2002 2001 -------------------------------------------------------------------------------- Loan Categories Nonaccrual Loans $20,482 $16,747 Past Due 90 days or more 1,241 1,204 -------------------------------------------------------------------------------- Total $21,723 $17,951 ---------------------------------------------------============================= LIQUIDITY AND CAPITAL RESOURCES The Company considered its liquidity level adequate at March 31, 2002. Continued growth in the Company's loan portfolio resulted in the loan/deposit ratio (including loans held-for-sale) equaling 92.4% at March 31, 2002. Comparable amounts at December 31, 2001 and March 31, 2001 were 90.1% and 94.6%, respectively. The Company's membership in the Federal Home Loan Bank of Topeka provides a secondary source of liquidity. In addition, the Company maintains a variety of funding sources, including core-deposit acquisition, federal funds purchases, acquisition of public funds and the normal run-off of interest-earning assets. Approximately 69% of the Company's investment portfolio is comprised of United States government and agency securities, with mortgage-backed securities representing another 27% of the portfolio. The Company maintains a relatively short weighted average maturity in this portion of its investment portfolio. At March 31, 2002, the average maturity of United States government and agency securities and mortgage-backed securities was 3 years and 2 months, and the average maturity of municipal securities was 2 years and 7 months. The Company has thoroughly reviewed its investment security portfolio and has determined that at March 31, 2002, it has the ability and intent to hold all securities in the portfolio that have been classified as held-to-maturity. With the increases the Company has experienced in its loan portfolio, it has continued to classify purchases of United States government and agency securities as available-for-sale. The Company believes that it has a variety of sources of additional liquidity available. These include, but are not limited to, the following: securities classified as available-for-sale, the regularly scheduled maturities of those securities presently held in its investment portfolio, the securitization of credit card receivables, the ability to securitize other receivables, such as automobile loans, and federal funds lines available through other financial institutions. The Company believes these sources provide sufficient liquidity to meet depositors' needs and make available lendable funds within its service area. As has been disclosed in previous filings, in January, 1998, a statutory business trust of the Company issued $57,500,000 in cumulative trust preferred securities. These preferred securities, which qualify as capital for regulatory reporting purposes, have a distribution rate of 8.24%, and will mature on January 31, 2028, unless called or extended by the Company. The Company owns 100% of the common stock of the trust, and the only assets of the trust consist of the 8.24% subordinated debentures due January 31, 2028 issued by the Company to the trust. The Company has issued Back-up Obligations to the trust, which, when taken in the aggregate, constitute the full and unconditional guarantee by the Company of all of the trust's obligations under the preferred securities. The Company's capital position continues to exceed regulatory capital requirements. The Company must maintain a minimum ratio of total capital to risk-weighted assets of 8%, of which at least 4% must qualify as Tier 1 capital. At March 31, 2002, the Company's total capital to risk-weighted assets ratio was 12.4% and its Tier 1 capital to risk-weighted assets ratio was 11.1%. In addition to the aforementioned regulatory requirements, the Company's subsidiary bank met all required minimum capital ratios. OTHER INCOME AND OTHER EXPENSE Current year first quarter noninterest income totaled $13,885,000, increasing 6.1% over first quarter 2001 amounts. This quarter's noninterest income was $129,000 less than that of the preceding quarter. The year-over-year increase is due principally to pricing initiatives which commenced in the second quarter of 2001. The quarter-over-quarter decline is due to the termination of the Company's participation in its remaining credit card securitization transaction. Net amounts that had previously been reported as non-interest income are now reported as interest income and affect the provision for loan losses. Service charges on deposit accounts increased 27%, or $995,000, over comparable prior year amounts. Approximately 55% of this increase resulted from revised pricing and increased volumes associated with overdrafts and insufficient funds activity. Most of the remaining increase was attributable to increased service charges on commercial accounts. The Company continues to see growth in its commercial account base, and the low interest rate environment results in a lesser earnings credit rate on commercial accounts. With these accounts receiving a reduced earnings credit, service charges on commercial accounts increase. Fiduciary income declined 2.9% from prior year levels but increased 2% from the amount recorded in the preceding quarter. U.S. equity markets generally recorded increases during the first quarter, with the Dow Jones Industrial Average increasing 3. 8% during the three-month period ended March 31, 2002. As a result of this increase, the Company recorded a 2.4% increase in assets under management during the quarter, which translated into the aforementioned increase in revenue. The year-over-year decline is due principally to the composition of assets under management. Personal and institutional trusts comprised 42.2% of assets under management during the quarter ended March 31, 2002. The comparable percentage in 2001 was 47.9%. Fee income on these accounts is greater than that recorded for other types of assets under management, thus the year-over-year decline in revenues. Credit card fees declined $660,000 from prior year levels as the termination of the credit card securitization conduit referred to above resulted in a lesser level of fee income. Excess servicing revenue attributable to securitized accounts in 2002 declined $243,000 from prior year levels. The majority of the remaining year-over-year decline was due to decreased levels of both penalty fees and merchant revenue. The softness in the economy, combined with the lingering effects of September 11 have resulted in a decline in transaction volume when compared to the same period of the preceding year. Other service charges, fees and income increased $554,000 over comparable 2001 amounts. Approximately one-half of this increase is due to the receipt of life insurance proceeds on two former employees on which the Company maintained insurance coverage. The remainder of the increase is attributable to a higher level of sales activity in the Company's broker-dealer subsidiary, increased loan fees on mortgage loans originated and sold, and increased credit life commission income arising from a home equity loan promotion. Total noninterest expense declined $49,000 from the first quarter of 2001. The effect of adopting SFAS No. 142, "Goodwill and Other Intangible Assets" was to reduce goodwill amortization by $329,000. Had this Statement not been adopted, the year-over-year increase in noninterest expense would have been $280,000, or 1.2%. As has been disclosed in previous filings, the Company outsourced wealth management operational support to SunGard Wealth Management Services, LLC ("SunGard"). As a result of taking this action, the Company recorded an increase in professional services cost in 2002, while many other noninterest expense line items reflected declines this year when compared to comparable 2001 amounts. Salaries and employee benefit costs increased $253,000, or 2.2%, over comparable 2001 amounts. The Company estimates that without the SunGard transaction salary and employee benefit costs would have increased approximately $700,000. One-fourth of this increase is due to new personnel in the Company's wealth management staff in Johnson County, Kansas. Another 20% of the increase arises from increased health insurance and employee benefit plan expense. General wage increases comprise the majority of the remaining increase. Net occupancy and equipment expense declined 2.6% from prior year amounts. Two-thirds of this decline was the result of reduced utility costs. Utility expense in 2001 was abnormally high by historical standards and returned to more normal levels in 2002. The Company also recorded reductions in depreciation expense and new fixed asset purchases. Data processing expense declined 12.5% from comparable 2001 amounts, and postage and dispatch costs fell 20.5% when compared to 2001 totals. As was noted last year, the Company incurred certain programming costs associated with revisions made to much of its product line. In addition, postage costs were incurred in order to notify all customers of these product changes. Similar expenses were not incurred in 2002. Advertising and promotional expense declined nominally from prior year amounts. In 2001, certain production costs were incurred in connection with a new advertising campaign that commenced in the second quarter. There was no such activity in the first quarter of 2002. Supplies expense and other noninterest expense declined 14.8% and 10.9%, respectively from comparable 2001 amounts. The Company continues to examine all areas of noninterest expense, including supplies, to reduce its expense structure. The reduction in other noninterest expense was due primarily to a reduction in net credit card processing costs and item processing costs. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not anticipate that adoption of Statement No. 143 will have a material impact on its operating results or its financial condition. FORWARD-LOOKING STATEMENTS This 10-Q contains various forward-looking statements and includes assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based on current expectations, are subject to risk and uncertainties and the Company undertakes no obligation to update any such statement to reflect later developments. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important economic, political and technological factors, among others, the absence of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (i) continuation of the current and projected future business environment, including interest rates and capital and consumer spending; (ii) competitive factors and competitor responses to Company initiatives; (iii) successful development and market introductions of anticipated new products; (iv) stability of government laws and regulations, including taxes; and (v) trends in the banking industry. PART 2. OTHER INFORMATION Item 6(b). Exhibits and Reports on Form 8-K. (a) Exhibits None (b) There were no reports on Form 8-K filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTRUST Financial Corporation Date: May 14, 2002 By: /s/ C.Q. Chandler IV --------------------- C.Q. Chandler IV President (Principal Executive Officer) Date: May 14, 2002 By: /s/ Jay L. Smith ----------------- Jay L. Smith Chief Financial Officer (Principal Accounting Officer)