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 MARCH 31, 1995
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 0-5907
1ST SOURCE CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1068133
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Michigan Street South Bend, Indiana 46601
(Address of principal executive offices) (Zip Code)
(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 March 31, 1995 -
7,986,188 shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated statements of financial condition --
March 31, 1995 and December 31, 1994
b) Consolidated statements of income --
three months ended March 31, 1995 and 1994
c) Consolidated statements of cash flows --
three months ended March 31, 1995 and 1994
-2-
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Dollars in thousands)
March 31, December 3
1995 1994
ASSETS
Cash and due from banks $71,400 $79,226
Interest bearing deposits with other banks 1,000 3,494
Federal funds sold 5,000 2,800
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $255,785 and $260,246
at March 31, 1995 and December 31, 1994) 247,601 245,753
Securities held-to-maturity, at amortized cost
(fair value of $121,831 and $105,263
at March 31, 1995 and December 31, 1994) 118,209 104,132
Total Investment Securities 365,810 349,885
Loans - net of unearned discount 1,140,509 1,100,713
Reserve for loan losses (25,057) (23,868)
Net Loans 1,115,452 1,076,845
Premises and equipment 23,892 21,306
Other assets 43,632 49,471
Total Assets $1,626,186 $1,583,027
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $171,609 $187,003
Interest bearing 1,153,679 1,114,334
Total Deposits 1,325,288 1,301,337
Federal funds purchased and securities
sold under agreements to repurchase 86,159 76,403
Other short-term borrowings 28,040 24,162
Other liabilities 27,192 23,959
Long-term debt 22,655 28,084
Total Liabilities 1,489,334 1,453,945
Shareholders' equity:
Common stock-no par value 5,429 5,170
Capital surplus 56,338 45,788
Retained earnings 83,513 90,444
Less cost of common stock in treasury (3,717) (4,036)
Unrealized depreciation of investment
securities, net (4,711) (8,284)
Total Shareholders' Equity 136,852 129,082
Total Liabilities and Shareholders' Equity $1,626,186 $1,583,027
CONSOLIDATED STATEMENTS OF INCOME
1st Source Corporation and Subsidiaries
(Dollars in thousands, except per share amounts)
Three Months Ended March 31
1995 1994
Interest Income:
Loans, including fees $25,726 $20,625
Investment securities:
Taxable 3,480 3,158
Tax-exempt 1,765 1,612
Other 391 303
Total Interest Income 31,362 25,698
Interest Expense:
Deposits 12,706 9,094
Short-term borrowings 1,073 889
Long-term debt 529 424
Total Interest Expense 14,308 10,407
Net Interest Income 17,054 15,291
Provision for Loan Losses 960 898
Net Interest Income After
Provision for Loan Losses 16,094 14,393
Other Income:
Trust fees 1,664 1,513
Service charges on deposit accounts 1,198 1,087
Mortgage servicing fees, commission income and other 1,950 936
Investment securities and other gains (losses) (153) 33
Total Other Income 4,659 3,569
Other Expense:
Salaries and employee benefits 8,090 6,966
Net occupancy expense 870 846
Furniture and equipment expense 1,438 1,155
Insurance expense 856 766
Other 2,113 1,945
Total Other Expense 13,367 11,678
Income Before Income Taxes 7,386 6,284
Income taxes 2,532 1,948
Net Income $4,854 $4,336
Per Common Share: (1)
Net Income $0.60 $0.54
Dividends $0.110 $0.095
Weighted Average Common Shares Outstanding 8,122,557 8,116,980
(1) The computation of per share data gives retroactive recognition to a 5
percent stock dividend declared January 23, 1995.
-4-
CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Dollars in thousands)
Three Months Ended March
1995 1994
Operating Activities:
Net income $4,854 $4,336
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 960 898
Depreciation of premises and equipment 609 494
Amortization of investment security premiums
and accretion of discounts, net 212 289
Deferred income taxes 974 (195)
Increase in trading account securities - 225
Realized investment securities (gains) losses 153 (33)
Increase in interest receivable (32) (149)
Increase in interest payable 3,297 1,662
Other 270 (746)
Net Cash Provided by Operating Activities 11,297 6,781
Investing Activities:
Proceeds from sales and maturities of investment 28,244 29,394
securities
Purchases of investment securities (38,223) (30,047)
Net (increase) decrease in short-term investments 294 (12,044)
Loans sold or participated to others 39,806 37,703
Net increase in loans made to customers
and principal collections on loans (79,356) (66,976)
Principal payments received under leases 850 773
Purchase of assets to be leased (1,169) (1,165)
Purchases of premises and equipment (681) (4,060)
Other (94) 72
Net Cash Used in Investing Activities (50,329) (46,350)
Financing Activities:
Net increase (decrease) in demand deposits, NOW
accounts and savings accounts (41,697) 4,840
Net increase in certificates of deposit 65,648 34,915
Net (decrease) increase in short-term borrowings 13,715 (7,097)
Payments on long-term debt (5,429) (4)
Acquisition of treasury stock (140) (937)
Cash dividends (879) (765)
Other (12) (12)
Net Cash Provided by Financing Activities 31,206 30,940
Decrease in Cash and Cash Equivalents (7,826) (8,629)
Cash and cash equivalents, beginning of year 79,226 77,375
Cash and Cash Equivalents, End of Period $71,400 $68,746
-5-
PART I.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 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.
This discussion and analysis should be read in conjunction with
the Company's consolidated condensed financial statements and the
financial and statistical data appearing elsewhere in this report. The
amounts shown in this analysis have been adjusted to reflect tax-exempt
income on a tax equivalent basis using a 40.525% rate.
Effective December 31, 1993, 1st Source adopted, on a prospective
basis, Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
and revised its investment securities accounting policy. Securities
that may be sold as part of 1st Source's asset/liability or liquidity
management or in response to or in anticipation of changes in interest
rates and resulting prepayment risk, or for other similar factors, are
classified as available-for-sale and carried at fair market value.
Unrealized holding gains and losses on such securities are reported net
of related deferred income taxes as a separate component of
shareholders' equity. Trading securities are carried at fair market
value with unrealized gains and losses included in current earnings.
Securities that 1st Source has the ability and positive intent to hold
to maturity are classified as held-to-maturity and carried at amortized
cost. Realized gains and losses on the sales of all securities are
reported in earnings and computed using the specific identification
cost basis.
On September 30, 1994, 1st Source Corporation purchased the
remaining shares of the outstanding common stock of Mortgage
Acquisition Company the parent company of Trustcorp Mortgage Company, a
South Bend based full service mortgage banker (collectively "Trustcorp
Mortgage Company" or "Trustcorp"). 1st Source previously owned 30% of
the outstanding common stock of Trustcorp. The purchase price
consisted of approximately $2.6 million in cash, $500,000 in guaranteed
notes maturing in one to two years and 91,504 shares of 1st Source
Corporation common stock with a market value of approximately
$2.4 million.
The acquired net assests of Trustcorp consisted of $17 million of
mortgage loans held for sale, $5.2 million of mortgage servicing
rights, and $1.9 million of other assets. Liabilities assumed
consisted of $20.5 million of borrowings and $1.1 million of other
liabilities. A premium in excess of book value of $3.6 million was
paid in the transaction and allocated to purchased mortgage servicing
rights ($2.2 million) and goodwill ($1.4 million). At the date of its
acquisition, Trustcorp had a mortgage loan servicing portfolio in
excess of $1.0 billion.
During the third quarter of 1994, 1st Source Bank completed the
securitization of $60 million of aircraft loans originated by its
Transportation and Equipment Financing Group. 1st Source Bank will
continue to service the loans for a fee. A total of $1.45 million was
expensed in connection with this transaction. Due to reduced loan
outstandings, a similar amount was released from the reserve for loan
losses which made the transaction income neutral in the third quarter
of 1994.
1st Source adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114)
on January 1, 1995. Under the new standard, a loan is considered
impaired, based on current information and events, if it is probable
that the Corporation will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of
the loan agreement. The measurement of impaired loans is generally
based on the present value of expected future cash flows discounted at
the historical effective interest rate, except that all collateral-
dependent loans are measured for impairment based on the fair value of
the collateral. At March 31, 1995, 1st Source has not yet completed
its analysis of the impact of SFAS 114, but management feels current
policies for establishing the allowance for loan losses include those
loans that may be considered impaired under SFAS 114, therefore,
management does not expect any increase in the provision for loan
losses as a result of this adoption. In accordance with the
aforementioned, the adoption of SFAS 114 is not expected to affect the
comparability between any of the periods in the years ended December
31, 1995 and 1994.
-7-
COMPARISON OF THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1994
Net income for the three month period ended March 31, 1995 was
$4,854,000 compared to $4,336,000 for the equivalent period in 1994.
The primary reasons for the increase were an increase in net interest
income and an increase in other income offset by a slight increase in
the provision for loan losses and an increase in other expense.
Net income per share increased to $0.60 for the three month
period ended March 31, 1995 from $0.54 in 1994. Return on average
equity was 14.09% for the three months ended March 31, 1995 compared to
14.17% in 1994. This ratio is based on shareholders' equity before the
market value adjustment for securities designated as "available for
sale" as required by SFAS No. 115. The ratio after the market value
adjustment was 14.81% for the three months ended March 31, 1995
compared to 13.94% for the same period in 1994. The return on total
average assets was 1.24% for the three months ended March 31, 1995
compared to 1.18% in 1994.
NET INTEREST INCOME
The taxable equivalent net interest income for the three month
period ended March 31, 1995 was $17,991,000, an increase of 10.81% over
the same period in 1994, resulting in a net yield of 4.95% compared to
4.75% in 1994.
Total average earning assets increased 6.39% for the period ended
March 31, 1995 compared to the period ended March 31, 1994. Total
average investment securities increased 0.29% from one year ago,
and an 8.56% increase in average loans occurred primarily in commercial
and real estate loans. The taxable equivalent yields on total
average earning assets were 8.89% and 7.80% for the periods ended
March 31, 1995 and 1994, respectively.
Average deposits increased 10.03% from the first quarter of 1994
to the first quarter of 1995. The cost rate on average interest
bearing funds was 4.59% for the period ended March 31, 1995 compared to
3.55% for the three months ended March 31, 1994. The majority of the
growth in deposits from last year has occurred in time deposits of
$100 thousand and over and time deposits greater than one year. An
increase of 8.24% in average non-interest bearing deposits for the
period ended March 31, 1995 over the same period in 1994 was a factor
in preserving the net yield on earning assets.
The following table sets forth consolidated information
regarding average balances and rates.
-8-
<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three months ended March 31, 1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest bearing deposits $999 $6 2.56% $179 $1 2.92%
Investment securities:
Taxable 241,924 3,762 6.31% 258,561 3,430 5.38%
Tax exempt <F1> 114,801 2,651 9.37% 101,299 2,498 10.00%
Net loans <F2><F3> 1,109,321 25,777 9.42% 1,021,856 20,684 8.21%
Other investments 7,044 103 5.91% 3,671 30 3.28%
Total Earning Assets 1,474,089 32,299 8.89% 1,385,566 26,643 7.80%
Cash and due from banks 70,383 74,974
Reserve for loan losses (24,157) (22,641)
Other assets 69,161 52,803
Total $1,589,476 $1,490,702
LIABILITIES AND SHAREHOLDERS' EQUITY:
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits $1,144,237 12,706 4.50% $1,037,463 9,094 3.55%
Short-term borrowings 94,176 1,073 4.62% 126,079 889 2.86%
Long-term debt 26,811 529 8.00% 25,471 424 6.75%
Total Interest Bearing Liabilities 1,265,224 14,308 4.59% 1,189,013 10,407 3.55%
Noninterest bearing deposits 165,468 152,873
Other liabilities 25,827 22,652
Shareholders' equity 132,957 126,164
Total $1,589,476 $1,490,702
Net Interest Income $17,992 $16,236
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.95% 4.75%
<FN>
<F1> Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1995 and 1994.
The tax equivalent adjustments were $886 in 1995 and 1994.
<F2> Loan income includes fees on loans of $761 in 1995 and $784 in 1994. Loan income also includes the effects of
taxable equivalent adjustments, using a 40.525% rate for 1995 and 1994. The tax equivalent adjustments were
$51 in 1995 and $59 in 1994.
<F3> For purposes of this computation, nonaccruing loans are included in the daily average loan amounts outstanding.
</TABLE>
-9-
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended
March 31, 1995 and 1994 was $960,000 and $898,000, respectively. Year-
to-date Net Recoveries of $229,000 have been recorded in 1995, compared
to $492,000 of Net Charge-offs in the same period in 1994. The reserve
for loan losses was $25,057,000 or 2.20% of net loans at March 3, 1995
compared to $23,868,000 or 2.17% of net loans at December 31, 1994.
Nonperforming assets at March 31, 1995 were $4,753,000 compared to
$4,700,000 at December 31, 1994, a slight increase of 1.13%. At March
31, 1995, nonperforming assets were .42% of net loans compared to .43%
at December 31, 1994. It is management's opinion that the reserve for
loan losses is adequate to absorb anticipated losses in the loan
portfolio as of March 31, 1995.
OTHER INCOME
Other income for the three month periods ended March 31, 1995 and
1994 was $4,659,000 and $3,569,000, respectively. Trust fees increased
9.98%, service charges on deposit accounts increased 10.21% and other
mortgage servicing fees, commission income and other income increased
108.33% over the same period in 1994. The significant increases in the
last category were due to income recorded of $156,000 for the aircraft
securitization, $575,000 growth in mortgage servicing fees and net
gains on the sale of mortgage loans and servicing from the acquisition
of Trustcorp Mortgage Company in September 1994. Investment securities
and other losses were $153,000 in 1995 compared to $33,000 in gains in
1994. These losses were primarily due to a $159,000 adjustment made to
the carrying value of certain partnership investments.
OTHER EXPENSE
Other expense for the three month period ended March 31, 1995
was $13,367,000, an increase of 14.46% over the same period in 1994.
For the three month period ended March 31, 1995, salaries and employee
benefits increased 16.14%, furniture and equipment costs increased
24.50%, insurance expense increased 11.75%, business development and
marketing expense decreased 29.17% and miscellaneous other expenses
increased 14.37% over the same period in 1994. The increase in these
expenses was primarily due to the acquisition of Trustcorp Mortgage
Company in September 1994.
INCOME TAXES
The provision for income taxes for the three months ended
March 31, 1995 was $2,532,000 compared to $1,948,000 for the comparable
period in 1994. The increase was due to increased taxable income in
1995.
-10-
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 8.47% at March 31, 1995.
The Federal Reserve Board has also approved final 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 1995 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 risked-based capital ratio on March 31,
1995 was 11.71% and the total risk-based capital ratio was 14.06%.
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 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 sensitivity gaps and
interest spreads. Maturities of rate sensitive assets are carefully
maintained relative to the maturities of rate sensitive liabilities and
interest rate forecasts. At March 31, 1995, the consolidated statement
of financial condition was rate sensitive by $88,984,000 more assets
than liabilities scheduled to reprice within one year or 112.27%.
Management adjusts the composition of its assets and liabilities
to manage the interest rate sensitivity gap based upon its expectations
of interest rate fluctuations.
-11-
PART II. OTHER INFORMATION
Item l. 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.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
-12-
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
----------------------
(Registrant)
DATE 5/9/95 Christopher J. Murphy III /s/
------------------------------------
(Signature)
Christopher J. Murphy III, President
DATE 5/9/95 Larry E. Lentych /s/
------------------------------------
(Signature)
Larry E. Lentych, Treasurer (Chief
Accounting and Financial Officer)
-13-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 71,400
<INT-BEARING-DEPOSITS> 1,000
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 247,601
<INVESTMENTS-CARRYING> 118,209
<INVESTMENTS-MARKET> 121,831
<LOANS> 1,140,509
<ALLOWANCE> 25,057
<TOTAL-ASSETS> 1,626,186
<DEPOSITS> 1,325,288
<SHORT-TERM> 114,199
<LIABILITIES-OTHER> 27,192
<LONG-TERM> 22,655
<COMMON> 5,429
0
0
<OTHER-SE> 131,423
<TOTAL-LIABILITIES-AND-EQUITY> 1,626,186
<INTEREST-LOAN> 25,726
<INTEREST-INVEST> 5,636
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 31,362
<INTEREST-DEPOSIT> 12,706
<INTEREST-EXPENSE> 14,308
<INTEREST-INCOME-NET> 17,054
<LOAN-LOSSES> 960
<SECURITIES-GAINS> (153)
<EXPENSE-OTHER> 13,367
<INCOME-PRETAX> 7,386
<INCOME-PRE-EXTRAORDINARY> 4,854
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,854
<EPS-PRIMARY> .60
<EPS-DILUTED> .60
<YIELD-ACTUAL> 4.95
<LOANS-NON> 3,501
<LOANS-PAST> 450
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 23,868
<CHARGE-OFFS> 81
<RECOVERIES> 310
<ALLOWANCE-CLOSE> 25,057
<ALLOWANCE-DOMESTIC> 9,132
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 15,925
</TABLE>
