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, 1996
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, 1996 -
12,524,418 shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated statements of financial condition --
March 31, 1996 and December 31, 1995
b) Consolidated statements of income --
three months ended March 31, 1996 and 1995
c) Consolidated statements of cash flows --
three months ended March 31, 1996 and 1995
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Dollars in thousands)
March 31, December 31,
<S> 1996 1995
ASSETS
<C> <C>
Cash and due from banks $76,197 $94,517
Interest bearing deposits with other banks 2,790 2,946
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $274,667 and $270,621
at March 31, 1996 and December 31, 1995) 272,631 270,290
Securities held-to-maturity, at amortized cost
(fair value of $130,669 and $132,383
at March 31, 1996 and December 31, 1995) 125,459 126,085
Total Investment Securities 398,090 396,375
Loans - net of unearned discount 1,314,900 1,259,415
Reserve for loan losses (27,570) (27,470)
Net Loans 1,287,330 1,231,945
Premises and equipment 24,327 23,383
Other assets 53,676 50,091
Total Assets $1,842,410 $1,799,257
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $187,290 $190,045
Interest bearing 1,290,531 1,251,704
Total Deposits 1,477,821 1,441,749
Federal funds purchased and securities
sold under agreements to repurchase 92,159 101,166
Other short-term borrowings 62,440 51,813
Other liabilities 32,695 30,109
Long-term debt 20,178 21,819
Total Liabilities 1,685,293 1,646,656
Shareholders' equity:
Common stock-no par value 5,700 5,429
Capital surplus 69,947 56,337
Retained earnings 87,671 96,952
Less cost of common stock in treasury (5,564) (6,497)
Unrealized depreciation of investment
securities, net (637) 380
Total Shareholders' Equity 157,117 152,601
Total Liabilities and Shareholders' Equity $1,842,410 $1,799,257
</TABLE>
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
1st Source Corporation and Subsidiaries
(Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
<S> 1996 1995
Interest Income: <C> <C>
Loans, including fees $29,495 $25,726
Investment securities:
Taxable 3,478 3,480
Tax-exempt 1,973 1,765
Other 285 391
Total Interest Income 35,231 31,362
Interest Expense:
Deposits 15,246 12,706
Short-term borrowings 1,803 1,073
Long-term debt 346 529
Total Interest Expense 17,395 14,308
Net Interest Income 17,836 17,054
Provision for Loan Losses 1,209 960
Net Interest Income After
Provision for Loan Losses 16,627 16,094
Other Income:
Trust fees 1,623 1,664
Service charges on deposit accounts 1,176 1,198
Mortgage servicing fees,
commission income and other 2,609 1,950
Investment securities and other gains 38 (153)
Total Other Income 5,446 4,659
Other Expense:
Salaries and employee benefits 8,652 8,090
Net occupancy expense 1,154 870
Furniture and equipment expense 1,295 1,438
Insurance expense 121 856
Other 2,646 2,113
Total Other Expense 13,868 13,367
Income Before Income Taxes 8,205 7,386
Income taxes 2,839 2,532
Net Income $5,366 $4,854
Per Common Share: <F1>
Net Income $0.42 $0.38
Dividends $0.080 $0.070
Weighted Average Common Shares Outstanding 12,777,155 12,793,028
<FN>
<F1> The computation of per share data gives retroactive recognition to a 3:2 stock split
declared on July 18, 1995, and a 5 percent stock dividend declared on January 22, 1996.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Dollars in thousands) Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Operating Activities:
Net income $5,366 $4,854
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,209 960
Depreciation of premises and equipment 785 609
Amortization of investment security premiums
and accretion of discounts, net 131 212
Deferred income taxes 0 974
Realized investment securities (gains) losses (38) 153
Increase in interest receivable (791) (32)
Increase in interest payable 1,590 3,297
Other 294 270
Net Cash Provided by Operating Activities 8,546 11,297
Investing Activities:
Proceeds from sales and maturities
of investment securities 34,329 28,244
Purchases of investment securities (37,839) (38,223)
Net increase in short-term investments 156 294
Loans sold or participated to others 27,620 39,806
Net increase in loans made to customers
and principal collections on loans (82,732) (79,356)
Principal payments received under lease 1,066 850
Purchase of assets to be leased (2,556) (1,169)
Purchases of premises and equipment (1,526) (681)
Other (203) (94)
Net Cash Used in Investing Activities (61,685) (50,329)
Financing Activities:
Net decrease in demand deposits, NOW
accounts and savings accounts (11,346) (41,697)
Net increase in certificates of deposit 47,418 65,648
Net increase in short-term borrowings 1,620 13,715
Payments on long-term debt (1,642) (5,429)
Acquisition of treasury stock (220) (140)
Cash dividends (999) (879)
Other (12) (12)
Net Cash Provided by Financing Activities 34,819 31,206
Decrease in Cash and Cash Equivalents (18,320) (7,826)
Cash and cash equivalents, beginning of year 94,517 79,226
Cash and Cash Equivalents, End of Period $76,197 $71,400
</TABLE>
-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.
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 assets 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.
-6-
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 and 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. The adoption of SFAS No. 114 had no impact on the
provision for loan losses as reported.
The provision for loan losses charged to expense is based upon the
actual net loan losses incurred as determined on a basis consistent
with SFAS No. 114, plus an amount for such other factors which, in
management's judgment, deserve recognition in estimating possible loan
losses. Loans are charged against the reserve for loan losses when
deemed uncollectible.
1st Source adopted Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" (SFAS No. 122) on
January 1, 1996. The new standard requires mortgage banking
enterprises to recognize as separate assets the rights to service
mortgage loans for others, however those mortgage servicing rights are
acquired. SFAS 122 also requires that mortgage banking enterprises
assess capitalized mortgage servicing rights based on the fair value of
those rights on a disaggregated basis. As of March 31, 1996, 1st
Source has capitalized $369,000 of originated mortgage servicing
rights. The adoption of SFAS No. 122 has had no material impact on the
financial statements.
1st Source has entered into two off-balance sheet amortizing
interest rate swaps as part of its interest rate risk management
strategy. The swaps are being used to hedge against the company's
prime floating rate loans. The notional amount of the first swap as of
March 31, 1996 is $29 million. It has a maturity date of January,
2002, and has a current fair value of $(555,000). The second swap has
a notional amount of $30 million as of March 31, 1996. It has a
maturity date of March, 2001, and has a fair value of $(272,000).
The company pays a variable interest rate (one month LIBOR) on
each swap and receives a fixed rate. The interest rate swaps are the
most efficient means of protecting the bank net interest rate margin in
a declining interest rate environment. Conversely, if interest rates
increase, the increased contribution to net interest income from on-
balance sheet assets will substantially offset any negative impact on
net interest income from these swap transactions.
-7-
1st Source adopted Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-based Compensation" (SFAS No. 123) on
January 1, 1996. This Statement requires the fair value of stock
options and other stock-based compensation issued to employees to
either be included as compensation expense in the statement of income,
or the pro forma effect on net income and earnings per share of such
compensation expense to be disclosed in the footnotes to the financial
statements. 1st Source adopted SFAS No. 123 on a disclosure basis only
and, accordingly, the adoption of this Statement will not have a
material impact on the company's financial position. There have been
no stock options granted during the first quarter of 1996.
-8-
COMPARISON OF THREE MONTH PERIODS
ENDED MARCH 31, 1996 AND 1995
Net income for the three month period ended March 31, 1996 was
$5,366,000 compared to $4,854,000 for the equivalent period in 1995.
The primary reasons for the increase were an increase in net interest
income and a strong increase in other income offset by an increase in
the provision for loan losses and only a modest increase in other
expense.
Net income per share increased to $0.42 for the three month
period ended March 31, 1996 from $0.38 in 1995. Return on average
equity was 13.98% for the three months ended March 31, 1996 compared to
14.09% in 1995. 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 13.93% for the three months ended March 31, 1996
compared to 14.81% for the same period in 1995. The return on total
average assets was 1.20% for the three months ended March 31, 1996
compared to 1.24% in 1995.
NET INTEREST INCOME
The taxable equivalent net interest income for the three month
period ended March 31, 1996 was $18,780,000, an increase of 4.39% over
the same period in 1995, resulting in a net yield of 4.51% compared to
4.95% in 1995.
Total average earning assets increased 13.53% for the period ended
March 31, 1996 compared to the period ended March 31, 1995. Total
average investment securities increased 8.25% from one year ago,
and a 15.27% increase in average loans occurred primarily in
transportation and equipment loans. The taxable equivalent yields on
total average earning assets were 8.69% and 8.89% for the periods ended
March 31, 1996 and 1995, respectively.
Average deposits increased 9.86% from the first quarter of 1995 to
the first quarter of 1996. The cost rate on average interest bearing
funds was 4.89% for the period ended March 31, 1996 compared to 4.59%
for the three months ended March 31, 1995. The majority of the growth
in deposits from last year has occurred in time deposits of
$100 thousand and over and time deposits less than one year.
The following table sets forth consolidated information
regarding average balances and rates.
-9-
<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three months ended March 31,
1996 1995
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 $2,774 $34 4.98% $999 $6 2.56%
Investment securities:
Taxable 249,379 3,717 6.00% 241,924 3,762 6.31%
Tax exempt <F1> 141,882 2,879 8.16% 114,801 2,651 9.37%
Net loans <F2><F3> 1,278,685 29,533 9.29% 1,109,321 25,777 9.42%
Other investments 811 12 5.73% 7,044 103 5.91%
Total Earning Assets 1,673,531 36,175 8.69% 1,474,089 32,299 8.89%
Cash and due from banks 72,251 70,383
Reserve for loan losses (27,566) (24,157)
Other assets 73,394 69,161
Total $1,791,610 $1,589,476
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,266,349 15,245 4.84% $1,144,237 12,706 4.50%
Short-term borrowings 144,566 1,804 5.02% 94,176 1,073 4.62%
Long-term debt 20,840 346 6.68% 26,811 529 8.00%
Total Interest Bearing Liabilities 1,431,755 17,395 4.89% 1,265,224 14,308 4.59%
Noninterest bearing deposits 172,550 165,468
Other liabilities 32,340 25,827
Shareholders' equity 154,965 132,957
Total $1,791,610 $1,589,476
Net Interest Income $18,780 $17,991
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.51% 4.95%
<FN>
<F1> Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1996 and 1995.
Tax equivalent adjustments were $906 in 1996 and $886 in 1995.
<F2> Loan income includes fees on loans of $756 in 1996 and $761 in 1995. Loan income also includes the effects of
taxable equivalent adjustments, using a 40.525% rate for 1996 and 1995. The tax equivalent adjustments were
$38 in 1996 and $51 in 1995.
<F3> For purposes of this computation, nonaccruing loans are included in the daily average loan amounts outstanding.
</FN>
</TABLE>
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PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended
March 31, 1996 and 1995 was $1,209,000 and $960,000, respectively.
Year-to-date Net Charge-offs of $1,109,000 have been recorded in 1996,
compared to $229,000 of Net Recoveries in the same period in 1995. The
reserve for loan losses was $27,570,000 or 2.10% of net loans at March
31, 1996 compared to $27,470,000 or 2.18% of net loans at December 31,
1995.
Nonperforming assets at March 31, 1996 were $7,867,000 compared to
$6,584,000 at December 31, 1995, an increase of 19.47%. At March 31,
1996, nonperforming assets were .60% of net loans compared to .52% at
December 31, 1995. 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, 1996.
OTHER INCOME
Other income for the three month periods ended March 31, 1996 and
1995 was $5,446,000 and $4,659,000, respectively. Trust fees decreased
2.46%, service charges on deposit accounts decreased 1.84% and other
mortgage servicing fees, commission income and other income increased
46.82% over the same period in 1995. The significant increases in the
last category were attributed primarily to increases in mortgage
servicing, salable loan fees and equipment rental income. Investment
securities and other gains were $38,000 in 1996 compared to $153,000 in
losses in 1995. The net gains in 1996 and the net losses in 1995 were
primarily due to adjustments made to the carrying value of certain
partnership investments.
OTHER EXPENSE
Other expense for the three month period ended March 31, 1996
was $13,868,000, an increase of 3.75% over the same period in 1995.
For the three month period ended March 31, 1996, salaries and employee
benefits increased 6.95%, furniture and equipment costs decreased
9.94%, net occupancy expense increased 32.65%, insurance expense
decreased 85.86%, business development and marketing expense increased
38.53% and miscellaneous other expenses increased 22.67% over the same
period in 1995. The increase in net occupancy expense is due to the
loss of a major tenant in our corporate headquarters building. The
decrease in insurance expense reflects an FDIC assessment factor of 0%
for 1996. The Business development and marketing expense has increased
due to new branches being opened in 1996. The increase in
miscellaneous expense is due to depreciation of leased equipment.
-11-
INCOME TAXES
The provision for income taxes for the three months ended
March 31, 1996 was $2,839,000 compared to $2,532,000 for the comparable
period in 1995. The increase was due to increased taxable income in
1996.
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 8.57% at March 31, 1996.
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 1996 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,
1996 was 11.41% and the total risk-based capital ratio was 12.99%.
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, 1996, the consolidated statement
of financial condition was rate sensitive by $37,471,000 more assets
than liabilities scheduled to reprice within one year or 104.25%.
Management adjusts the composition of its assets and liabilities
to manage the interest rate sensitivity gap based upon its expectations
of interest rate fluctuations.
-12-
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
-13-
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 May 15, 1996 Christopher J. Murphy III /s/
(Signature)
Christopher J. Murphy III, President
DATE May 15, 1996 Larry E. Lentych /s/
(Signature)
Larry E. Lentych, Treasurer (Chief
Accounting and Financial Officer)
-14-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 76197
<INT-BEARING-DEPOSITS> 2790
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 272631
<INVESTMENTS-CARRYING> 125459
<INVESTMENTS-MARKET> 130669
<LOANS> 1314900
<ALLOWANCE> 27570
<TOTAL-ASSETS> 1842410
<DEPOSITS> 1477821
<SHORT-TERM> 154599
<LIABILITIES-OTHER> 32695
<LONG-TERM> 20178
0
0
<COMMON> 5700
<OTHER-SE> 151417
<TOTAL-LIABILITIES-AND-EQUITY> 1842410
<INTEREST-LOAN> 29495
<INTEREST-INVEST> 5736
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 35231
<INTEREST-DEPOSIT> 15246
<INTEREST-EXPENSE> 17395
<INTEREST-INCOME-NET> 17836
<LOAN-LOSSES> 1209
<SECURITIES-GAINS> 38
<EXPENSE-OTHER> 13868
<INCOME-PRETAX> 8205
<INCOME-PRE-EXTRAORDINARY> 5366
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5366
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<YIELD-ACTUAL> 4.51
<LOANS-NON> 5825
<LOANS-PAST> 625
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 27470
<CHARGE-OFFS> 1382
<RECOVERIES> 273
<ALLOWANCE-CLOSE> 27570
<ALLOWANCE-DOMESTIC> 10082
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 17488
</TABLE>
