FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
MARCH 31, 1997
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 of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Michigan Street South Bend, Indiana 46601
(Address of principal executive offices) (Zip Code)
(219) 235-2702
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Number of shares of common stock outstanding as of March 31, 1997 -
15,674,651 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Page
Consolidated statements of financial condition -- 3
March 31, 1997, and December 31, 1996
Consolidated statements of income -- 4
three months ended March 31, 1997 and 1996
Consolidated statements of cash flows -- 5
three months ended March 31, 1997 and 1996
Notes to the Consolidated Financial Statements 6
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Dollars in thousands)
March 31, December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 86,440 $ 137,588
Interest bearing deposits with other banks 1,248 600
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $307,144 and $303,177
at March 31, 1997 and December 31, 1996) 305,232 302,602
Securities held-to-maturity, at amortized cost
(fair value of $120,469 and $125,218 at
March 31, 1997 and December 31, 1996) 117,241 120,494
Total Investment Securities 422,473 423,096
Loans - net of unearned discount 1,536,803 1,455,563
Reserve for loan losses (31,004) (29,516)
Net Loans 1,505,799 1,426,047
Premises and equipment 28,288 27,780
Other assets 68,590 64,656
Total Assets $2,112,838 $2,079,767
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 228,510 $ 207,280
Interest bearing 1,394,626 1,426,698
Total Deposits 1,623,136 1,633,978
Federal funds purchased and securities
sold under agreements to repurchase 127,143 112,580
Other short-term borrowings 89,570 112,283
Other liabilities 34,561 30,497
Long-term debt 18,575 18,596
Total Liabilities 1,892,985 1,907,934
Guaranteed Preferred Beneficial Interests
in the Company's Subordinated Debentures 42,500 --
Shareholders' equity:
Common stock-no par value 5,700 5,700
Capital surplus 69,947 69,947
Retained earnings 107,798 102,399
Less cost of common stock in treasury (5,711) (6,670)
Unrealized appreciation (depreciation) of
investment securities, net (381) 457
Total Shareholders' Equity 177,353 171,833
Total Liabilities and Shareholders' Equity $2,112,838 $2,079,767
The accompanying notes are a part of the
consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
1st Source Corporation and Subsidiaries
(Dollars in thousands, except per share amounts)
Three Months Ended March 31
1997 1996
<S> <C> <C>
Interest Income:
Loans, including fees $ 33,010 $ 29,495
Investment securities:
Taxable 4,022 3,478
Tax-exempt 2,034 1,973
Other 80 285
Total Interest Income 39,146 35,231
Interest Expense:
Deposits 16,487 15,246
Short-term borrowings 2,670 1,803
Long-term debt 318 346
Total Interest Expense 19,475 17,395
Net Interest Income 19,671 17,836
Provision for Loan Losses 1,229 1,209
Net Interest Income After
Provision for Loan Losses 18,442 16,627
Other Income:
Trust fees 1,769 1,623
Service charges on deposit accounts 1,249 1,176
Mortgage servicing fees, and mortgage loan sale income 1,119 979
Equipment rental income 1,156 201
Commission, securitization and other income 1,687 1,429
Investment securities and other gains (losses) 181 38
Total Other Income 7,161 5,446
Other Expense:
Salaries and employee benefits 9,691 8,652
Net occupancy expense 1,172 1,154
Furniture and equipment expense 1,544 1,295
Depreciation - leased equipment 768 226
Business development and marketing expense 493 471
Other 2,575 2,070
Total Other Expense 16,243 13,868
Income Before Income Taxes and Subsidiary Trust Distributions 9,360 8,205
Income taxes 3,235 2,839
Distribution on Preferred Securities of
Subsidiary Trusts, Net of Tax 59 --
Net Income $ 6,066 $ 5,366
Per Common Share: <F1>
Net Income $ 0.38 $ 0.34
Dividends $ 0.072 $ 0.064
Weighted Average Common Shares Outstanding 16,097,698 15,971,223
<FN>
<F1> The computation of per share data gives retroactive recognition to a 5:4
stock split delcared on January 21, 1997.
<F2>The accompanying notes are a part of the consolidated financial statements.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Dollars in thousands)
Three Months Ended March 31
1997 1996
<S> <C> <C>
Operating Activities:
Net income $ 6,066 $ 5,366
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,229 1,209
Depreciation of premises and equipment 1,557 785
Amortization of investment security premiums
and accretion of discounts, net 226 131
Deferred income taxes (626) 0
Realized investment securities (gains) (181) (38)
Increase in interest receivable (585) (791)
Increase in interest payable 2,813 1,590
Other 548 294
Net Cash Provided by Operating Activities 11,047 8,546
Investing Activities:
Proceeds from sales and maturities of investment securities 30,481 34,329
Purchases of investment securities (31,239) (37,839)
Net (decrease) increase in short-term investments (648) 156
Loans sold or participated to others 37,367 27,620
Net increase in loans made to customers
and principal collections on loans (117,033) (82,732)
Net increase in leased assets (1,389) (1,490)
Purchases of premises and equipment (859) (1,526)
Other (1,206) (203)
Net Cash Used in Investing Activities (84,526) (61,685)
Financing Activities:
Net decrease in demand deposits, NOW
accounts and savings accounts (14,802) (11,346)
Net increase in certificates of deposit 3,961 47,418
Net (decrease) increase in short-term borrowings (8,150) 1,620
Payments on long-term debt (21) (1,642)
New issuance of trust preferred securities 42,500 0
Acquisition of treasury stock (23) (220)
Cash dividends (1,126) (999)
Other (8) (12)
Net Cash Provided by Financing Activities 22,331 34,819
Decrease in Cash and Cash Equivalents (51,148) (18,320)
Cash and Cash Equivalents, Beginning of Year 137,588 94,517
Cash and Cash Equivalents, End of Period $ 86,440 $ 76,197
<FN>
<F1> The accompanying notes are a part of the consolidated financial statements.
</FN>
</TABLE>
Notes to Consolidated Financial Statements
1. The unaudited consolidated condensed financial statements have been
prepared in accordance with the instructions for Form 10-Q and
therefore do not include all information and footnotes necessary for
a fair presentation of financial position, results of operations and
cash flows in conformity with generally accepted accounting principles.
The information furnished herein reflects all adjustments (all which
are normal and recurring in nature) which are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods for which this report is submitted. The notes to the
consolidated financial statements contained in the annual report 10-K
for the year ended December 31, 1996, should be read in conjunction
with these statements.
2. 1st Source has adopted Financial Accounting Standard No. 125 (SFAS
125), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," as of January 1, 1997. SFAS 125
requires that after a transfer of financial assets, an entity must
recognize the financial and servicing assets controlled and liabilities
incurred and derecognize financial assets and liabilities in which
control is surrendered or when debt is extinguished. The impact on 1st
Source's financial position and results of operations has not been
material.
3. In February 1997, Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share," was issued by the Financial
Accounting Standards Board. 1st Source is required to adopt this
pronouncement as of December 31, 1997. SFAS No. 128 will require
1st Source to make a dual presentation of basic and fully diluted
earnings per share on the face of its consolidated statements of
income. The Company does not presently anticipate that SFAS No. 128
will have a significant impact on the Company's historically reported
earnings per share.
4. On March 21, 1997, 1st Source raised $42.5 million through the issuance
of Cumulative Trust Preferred Securities. 1st Source Capital Trust I
issued $27.5 million of 9.00% Cumulative Trust Preferred Securities.
1st Source Capital Trust II issued $15 million of floating rate
Cumulative Trust Preferred Securities. 1st Source Capital Trust I and
1st Source Capital Trust II are wholly-owned consolidated subsidiaries
of the Company. 1st Source Capital Trust II issued an additional
$2.25 million of floating rate Cumulative Trust Preferred Securities
on April 10, 1997.
The Holders of the Fixed Rate Preferred Securities are entitled to
receive preferential cumulative cash distributions from 1st Source
Capital Trust I, at the annual rate of 9.00% of the liquidation amount
of $25 per Preferred Security, accruing from the date of original
issuance and payable quarterly in arrears on the last day of March,
June, September and December of each year. Holders of the Floating
Rate Preferred Securities are entitled to receive preferential
cumulative cash distributions from 1st Source Capital Trust II, at the
annual rate equal to the sum of the 3-Month Treasury plus 2.25% of the
liquidation amount of $25 per Floating Rate Preferred Security accruing
from the date of original issuance and payable quarterly in arrears on
the last day of March, June, September and December of each year.
The Company, 1st Source Capital Trust I and 1st Source Capital Trust
II have executed a guarantee with regard to the trust preferred
securities. The guarantee, when taken together with the company's
obligations under the trust debentures, the indenture pursuant to which
the trust debentures were issued, and the applicable trust document,
provides a full and unconditional guarantee of the trusts' obligations
under the trust preferred securities.
5. In February, 1997, members of the Department of Financial Institutions,
in the State of Indiana, approved an Order which waives the prohibition
of the sale of life insurance by State Chartered banks in Indiana who
have branches located in states other than Indiana. 1st Source Bank's
two Michigan branches will be required to meet all licensee
requirements in that state.
PART I.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 and the 1996 1st Source
Corporation Annual Report on Form 10-K. The amounts shown in this analysis
have been adjusted to reflect tax-exempt income on a tax equivalent basis
using a 40.525% rate.
COMPARISON OF THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1996
Net income for the three-month period ended March 31, 1997, was $6,066,000
compared to $5,366,000 for the equivalent period in 1996. 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 an increase in other expense.
Net income per share increased to $0.38 for the three-month period ended
March 31, 1997, from $0.34 in 1996. Return on average common shareholders'
equity was 14.10% for the three months ended March 31, 1997, compared to
13.93% in 1996. The return on total average assets was 1.22% for the three
months ended March 31, 1997, compared to 1.20% in 1996.
NET INTEREST INCOME
The taxable equivalent net interest income for the three-month period ended
March 31, 1997, was $20,623,000, an increase of 9.81% over the same period in
1996, resulting in a net yield of 4.43% compared to 4.51% in 1996.
Total average earning assets increased 12.86% for the three-month period
ended March 31, 1997, compared to the period ended March 31, 1996. Total
average investment securities increased 6.48% from one year ago due to an
increase in municipal and agency securities, while a 14.45% increase in
average loans occurred primarily in transportation and equipment loans. The
taxable equivalent yields on total average earning assets were 8.61% and
8.69% for the periods ended March 31, 1997, and 1996 respectively.
Average deposits increased 9.83% from the first quarter of 1996 to the
first quarter of 1997. The cost rate on average interest-bearing funds was
4.88% for the three-months ended March 31, 1997, compared to 4.89% for the
three months ended March 31, 1996. 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.
The following table sets forth consolidated information regarding average
balances and rates.
<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three Months Ended March 31
1997 1996
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment securities:
Taxable $ 268,132 $ 4,022 6.08% $ 249,379 $ 3,717 6.00%
Tax exempt<F1> 150,335 2,950 7.96% 141,882 2,879 8.16%
Net loans <F2><F3> 1,463,451 33,046 9.16% 1,278,685 29,533 9.29%
Other investments 6,762 81 4.83% 3,585 46 4.94%
Total Earning Assets 1,888,680 40,098 8.61% 1,673,531 36,175 8.69%
Cash and due from banks 70,154 72,251
Reserve for loan losses (29,833) (27,566)
Other assets 93,595 73,394
Total $2,022,596 $1,791,610
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,389,972 16,487 4.81% $1,266,349 15,245 4.84%
Short-term borrowings 210,805 2,670 5.14% 144,566 1,804 5.02%
Long-term debt 18,585 318 6.93% 20,840 346 6.68%
Total Interest Bearing Liabilities 1,619,362 19,475 4.88% 1,431,755 17,395 4.89%
Noninterest bearing deposits 190,387 172,550
Other liabilities 38,436 32,340
Shareholders' equity 174,411 154,965
Total $2,022,596 $1,791,610
Net Interest Income $20,623 $18,780
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.43% 4.51%
<FN>
<F1>Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1997 and 1996. Tax
equivalent adjustments were $916 in 1997 and $906 in 1996.
<F2>Loan income includes fees of $797 in 1997 and $756 in 1996. Loan income also includes the effects of taxable equivalent
adjustments, using a 40.525% rate for 1997 and 1996. The tax equivalent adjustments were $36 in 1997 and $38 in 1996.
<F3>For purposes of this computation, non-accruing loans are included in the daily average loan amounts outstanding.
</FN>
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three-month periods ended March 31,
1997, and 1996, was $1,229,000 and $1,209,000, respectively. Year-to-date
Net Recoveries of $259,000 have been recorded in 1997, compared to $1,109,000
of Net Charge-offs for the same period in 1996. The reserve for loan losses
was $31,004,000 or 2.02% of net loans at March 31, 1997, compared to
$29,516,000 or 2.03% of net loans at December 31, 1996.
Non-performing assets at March 31, 1997, were $7,641,000 compared to
$7,773,000 at December 31, 1996, a decrease of 1.70%. At March 31, 1997,
non-performing assets were .50% of net loans compared to .53% at December 31,
1996. 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,
1997.
OTHER INCOME
Other income for the three-month periods ended March 31, 1997, and 1996 was
$7,161,000 and $5,446,000, respectively. Trust fees increased 9.00%, service
charges on deposit accounts increased 6.21%, mortgage servicing fees and
mortgage loan sale income increased 14.30%, equipment rental income increased
575.12% and commission, securitization and other income increased 18.05%.
The significant increase in equipment rental income was primarily due to
large sales growth. Investment Security gains and other gains for the
three-month period ended March 31, 1997, were $181,000 compared to $38,000 in
1996. The net gains in 1977 and 1996 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, 1997, was
$16,243,000, an increase of 17.13% over the same period in 1996. For the
three-month period ended March 31, 1997, salaries and employee benefits
increased 12.01%, net occupancy expense increased 1.56%, furniture and
equipment expense increased 19.23%, depreciation on leased equipment
increased 339.82%, business development and marketing expense increased
4.67%, and miscellaneous other expenses increased 24.40% over the same period
in 1996. The increase in salaries, furniture and equipment expense, business
development and marketing expense is primarily due to ten new branches being
opened in 1996. The increase in miscellaneous expense is due to supplies and
communications. The increase in depreciation of leased equipment is due to
a significant volume increase from the prior year.
INCOME TAXES
The provision for income taxes for the three-month period ended March 31,
1997, was $3,235,000 compared to $2,839,000 for the comparable period in
1996. The provision for income taxes for the three months ended March 31,
1997, and 1996, is at a rate which management believes approximates the
effective rate for the year. The increase was due to increased taxable
income in 1997.
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 10.73% at March 31, 1997.
The Federal Reserve Board has established risk-based capital guidelines for
U.S. banking organizations. The guidelines established a conceptual
framework calling for risk weights to be assigned to on and off-balance sheet
items in arriving at risk-adjusted total assets, with the resulting ratio
compared to a minimum standard to determine whether a bank has adequate
capital. The minimum standard risk-based capital ratios effective in 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 risk-based capital ratio on
March 31, 1997, was 13.49% and the total risk-based capital ratio was 14.99%.
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, 1997, the consolidated statement of financial
condition was rate sensitive by $86,156,000 more liabilities than assets
scheduled to reprice within one year or 92.46%.
Management adjusts the composition of its assets and liabilities to manage
the interest rate sensitivity gap based upon its expectations of interest
rate fluctuations.
1st Source has entered into two off-balance sheet 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, 1997, is $28 million. It has a
maturity date of January, 2002, and has a current fair value of $(878,000).
The second swap also has a notional amount of $28 million as of March 31,
1997. It has a maturity date of March, 2001, and has a current fair value of
$(579,000).
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's 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.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1st Source Corporation
___________________
DATE 5/14/97 /s/ Christopher J. Murphy III
(Signature)
Christopher J. Murphy III, President
DATE 5/14/97 /s/ Larry E. Lentych
(Signature)
Larry E. Lentych, Treasurer (Chief
Accounting and Financial Officer)
<TABLE> <S> <C>
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<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 86440
<INT-BEARING-DEPOSITS> 1248
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 305232
<INVESTMENTS-CARRYING> 117241
<INVESTMENTS-MARKET> 120469
<LOANS> 1536803
<ALLOWANCE> 31004
<TOTAL-ASSETS> 2112838
<DEPOSITS> 1623136
<SHORT-TERM> 216713
<LIABILITIES-OTHER> 34561
<LONG-TERM> 61075
0
0
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<INCOME-PRETAX> 9360
<INCOME-PRE-EXTRAORDINARY> 6066
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<EPS-DILUTED> .38
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<LOANS-PAST> 397
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</TABLE>
