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 September 30, 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 September 30, 1997 -
15,630,980 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Page
Consolidated statements of financial condition -- 3
September 30, 1997, and December 31, 1996
Consolidated statements of income -- 4
three months and nine months ended September 30,
1997 and 1996
Consolidated statements of cash flows -- 5
nine months ended September 30, 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)
September 30 December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 83,595 $ 137,588
Interest bearing deposits with other banks 911 600
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $311,538 and $303,177
at September 30, 1997 and December 31, 1996) 312,423 302,602
Securities held-to-maturity, at amortized cost
(fair value of $117,905 and $125,218 at
September 30, 1997 and December 31, 1996) 113,528 120,494
Total Investment Securities 425,951 423,096
Loans - net of unearned discount 1,719,611 1,455,563
Reserve for loan losses (33,649) (29,516)
Net Loans 1,685,962 1,426,047
Premises and equipment 29,371 27,780
Other assets 97,320 64,656
Total Assets $2,323,110 $2,079,767
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 215,875 $ 207,280
Interest bearing 1,501,684 1,426,698
Total Deposits 1,717,559 1,633,978
Federal funds purchased and securities
sold under agreements to repurchase 217,039 112,580
Other short-term borrowings 102,666 112,283
Other liabilities 37,155 30,497
Long-term debt 15,505 18,596
Total Liabilities 2,089,924 1,907,934
Guaranteed Preferred Beneficial Interests
in the Company's Subordinated Debentures 44,750 --
Shareholders' equity:
Common stock-no par value 5,700 5,700
Capital surplus 69,947 69,947
Retained earnings 118,623 102,399
Less cost of common stock in treasury (7,278) (6,670)
Unrealized appreciation of investment
securities, net 1,444 457
Total Shareholders' Equity 188,436 171,833
Total Liabilities and Shareholders' Equity $2,323,110 $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 Nine Months Ended
September 30 September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $38,471 $32,080 $107,895 $ 92,326
Investment securities:
Taxable 4,295 3,726 12,540 11,294
Tax-exempt 2,042 2,040 6,132 6,064
Other 34 195 179 469
Total Interest Income 44,842 38,041 126,746 110,153
Interest Expense:
Deposits 19,143 16,429 53,279 47,454
Short-term borrowings 3,330 2,005 9,154 5,783
Long-term debt 277 347 875 1,032
Total Interest Expense 22,750 18,781 63,308 54,269
Net Interest Income 22,092 19,260 63,438 55,884
Provision for Loan Losses 2,130 1,431 3,838 3,833
Net Interest Income After
Provision for Loan Losses 19,962 17,829 59,600 52,051
Other Income:
Trust fees 1,999 1,574 5,491 5,030
Service charges on deposit accounts 1,433 1,272 3,969 3,626
Mortgage servicing fees, and
mortgage loan sale income 1,459 1,478 3,794 3,411
Equipment rental income 1,955 975 4,617 1,584
Commission, securitization and
other income 2,120 1,967 5,593 4,843
Investment securities and other
gains (losses) 24 0 (279) 127
Total Other Income 8,990 7,266 23,185 18,621
Other Expense:
Salaries and employee benefits 10,111 9,406 29,853 26,969
Net occupancy expense 1,143 1,211 3,337 3,527
Furniture and equipment expense 1,680 1,510 4,956 4,167
Depreciation - leased equipment 1,400 671 3,409 1,100
Business development and marketing expense 650 581 2,532 1,766
Other 2,935 2,435 8,081 6,804
Total Other Expense 17,919 15,814 52,168 44,333
Income Before Income Taxes and
Subsidiary Trust Distributions 11,033 9,281 30,617 26,339
Income taxes 3,831 3,258 10,288 9,169
Distribution on Preferred Securities of
Subsidiary Trusts, Net of Tax 564 -- 1,184 --
Net Income $ 6,638 $ 6,023 $19,145 $ 17,170
Per Common Share: <F1>
Net Income $ 0.41 $ 0.37 $ 1.19 $ 1.07
Dividends $ 0.075 $ 0.064 $ 0.222 $ 0.192
Weighted Average Common Shares
Outstanding 16,171,672 16,002,776 16,143,953 15,994,873
<FN>
<F1> The computation of per share data gives retroactive recognition to a
5:4 stock split declared on January 21, 1997.
</FN>
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Dollars in thousands)
Nine Months Ended September 30
1997 1996
<S> <C> <C>
Operating Activities:
Net income $ 19,145 $ 17,170
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,838 3,833
Depreciation of premises and equipment 5,858 2,902
Amortization of investment security premiums
and accretion of discounts, net 656 552
Deferred income taxes 3,421 (26)
Realized investment securities (gains) 279 (127)
Increase in interest receivable (1,343) (574)
Increase in interest payable 9,330 5,869
Other (36,250) (14,122)
Net Cash Provided by Operating Activities 4,934 15,477
Investing Activities:
Proceeds from sales and maturities of
investment securities 104,016 76,432
Purchases of investment securities (106,345) (85,710)
Net decrease in short-term investments (311) (3,100)
Loans sold or participated to others 113,728 109,141
Net increase in loans made to customers
and principal collections on loans (368,095) (257,177)
Net increase in leased assets (9,027) (1,491)
Purchases of premises and equipment (2,746) (4,494)
Other (4,703) 699
Net Cash Used in Investing Activities (273,483) (165,700)
Financing Activities:
Net increase (decrease) in demand deposits, NOW
accounts and savings accounts (41,715) 657
Net increase in certificates of deposit 125,297 105,838
Net increase in short-term borrowings 94,842 54,690
New long-term debt -- 140
Payments on long-term debt (3,091) (2,346)
New issuance of trust preferred securities 44,750 --
Acquisition of treasury stock (2,046) (1,349)
Cash dividends (3,473) (3,000)
Other (8) (13)
Net Cash Provided by Financing Activities 214,556 154,617
(Increase) Decrease in Cash and Cash Equivalents (53,993) 4,394
Cash and Cash Equivalents, Beginning of Year 137,588 94,517
Cash and Cash Equivalents, End of Period $ 83,595 $ 98,911
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
Notes to the Consolidated Financial Statements
1. The unaudited consolidated 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 of
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 1996
1st Source Corporation Annual Report on Form 10-K and quarterly
report on Form 10-Q for the quarters ended March 31, and June 30,
1997, 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. During 1997, 1st Source raised $44.75 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 $17.25 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.
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.
4. 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
dilutive 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.
5. The Financial Accounting Standards Board has issued Statement
No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its
components. In addition, the Financial Accounting Standards Board
has issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards
for disclosing information about operating segments in interim and
annual financial statements. The Corporation will comply with the
new disclosure requirements beginning in 1998. The application of
the new rules will not have a material impact on the Corporation's
financial condition or results of operations.
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 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 and the quarterly report
on Form 10-Q for the quarters ended March 31, and June 30, 1997. The
amounts shown in this analysis have been adjusted to reflect tax-exempt
income on a tax equivalent basis using a 40.525% rate.
Management's discussion and analysis contains forward-looking
statements that are provided to assist in the understanding of anticipated
future financial performance. However, such performance involves risks
and uncertainties which may cause actual results to differ materially from
those in such statements. For a discussion of certain factors that may
cause such forward-looking statements to differ materially from actual
results, see the 1996 Form 10-K.
During the second quarter of 1997, the Governor signed a bill passed by
the Indiana Legislature that permits state-chartered banks to sell life
insurance products to consumers in Indiana under the same statutory and
regulatory conditions that apply to traditional insurance brokerage
activities. This brings Indiana into alignment with more than 30 other
states which allow their consumers the benefits of additional competition
in the insurance marketplace.
During the same session, the Governor signed into law two additional
bills passed by the legislature. One bill permits powers of national
banks for state banks. It authorizes a state-chartered bank or trust
company to exercise rights and privileges that are granted to national
banks domiciled in Indiana if it requests permission from the Department
of Financial Institutions. The other significant bill permits Indiana
state-chartered banks to own subsidiaries in states other than Indiana.
Previously, only subsidiaries located in the State of Indiana could be
owned by Indiana state banks.
COMPARISON OF THREE-MONTH AND NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
Net income for the three-month and nine-month periods ended September
30, 1997, was $6,638,000 and $19,145,000 respectively, compared to
$6,023,000 and $17,170,000 for the equivalent periods 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 other
expense.
Net income per share increased to $0.41 and $1.19, respectively, for
the three-month and nine-month periods ended September 30, 1997, from
$0.37 and $1.07 in 1996. Return on average common shareholders' equity
was 14.25% for the nine months ended September 30, 1997, compared to
14.45% in 1996. The return on total average assets was 1.19% for the nine
months ended September 30, 1997, compared to 1.23% in 1996.
NET INTEREST INCOME
The taxable equivalent net interest income for the three-month period
ended September 30, 1997, was $23,023,000, an increase of 13.98% over the
same period in 1996, resulting in a net yield of 4.35% compared to 4.47%
in 1996. The fully taxable equivalent net interest income for the nine-month
period ended September 30, 1997, was $66,247,000, an increase of
12.82% over 1996, resulting in a net yield of 4.42% compared to 4.50% in
1996.
Total average earning assets increased 16.95% and 14.94%, respectively,
for the three-month and nine-month periods ended September 30, 1997, over
the comparative periods in 1996. Total average investment securities
increased 10.6% and 8.2%, respectively for the three-month and nine-month
periods, due to an increase in municipal and agency securities, while a
19.72% and 17.53% increase for the three-month and nine-month periods for
average loans occurred primarily in commercial mortgage, transportation
and equipment loans. The taxable equivalent yields on total average
earning assets were 8.64% and 8.63% for the three-month period ended
September 30, 1997, and 1996, and 8.65% and 8.66% for the nine-month
period ended September 30, 1997, and 1996.
Average deposits increased 11.85% and 10.52%, respectively, for the
three-month and nine-month periods over the same periods from 1996. The
cost rate on average interest-bearing funds was 5.08% and 4.84% for the
three-months ended September 30, 1997, and 1996, and 5.00% and 4.86% for
the nine-month periods ended September 30, 1997 and 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 September 30
1997 1996
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expens Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment securities:
Taxable $ 283,097 $ 4,295 6.02% $ 248,113 $ 3,726 5.97%
Tax exempt <F1> 153,679 2,919 7.54% 146,919 2,952 7.99%
Net loans <F2><F3> 1,661,407 38,526 9.20% 1,387,767 32,106 9.20%
Other investments 3,497 33 3.74% 14,280 196 5.46%
Total Earning Assets 2,101,680 45,773 8.64% 1,797,079 38,980 8.63%
Cash and due from banks 75,689 77,921
Reserve for loan losses (32,326) (29,089)
Other assets 114,290 85,396
Total $2,259,333 $1,931,307
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,525,952 $19,144 4.97% $1,365,301 $16,429 4.79%
Short-term borrowings 236,157 3,329 5.59% 159,505 2,004 5.00%
Long-term debt 15,505 277 7.09% 19,694 348 7.03%
Total Interest Bearing Liabilities 1,777,614 22,750 5.08% 1,544,500 18,781 4.84%
Noninterest bearing deposits 213,338 189,725
Other liabilities 83,324 34,353
Shareholders' equity 185,057 162,729
Total $2,259,333 $1,931,307
Net Interest Income $23,023 $20,199
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.35% 4.47%
Nine Months Ended September 30
1997 1996
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS:
Investment securities:
Taxable $ 274,197 $12,540 6.11% $ 248,788 $11,294 6.06%
Tax exempt <F1> 152,017 8,819 7.76% 145,068 8,798 8.10%
Net loans <F2><F3> 1,570,527 108,017 9.20% 1,336,250 92,428 9.24%
Other investments 5,402 179 4.44% 11,751 470 5.34%
Total Earning Assets 2,002,143 129,555 8.65% 1,741,857 112,990 8.66%
Cash and due from banks 72,286 74,576
Reserve for loan losses (31,126) (28,245)
Other assets 103,147 78,425
Total $2,146,450 $1,866,613
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,455,835 53,279 4.89% $1,318,707 $47,454 4.81%
Short-term borrowings 221,850 9,154 5.52% 152,067 5,783 5.08%
Long-term debt 16,750 875 6.96% 20,180 1,032 6.84%
Total Interest Bearing
Liabilities 1,694,435 63,308 5.00% 1,490,954 54,269 4.86%
Noninterest bearing deposits 205,048 184,146
Other liabilities 67,295 32,745
Shareholders' equity 179,672 158,768
Total $2,146,450 $1,866,613
Net Interest Income $66,247 $58,721
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.42% 4.50%
<FN>
<F1> Interest income includes the effects of taxable equivalent
adjustments, using a 40.525% rate for 1997 and 1996. Tax equivalent
adjustments for the three-month periods were $876 in 1997 and $912 in
1996 and for the nine-month periods were $2,687 in 1997 and $2,733 in
1996.
<F2> Loan income includes fees on loans for the three-month periods of
$1,151 in 1997 and $810 in 1996 and for the nine-month periods of
$2,912 in 1997 and $2,284 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 for the three-month
periods were $54 in 1997 and $27 in 1996 and for the nine-month
periods were $121 in 1997 and $102 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 period ended
September 30, 1997, and 1996, was $2,130,000 and $1,431,000, respectively,
and was $3,838,000 and $3,833,000 for the nine-month periods ended
September 30, 1997 and 1996. Net Charge-offs of $370,000 have been
recorded for the three-month period ended September 30, 1997, compared to
$431,000 of Net Charge-offs for the same period in 1996. Year-to-date Net
Recoveries of $295,000 have been recorded in 1997, compared to Net Charge-
Offs of $1,763,000 through September 1996. The reserve for loan losses
was $33,649,000 or 1.96% of net loans at September 30, 1997, compared to
$29,516,000 or 2.03% of net loans at December 31, 1996.
Non-performing assets at September 30, 1997, were $9,632,000 compared
to $7,773,000 at December 31, 1996, an increase of 23.92%. At
September 30, 1997, non-performing assets were .56% 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 September 30, 1997.
OTHER INCOME
Other income for the three-month periods ended September 30, 1997, and
1996 was $8,990,000 and $7,266,000, respectively, and for the nine-month
periods was $23,185,000 in 1997 and $18,621,000 in 1996. For the nine-
month period, trust fees increased 9.17%, service charges on deposit
accounts increased 9.46%, mortgage servicing fees and mortgage loan sale
income increased 11.23%, equipment rental income increased 291.48% and
commission, securitization and other income increased 15.49%. The
significant increase in equipment rental income was primarily due to
substantial growth in operating leases. Investment Security losses and
other losses for the nine-month period ended September 30, 1997, were
$279,000 compared to net gains of $127,000 for the same period in 1996.
The net losses in 1997 were primarily due to a write-down pertaining to a
venture capital investment. The net gains in 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 September 30, 1997, was
$17,919,000, an increase of 13.31% over the same period in 1996 and was
$52,168,000 for the nine-month period ended September 30, 1997, an
increase of 17.67% over 1996. For the nine-month period ended
September 30, 1997, salaries and employee benefits increased 10.69%, net
occupancy expense decreased 5.39%, furniture and equipment expense
increased 18.93%, depreciation on leased equipment increased 309.91%,
business development and marketing expense increased 43.37%, and
miscellaneous other expenses increased 18.77% over the same period in
1996. The increase in salaries and furniture and equipment expense is
primarily due to ten new branches being opened in 1996, and two in 1997.
Business development and marketing expense increased due to appreciated
stock donated to the 1st Source Foundation. This action enabled
1st Source to capitalize on a tax deduction based on the appreciated value
of the donated stock. The increase in miscellaneous expense is due to an
increase in supplies and communications expense. The increase in
depreciation of leased equipment is due to a significant volume increase
of operating leases from the prior year.
INCOME TAXES
The provision for income taxes for the three-month and nine-month
periods ended September 30, 1997, was $3,831,000 and $10,288,000,
respectively, compared to $3,258,000 and $9,169,000 for the comparable
periods in 1996. The provision for income taxes for the nine months ended
September 30, 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. The effective tax rate for the nine
months ended September 30, 1997, has declined due to the donation of
appreciated stock, previously mentioned in other expense.
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
10.12% at September 30, 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 1997 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 September 30, 1997, was 12.65% and the total risk-
based capital ratio was 14.07%.
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 the 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 rate sensitivity gaps and
interest rate spreads. Maturities of rate sensitive assets are carefully
maintained relative to the maturities of rate sensitive liabilities and
interest rate forecasts. At September 30, 1997, the consolidated
statement of financial condition was rate sensitive by $3,438,000 more
assets than liabilities scheduled to reprice within one year or 100.29%.
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 September 30, 1997, is $27
million. It has a maturity date of January, 2002, and has a current fair
value of $(250,000). The second swap has a notional amount of $27 million
as of September 30 1997. It has a maturity date of March, 2001, and has
a current fair value of $(85,000).
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.<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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
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 10/13/97 /s/ Christopher J. Murphy III
(Signature)
Christopher J. Murphy III, President
DATE 10/13/97 /s/ Larry E. Lentych
(Signature)
Larry E. Lentych, Treasurer (Chief
Accounting and Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
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