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, 1998
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, 1998 -
17,353,840 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Page
Consolidated statements of financial condition -- 3
March 31, 1998, and December 31, 1997
Consolidated statements of income -- 4
three months ended March 31, 1998 and 1997
Consolidated statements of cash flows -- 5
three months ended March 31, 1998 and 1997
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,
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 73,615 $ 90,864
Interest bearing deposits with other banks 793 1,677
Federal funds sold -- 10,000
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $312,044 and $298,438
at March 31, 1998 and December 31, 1997) 314,087 299,933
Securities held-to-maturity, at amortized cost
(fair value of $114,850 and $119,369 at
March 31, 1998 and December 31, 1997) 110,815 114,975
Total Investment Securities 424,902 414,908
Loans - net of unearned discount 1,904,564 1,796,781
Reserve for loan losses (37,674) (35,424)
Net Loans 1,866,890 1,761,357
Premises and equipment 30,771 30,782
Other assets 117,654 108,566
Total Assets $ 2,514,625 $2,418,154
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 247,459 $ 274,906
Interest bearing 1,684,129 1,616,885
Total Deposits 1,931,588 1,891,791
Federal funds purchased and securities
sold under agreements to repurchase 140,487 117,987
Other short-term borrowings 144,299 117,019
Other liabilities 39,147 34,998
Long-term debt 12,659 16,656
Total Liabilities 2,268,180 2,178,451
Guaranteed preferred beneficial interests
in the Company's subordinated debentures 44,750 44,750
Shareholders' equity:
Common stock-no par value 6,270 5,700
Capital surplus 121,456 69,947
Retained earnings 78,168 124,394
Less cost of common stock in treasury (6,484) (6,978)
Unrealized appreciation of
investment securities, net 2,285 1,890
Total Shareholders' Equity 201,695 194,953
Total Liabilities and Shareholders' Equity $ 2,514,625 $2,418,154
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
1998 1997
<S> <C> <C>
Interest Income:
Loans, including fees $ 41,772 $ 33,010
Investment securities:
Taxable 4,046 4,022
Tax-exempt 1,997 2,034
Other 77 80
Total Interest Income 47,892 39,146
Interest Expense:
Deposits 19,984 16,487
Short-term borrowings 4,432 2,670
Long-term debt 232 318
Total Interest Expense 24,648 19,475
Net Interest Income 23,244 19,671
Provision for Loan Losses 2,401 1,229
Net Interest Income After
Provision for Loan Losses 20,843 18,442
Non-Interest Income:
Trust fees 2,066 1,769
Service charges on deposit accounts 1,406 1,249
Loan servicing and sale income 2,520 1,422
Equipment rental income 2,347 1,156
Other income 2,445 1,384
Investment securities and other gains (losses) (122) 181
Total Non-Interest Income 10,662 7,161
Non-Interest Expense:
Salaries and employee benefits 11,687 9,691
Net occupancy expense 1,218 1,172
Furniture and equipment expense 1,642 1,544
Depreciation - leased equipment 1,820 768
Business development and marketing expense 587 493
Other 2,900 2,575
Total Non-Interest Expense 19,854 16,243
Income Before Income Taxes and
Subsidiary Trust Distributions 11,651 9,360
Income taxes 3,926 3,235
Distribution on preferred securities of
subsidiary trusts, net of tax 565 59
Net Income $ 7,160 $ 6,066
Other Comprehensive Income, Net of Tax:
Unrealized Gain (Loss) on Securities 395 (839)
Comprehensive Income $ 7,555 $ 5,227
Per Common Share: <F1>
Basic Net Income Per Common Share $ 0.41 $ 0.35
Diluted Net Income Per Common Share $ 0.40 $ 0.34
Dividends $ 0.073 $ 0.066
Basic Weighted Average Common Shares Outstanding 17,345,487 17,198,020
Diluted Weighted Average Common Shares Outstanding 17,711,171 17,707,468
<FN>
<F1> The computation of per share data gives retroactive recognition to a
10% stock dividend declared on January 20, 1998, and a five-for-four
stock split declared on January 21, 1997.
</FN>
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Dollars in thousands)
Three Months Ended March 31
1998 1997
<S> <C> <C>
Operating Activities:
Net income $ 7,160 $ 6,066
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,401 1,229
Depreciation of premises and equipment 2,730 1,557
Amortization of investment security premiums
and accretion of discounts, net 219 226
Deferred income taxes 269 (626)
Realized investment securities (gains) losses 122 (181)
Increase in interest receivable (909) (585)
Increase in interest payable 2,171 2,813
Other (1,186) 548
Net Cash Provided by Operating Activities 12,977 11,047
Investing Activities:
Proceeds from sales and maturities
of investment securities 38,516 30,481
Purchases of investment securities (48,299) (31,239)
Net (decrease) increase in short-term investments 10,885 (648)
Loans sold or participated to others 33,679 37,367
Net increase in loans made to customers
and principal collections on loans (141,500) (117,033)
Net increase in leased assets (4,776) (1,389)
Purchases of premises and equipment (604) (859)
Other (2,116) (1,206)
Net Cash Used in Investing Activities (114,215) (84,526)
Financing Activities:
Net decrease in demand deposits, NOW
accounts and savings accounts (20,016) (14,802)
Net increase in certificates of deposit 59,812 3,961
Net (decrease) increase in short-term borrowings 49,780 (8,150)
Payments on long-term debt (3,997) (21)
Proceeds from issuance of cumulative
trust preferred securities 0 42,500
Acquisition of treasury stock (340) (23)
Cash dividends (1,262) (1,126)
Other 12 (8)
Net Cash Provided by Financing Activities 83,989 22,331
Decrease in Cash and Cash Equivalents (17,249) (51,148)
Cash and Cash Equivalents, Beginning of Year 90,864 137,588
Cash and Cash Equivalents, End of Period $ 73,615 $86,440
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
Notes to the 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 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 1997 1st Source Corporation Annual Report
on Form 10-K should be read in conjunction with these statements.
2. 1st Source has adopted Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," as of December 31, 1997. 1st Source
was required to adopt this pronouncement as of December 31, 1997.
SFAS No. 128 requires 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 adoption of SFAS No. 128
has not significantly impacted the Company's historically reported
earnings per share.
3. 1st Source has adopted Financial Accounting Standard (SFAS) No.
130, "Reporting Comprehensive Income," as of March 31, 1998. SFAS
No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components in a full set of general
purpose financial statements. Presently, the only component of
comprehensive income not included in net income is unrealized gains
or losses on available-for-sale investment securities.
4. In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131 "Disclosure about Segments of an Enterprise and Related
Information." The Statement changes the manner in which public
companies report significant information in annual reports and
requires companies to report selected segment information in
interim financial reports. Companies will be required to report
financial and descriptive information about the company's operating
segments. In the year of adoption, companies will not be required
to disclose interim period information. 1st Source will adopt the
Statement in 1998.
5. 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 adjusted to a constant maturity plus 2.25% applied
to 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.
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 1997
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.
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 1997 Form 10-K.
COMPARISON OF THREE-MONTH PERIODS
ENDED MARCH 31, 1998 AND 1997
Net income for the three-month period ended March 31, 1998, was
$7,160,000 compared to $6,066,000 for the equivalent period in 1997 The
primary reasons for the increase were an increase in net interest income
and a strong increase in non-interest income offset by an increase in the
provision for loan losses and an increase in non-interest expense.
Diluted net income per common share increased to $0.40 for the three-
month period ended March 31, 1998, from $.34 in 1997. Return on average
common shareholders' equity was 14.64% for the three months ended March
31, 1998, compared to 14.10% in 1997. The return on total average assets
was 1.19% for the three months ended March 31, 1998, compared to 1.22% in
1997.
NET INTEREST INCOME
The taxable equivalent net interest income for the three-month period
ended March 31, 1998, was $24,153,000, an increase of 17.12% over the same
period in 1997, resulting in a net yield of 4.33% compared to 4.43% in
1997.
Total average earning assets increased 19.79% for the three-month
period ended March 31, 1998, compared to the period ended March 31, 1997.
Total average investment securities increased .38% from one year ago,
while a 25.53% increase in average loans occurred primarily in
transportation and equipment loans. The taxable equivalent yields on
total average earning assets were 8.75% and 8.61% for the periods ended
March 31, 1998, and 1997 respectively.
Average deposits increased 17.81% from the first quarter of 1997 to the
first quarter of 1998. The cost rate on average interest-bearing funds
was 5.17% for the three-months ended March 31, 1998, compared to 4.88% for
the three months ended March 31, 1997. 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
1998 1997
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment securities:
Taxable $ 271,221 $ 4,046 6.05% $ 268,132 $ 4,022 6.08%
Tax exempt <F1> 148,832 2,855 7.78% 150,335 2,950 7.96%
Net loans <F2><F3> 1,837,020 41,823 9.23% 1,463,451 33,045 9.16%
Other investments 5,462 77 5.72% 6,762 81 4.83%
Total Earning Assets 2,262,535 48,801 8.75% 1,888,680 40,098 8.61%
Cash and due from banks 78,492 70,154
Reserve for loan losses (36,113) (29,833)
Other assets 143,107 93,595
Total $2,448,021 $2,022,596
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,628,832 $19,984 4.98% $1,389,972 $16,487 4.81%
Short-term borrowings 292,933 4,432 6.14% 210,805 2,670 5.14%
Long-term debt 13,310 232 7.06% 18,585 318 6.93%
Total Interest Bearing
Liabilities 1,935,075 24,648 5.17% 1,619,362 19,475 4.88%
Non-interest bearing deposits 233,018 190,387
Other liabilities 81,547 38,436
Shareholders' equity 198,381 174,411
Total $2,448,021 $2,022,596
Net Interest Income $24,153 $20,623
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.33% 4.43%
<FN>
<F1> Interest income includes the effects of taxable equivalent
adjustments, using a 40.525% rate for 1998 and 1997. Tax equivalent
adjustments were $858 in 1998 and $916 in 1997.
<F2> Loan income includes fees of $1,094 in 1998 and $797 in 1997. Loan
income also includes the effects of taxable equivalent adjustments,
using a 40.525% rate for 1998 and 1997. The tax equivalent
adjustments were $51 in 1998 and $36 in 1997.
<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, 1998, and 1997, was $2,401,000 and $1,229,000, respectively. Year-to-date
Net Charge-Offs of $151,000 have been recorded in 1998, compared
to $259,000 of Net Recoveries for the same period in 1997. The reserve
for loan losses was $37,674,000 or 1.98% of net loans at March 31, 1998,
compared to $35,424,000 or 1.97% of net loans at December 31, 1997.
Non-performing assets at March 31, 1998, were $10,838,000 compared to
$11,436,000 at December 31, 1997, a decrease of 5.23%. At March 31, 1998,
non-performing assets were .57% of net loans compared to .64% at December
31, 1997. 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, 1998.
NON-INTEREST INCOME
Non-interest income for the three-month periods ended March 31, 1998,
and 1997 was $10,662,000 and $7,161,000, respectively. Trust fees
increased 16.79%, service charges on deposit accounts increased 12.57%,
loan servicing and sale income increased 77.22%, equipment rental income
increased 103.03% and other income increased 76.66%. The loan servicing
and sale income increase came from additional aircraft loan securitization
servicing and an increase in the sale and servicing of mortgage loans.
The significant increase in equipment rental income was primarily due to
higher operating lease volume. The growth of other income was generated
primarily by increases in cash surrender value of bank-owned life
insurance and mortgage underwriting fees. Investment Security and other
net losses for the three-month period ended March 31, 1998, were $122,000
compared to net gains of $181,000 in 1997. The net losses in 1998 and
the net gains in 1997 were primarily due to adjustments made to the
carrying value of certain partnership investments.
NON-INTEREST EXPENSE
Non-interest expense for the three-month period ended March 31, 1998,
was $19,854,000, an increase of 22.23% over the same period in 1997. For
the three-month period ended March 31, 1998, salaries and employee
benefits increased 20.6%, net occupancy expense increased 3.92%, furniture
and equipment expense increased 6.35%, depreciation on leased equipment
increased 136.98%, business development and marketing expense increased
19.07%, and miscellaneous other expenses increased 12.62% over the same
period in 1997. The increase in depreciation of leased equipment is due
to a significant volume increase from the prior year. The primary
increase in salaries and employee benefits is attributed to the additional
expense provisions being made to fund our stock incentive reserves, due to
the increase in the market price of 1st Source stock during the first
quarter. The increase in miscellaneous expense is due to a charge for
professional computer consulting fees.
INCOME TAXES
The provision for income taxes for the three-month period ended March
31, 1998, was $3,926,000 compared to $3,235,000 for the comparable period
in 1997. The provision for income taxes for the three months ended
March 31, 1998, and 1997, is at a rate which management believes
approximates the effective rate for the year. The increase was due to
increased taxable income in 1998.
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 9.86%
at March 31, 1998.
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, 1998 was 12.08% and the total risk-based
capital ratio was 13.36%.
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 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, 1998, the consolidated statement of
financial condition was rate sensitive by $98,853,000 more assets than
liabilities scheduled to reprice within one year or 107.80%.
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, 1998, is $23.8 million.
It has a maturity date of January, 2002, and has a current fair value of
$(52,000). The second swap has a notional amount of $23.4 million as of
March 31, 1998. It has a maturity date of March, 2001, and has a current
fair value of $13,000.
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.
YEAR 2000
During 1997, management formed a task force to analyze the business and
operational risks associated with whether systems, software, and other
date-specific applications are Year 2000 compliant. Completion of the
study, testing and full implementation of any required changes to "mission
critical" systems are targeted by December 31, 1998. At this time,
management does not anticipate any material impact to 1st Source.
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 5/14/98 /s/ Christopher J. Murphy III
(Signature)
Christopher J. Murphy III
Chairman of the Board and CEO
DATE 5/14/98 /s/ Larry E. Lentych
(Signature)
Larry E. Lentych, Treasurer (Chief
Accounting and Financial Officer)
<TABLE> <S> <C>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
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<FED-FUNDS-SOLD> 0
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<INVESTMENTS-HELD-FOR-SALE> 314087
<INVESTMENTS-CARRYING> 110815
<INVESTMENTS-MARKET> 114850
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<ALLOWANCE> 37674
<TOTAL-ASSETS> 2514625
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0
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</TABLE>
