U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR (15)d OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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Commission file number: 0-12199
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SOURCE CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 91-0853890
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1825 N. Hutchinson Rd. Spokane, Washington 99212
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(Address of principal executive office)
(509) 928-0908
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
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As of March 31, 1997, there were 1,380,406 shares of the Registrant's
common stock outstanding.
<PAGE>
SOURCE CAPITAL CORPORATION
Form 10-QSB
For the Quarter Ended March 31, 1997
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Index
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
- Consolidated Balance Sheets - March 31, 1997 (unaudited)
and December 31, 1996
- Consolidated Statements of Income and Retained Earnings -
Three Months Ended March 31, 1997 and 1996 (unaudited)
- Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1997 and 1996 (unaudited)
- Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOURCE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
March 31, December 31,
1997 1996
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(Unaudited)
ASSETS
Loans receivable, net $25,461,225 $26,059,031
Accrued interest receivable 254,297 295,047
Cash and cash equivalents 565,333 21,506
Deferred compensation trust 863,578 840,881
Investment securities 724,832 740,004
Other real estate owned 898,003 916,196
Other assets 232,000 360,839
Deferred income taxes 1,657,535 1,685,535
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Total assets $30,656,803 $30,919,039
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LIABILITIES
Notes payable to bank $14,375,000 $14,000,000
Long-term debt 3,212,653 3,214,824
Accounts payable and accrued expenses 277,347 550,638
Deferred compensation payable 863,578 840,881
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Total liabilities 18,728,578 18,606,343
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STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock, no stated par value
Class A, authorized 50,000,000 shares;
issued and outstanding, 1,380,406 and
1,417,220 shares 7,184,952 7,462,827
Additional paid in capital 2,049,047 2,049,047
Unrealized losses on investment
securities (25,652) (10,480)
Retained earnings 2,719,878 2,811,302
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Total stockholders' equity 11,928,225 12,312,696
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Total liabilities and stockholders'
equity $30,656,803 $30,919,039
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The accompanying notes are an integral part of the financial
statements.
<PAGE>
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (unaudited)
For the Three Months Ended March 31, 1997 and 1996
1997 1996
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Revenues:
Interest and rent income $ 1,051,374 $ 710,476
Interest expense (394,922) (195,751)
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Net interest and rent 656,452 514,725
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Non-interest income:
Gain on sales of investments
and real estate 16,745
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Non-interest expense:
Employee compensation and
benefits 243,429 182,667
Other operating expenses 164,848 135,516
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Total non-interest expenses 408,277 318,183
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Income before income taxes 248,175 213,287
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Income tax provision
Current (56,500) (40,400)
Deferred and other (28,000) (35,325)
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Total income tax provision (84,500) (75,725)
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Net income 163,675 137,562
Retained earnings, beginning of period 2,811,302 2,177,804
Dividends paid or declared (255,099) (213,457)
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Retained earnings, end of period $ 2,719,878 $ 2,101,909
=========== ===========
Net income per common share $ .12 $ .10
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Weighted average number of common share
Equivalents outstanding 1,392,677 1,443,292
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Cash dividends per share $ .18 $ .15
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All share and per share amounts have been restated to reflect a 1 for
5 reverse stock split completed by the company on May 31, 1996.
The accompanying notes are an integral part of the financial
statements.
<PAGE>
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, 1997 and 1996
1997 1996
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Cash flows from operating activities:
Net income $ 163,675 $ 137,562
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 5,715 4,805
Provision for loan losses 20,000
Deferred income taxes 28,000 32,550
Gain on sale of securities (16,745)
Change in:
Accrued interest receivable 40,750 (14,588)
Other assets 144,037 (21,750)
Deferred compensation trust (22,697) (21,951)
Accounts payable and accrued
expenses (273,291) 92,053
Deferred compensation payable 22,697 21,951
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Net cash provided by
operating activities 108,886 233,887
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Cash flows from investing activities:
Purchases of investment securities (299,877)
Sale of investment securities 94,122
Loan originations (2,334,820) (2,881,076)
Loan repayment 2,932,626 3,283,893
Capitalization of costs related to
other real estate owned (406) (32,371)
Proceeds from sale of other real
estate owned 18,599 165,402
Purchase of office equipment and
vehicles (20,913) (12,316)
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Net cash provided by
investing activities 595,086 317,777
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<PAGE>
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), Continued
For the Three Months Ended March 31, 1997 and 1996
1997 1996
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Cash flows from financing activities:
Proceeds from line-of-credit borrowings 2,125,000 2,025,000
Payments on line-of-credit borrowings (1,750,000) (2,800,000)
Payments of long-term debt (2,171)
Payments for redemption of capital stock (277,875) (187)
Payment of cash dividends (255,099)
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Net cash used in financing
activities (160,145) (775,187)
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Net increase (decrease) in cash and cash
equivalents 543,827 (223,523)
Cash and cash equivalents, beginning of
period 21,506 393,374
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Cash and cash equivalents, end of period $ 565,333 $ 169,851
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The accompanying notes are an integral part of the financial
statements.
<PAGE>
SOURCE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
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The financial information given in the accompanying unaudited
consolidated financial statements reflect all adjustments that, in the
opinion of management, are necessary to a fair statement for the
periods reported. Certain 1996 amounts have been reclassified to
conform with 1997 presentation. These reclassifications had no effect
on the net income or retained earnings as previously reported. The
results of operations for the three month period ended March 31, 1997
are not necessarily indicative of the results to be expected for the
full year. These unaudited consolidated financial statements should
be read in conjunction with the Company's most recent audited
financial statements.
NOTE 2.
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The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Source Capital Leasing Co.
All significant intercompany transactions and balances have been
eliminated in consolidation.
NOTE 3.
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The Company's provision for federal income taxes for the three months
ended March 31, 1997 and 1996 was calculated using the statutory
corporate income tax rate of 34%. The actual income tax liability of
the Company for the year ending December 31, 1997 is estimated to be
significantly less than the statutory corporate tax rate, after
considering the Company's net operating loss carryovers.
Notwithstanding the foregoing statement the actual tax liability paid
for the year ended December 31, 1996 resulted in an effective tax rate
of approximately 31%.
<PAGE>
SOURCE CAPITAL CORPORATION
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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General
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The discussions contain some forward-looking statements. A forward-
looking statement may contain words such as "will continue to be,"
"will be," "continue to," "expect to," "anticipates that," "to be," or
"can impact." Management cautions that forward-looking statements are
subject to risks and uncertainties that could cause the Company's
actual results to differ materially from those projected in forward-
looking statements.
Three Months Ended March 31, 1997 Compared to Three Months Ended
March 31, 1996
----------------------------------------------------------------
For the three months ended March 31, 1997, the Company reported a net
income of $163,675 or $.12 per share. This compares to a net income
of $137,562 or $.10 per share, for the comparable period in 1996. Net
revenues increased from approximately $515,000 during the three months
ended March 31, 1996 to approximately $656,000 for the same period in
1997, a 27.4% increase.
The Company's average earning asset portfolio grew from approximately
$17 million for the quarter ended March 31, 1996 to approximately
$26.8 million in 1997. This growth was accomplished due to
significant growth in the loan portfolio in the last half of 1996.
At March 31, 1997, there were approximately $755,000 of loans in the
Company's portfolio which were considered non-performing and
approximately $898,000 of other real estate owned which did not
contribute to first quarter earnings.
The increase in interest and rent income of approximately $341,000 was
primarily due to the $10 million increase in average earning assets
over the prior year. The increase in revenue was partially offset by
an increase in interest expense of approximately $199,000, due to
increased borrowings to fund the increase in the loan portfolio. The
yield on average earning assets decreased from 17.5% in 1996 to 15.6%
in 1997. The decrease in yield was primarily due to lower contractual
interest rates being charged on loans funded in the last half of 1996.
The Company's cost of funds on average borrowings decreased to 9.1% in
1997 as compared to 9.6% in the comparable period in 1996. As a
result of increased leverage (more borrowing related to funding
increased lending activity) and the decrease in yield, net interest
margin on earning assets (annualized interest and rent income, minus
interest expense, divided by average earning assets for the quarter)
decreased from 12.6% in 1996 to 9.8% in 1997.
<PAGE>
Non-interest operating expenses increased approximately $90,000 for
the three months ended March 31, 1997 compared to 1996. The increase
was principally due to a $61,000 increase in salaries and benefits due
to the opening of the Portland loan production office; and the three
employees hired during the first quarter of 1996 being on the payroll
for a full quarter in 1997.
The Company is continuing its traditional types of lending activities
primarily in the commercial and real estate business. Near the end of
the first quarter of 1997 the Company hired three employees in its
leasing subsidiary (Source Capital Leasing Co.) to expand its
equipment leasing activities. Management believes that equipment
leasing represents an opportunity to expand its financial services
business at attractive rates in an area complimentary to its long time
core business. Management does not expect the leasing subsidiary to
contribute to near term profits as it is essentially a de novo start
up and it will take some time to build the leasing portfolio; however,
in the long term management believes it will add to the earnings
strength of the Company.
The net recorded provision for income taxes of approximately $84,500
and $76,000 for the three months ended March 31, 1997 and 1996
respectively is based on the statutory tax rate applicable to the
Company, without considering the utilization of net operating loss
carryovers. Please refer to Note 3, of the consolidated financial
statements and to the Company's 1996 annual report for an explanation
of the Company's accounting for income taxes.
Financial Condition and Liquidity
---------------------------------
At March 31, 1997, the Company had approximately $565,000 of cash and
cash equivalents and $725,000 of marketable debt securities. Cash
and cash equivalents increased by approximately $544,000 since
December 31, 1996. The Company's primary sources of cash during the
first three months of 1997 were approximately $2,933,000 from loan
repayments, $2,125,000 from borrowings on the Company's line of credit
and $109,000 from operations. The primary uses of cash during the
first three months of 1996 were approximately $2,335,000 of loan
originations, $1,750,000 in repayments on short-term borrowings,
$278,000 redemptions of capital stock and $255,000 was used to pay a
cash divided on February 28, 1997.
The Company's line of credit, which matures annually, was increased to
$25,000,000, renewed for another year and is scheduled to mature on
April 30, 1998. In addition, the Company's leasing subsidiary has a
$1,500,000 line which matures July 15, 1997 and is expected to be
renewed at that time. At March 31, 1997, the Company had $14,375,000
outstanding under the line of credit. The leasing subsidiary had no
outstanding borrowings under its line at March 31, 1997. The
Company's line of credit and cash provided from loan repayments,
existing cash, cash equivalents, investment securities, and sales of
other real estate owned provide sufficient cash flows for the
operating needs of the Company. However, the Company may seek
additional funds dependent on the direct lending demand and other
projects the Company may endeavor to undertake during the year.
<PAGE>
Effect of Inflation and Changing Prices
---------------------------------------
Interest rates on the Company's loan portfolio are subject to
inflation as inflationary pressures affect prime interest rate. At
March 31, 1997, interest rates on approximately 90% of the Company's
loan portfolio vary based upon the prime rate. The remaining loans
have fixed interest rates.
New Accounting Rules
--------------------
In February 1997, Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings per Share" was issued. SFAS 128 establishes
standards for computing and presenting earning per share (EPS) and
simplifies the existing standards. This standard replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires the dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim
periods and requires restatement of all prior-period EPS data
presented. The Company does not believe that the application of this
statement will have a material effect on its earnings per share
disclosures.
<PAGE>
SOURCE CAPITAL CORPORATION
PART II - OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
None
(b) Reports on Form 8-K
None
Items 1,2,3,4 and 5 of Part II are omitted from this report
as inapplicable.
<PAGE>
SOURCE CAPITAL CORPORATION
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
SOURCE CAPITAL CORPORATION
--------------------------
(Registrant)
Date: May 12, 1997 By: /s/ D. Michael Jones
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D. Michael Jones
President
Date: May 12, 1997 By: /s/ Lester L. Clark
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Lester L. Clark, Vice President-
Secretary/Treasurer, principle
accounting and finance officer
<PAGE>
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