FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-5907
1ST SOURCE CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1068133
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Michigan Street South Bend, Indiana 46601
(Address of principal executive offices) (Zip Code)
(219) 235-2702
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
Number of shares of common stock outstanding as of June 30, 1995 -
12,002,615 shares. The shares have been restated to reflect the
effects of a 3 for 2 stock split declared July 18, 1995.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated statements of financial condition --
June 30, 1995 and December 31, 1994
b) Consolidated statements of income --
three months and six months ended June 30, 1995
and 1994
c) Consolidated statements of cash flows --
six months ended June 30, 1995 and 1994
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Dollars in thousands)
June 30, December 31,
1995 1994
ASSETS
Cash and due from banks $85,570 $79,226
Interest bearing deposits with other banks 3,559 3,494
Federal funds sold 39,000 2,800
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $251,410 and $260,246
at June 30, 1995 and December 31, 1994) 248,325 245,753
Securities held-to-maturity, at amortized cost
(fair value of $132,559 and $105,263
at June 30, 1995 and December 31, 1994) 127,871 104,132
Total Investment Securities 376,196 349,885
Loans - net of unearned discount 1,205,240 1,100,713
Reserve for loan losses (25,732) (23,868)
Net Loans 1,179,508 1,076,845
Premises and equipment 24,818 21,306
Other assets 46,744 49,471
Total Assets $1,755,395 $1,583,027
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $175,094 $187,003
Interest bearing 1,203,385 1,114,334
Total Deposits 1,378,479 1,301,337
Federal funds purchased and securities
sold under agreements to repurchase 123,392 76,403
Other short-term borrowings 57,224 24,162
Other liabilities 29,393 23,959
Long-term debt 22,155 28,084
Total Liabilities 1,610,643 1,453,945
Shareholders' equity:
Common stock-no par value 5,429 5,170
Capital surplus 56,337 45,788
Retained earnings 87,713 90,444
Less cost of common stock in treasury (3,384) (4,036)
Unrealized depreciation of investment
securities, net (1,343) (8,284)
Total Shareholders' Equity 144,752 129,082
Total Liabilities and Shareholders' Equity $1,755,395 $1,583,027
CONSOLIDATED STATEMENTS OF INCOME
1st Source Corporation and Subsidiaries
(Dollars in thousands, except per share amounts)
Three Months Ended June 30 Six Months Ended June 30
1995 1994 1995 1994
Interest Income:
Loans, including fees $27,626 $22,490 $53,352 $43,115
Investment securities:
Taxable 3,887 3,721 7,648 7,152
Tax-exempt 1,988 1,630 3,753 3,242
Other 359 29 469 59
Total Interest Income 33,860 27,870 65,222 53,568
Interest Expense:
Deposits 13,936 9,948 26,642 19,042
Short-term borrowings 1,892 1,024 2,965 1,913
Long-term debt 463 444 992 868
Total Interest Expense 16,291 11,416 30,599 21,823
Net Interest Income 17,569 16,454 34,623 31,745
Provision for Loan Losses 181 1,746 1,141 2,644
Net Interest Income After
Provision for Loan Losses 17,388 14,708 33,482 29,101
Other Income:
Trust fees 1,710 1,629 3,374 3,142
Service charges on deposit accounts 1,233 1,176 2,431 2,263
Mortgage servicing fees,
commission income & other 1,474 806 3,424 1,742
Investment securities and other gains (losses) 9 187 (144) 220
Total Other Income 4,426 3,798 9,085 7,367
Other Expense:
Salaries and employee benefits 8,245 6,969 16,335 13,935
Net occupancy expense 900 832 1,770 1,678
Furniture and equipment expense 1,367 1,209 2,805 2,364
Insurance expense 862 786 1,718 1,552
Other 2,787 2,160 4,900 4,105
Total Other Expense 14,161 11,956 27,528 23,634
Income Before Income Taxes 7,653 6,550 15,039 12,834
Income taxes 2,541 2,026 5,073 3,974
Net Income $5,112 $4,524 $9,966 $8,860
Per Common Share: <F1>
Net Income $0.42 $0.37 $0.82 $0.73
Dividends $0.073 $0.063 $0.147 $0.127
Weighted Average Common Shares Outstanding 12,216,570 12,167,274 12,200,294 12,171,350
<FN>
<F1>The computation of per share data gives retroactive recognition to a 5 percent
stock dividend declared January 23, 1995 and a 3:2 stock split declared July 18, 1995.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Dollars in thousands)
Six Months Ended June 30
1995 1994
Operating Activities:
Net income $9,966 $8,860
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,141 2,644
Depreciation of premises and equipment 1,210 1,001
Amortization of investment security premiums
and accretion of discounts, net 443 629
Deferred income taxes (387) (957)
Increase in trading account securities - 539
Realized investment securities (gains) losses 144 (220)
Increase in interest receivable (1,130) (859)
Increase in interest payable 5,800 3,010
Other (2,490) (752)
Net Cash Provided by Operating Activities 14,697 13,895
Investing Activities:
Proceeds from sales and maturities of
investment securities 37,511 45,142
Purchases of investment securities (53,000) (46,943)
Net increase in short-term investments (36,265) (827)
Loans sold or participated to others 44,876 44,267
Net increase in loans made to customers
and principal collections on loans (146,949) (130,725)
Principal payments received under leases 1,316 1,183
Purchase of assets to be leased (2,785) (2,865)
Purchases of premises and equipment (2,219) (5,467)
Other (180) 547
Net Cash Used in Investing Activities (157,695) (95,688)
Financing Activities:
Net increase (decrease) in demand deposits, NOW
accounts and savings accounts (33,377) 12,578
Net increase in certificates of deposit 110,518 80,006
Net increase in short-term borrowings 80,132 13,943
Payments on long-term debt (5,929) (4)
Acquisition of treasury stock (233) (1,215)
Cash dividends (1,758) (1,529)
Other (12) (12)
Net Cash Provided by Financing Activities 149,341 103,767
Increase in Cash and Cash Equivalents 6,344 21,974
Cash and cash equivalents, beginning of year 79,226 77,375
Cash and Cash Equivalents, End of Period $85,570 $99,349
PART I.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The unaudited consolidated condensed financial statements have
been prepared in accordance with the instructions for Form 10-Q and
therefore do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles. The
information furnished herein reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results
for the interim periods for which this report is submitted.
This discussion and analysis should be read in conjunction with
the Company's consolidated condensed financial statements and the
financial and statistical data appearing elsewhere in this report. The
amounts shown in this analysis have been adjusted to reflect tax-exempt
income on a tax equivalent basis using a 40.525% rate.
Effective December 31, 1993, 1st Source adopted, on a prospective
basis, Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
and revised its investment securities accounting policy. Securities
that may be sold as part of 1st Source's asset/liability or liquidity
management or in response to or in anticipation of changes in interest
rates and resulting prepayment risk, or for other similar factors, are
classified as available-for-sale and carried at fair market value.
Unrealized holding gains and losses on such securities are reported net
of related deferred income taxes as a separate component of
shareholders' equity. Trading securities are carried at fair market
value with unrealized gains and losses included in current earnings.
Securities that 1st Source has the ability and positive intent to hold
to maturity are classified as held-to-maturity and carried at amortized
cost. Realized gains and losses on the sales of all securities are
reported in earnings and computed using the specific identification
cost basis.
On September 30, 1994, 1st Source Corporation purchased the
remaining shares of the outstanding common stock of Mortgage
Acquisition Company the parent company of Trustcorp Mortgage Company, a
South Bend based full service mortgage banker (collectively "Trustcorp
Mortgage Company" or "Trustcorp"). 1st Source previously owned 30% of
the outstanding common stock of Trustcorp. The purchase price
consisted of approximately $2.6 million in cash, $500,000 in guaranteed
notes maturing in one to two years and 91,504 shares of 1st Source
Corporation common stock with a market value of approximately $2.4 million.
The acquired net assets of Trustcorp consisted of $17 million of
mortgage loans held for sale, $5.2 million of mortgage servicing
rights, and $1.9 million of other assets. Liabilities assumed
consisted of $20.5 million of borrowings and $1.1 million of other
liabilities. A premium in excess of book value of $3.6 million was
paid in the transaction and allocated to purchased mortgage servicing
rights ($2.2 million) and goodwill ($1.4 million). At the date of its
acquisition, Trustcorp had a mortgage loan servicing portfolio in
excess of $1.0 billion.
During the third quarter of 1994, 1st Source Bank completed the
securitization of $60 million of aircraft loans originated by its
Transportation and Equipment Financing Group. 1st Source Bank will
continue to service the loans for a fee. A total of $1.45 million was
expensed in connection with this transaction. Due to reduced loan
outstandings, a similar amount was released from the reserve for loan
losses which made the transaction income neutral in the third quarter
of 1994.
1st Source adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114)
on January 1, 1995. Under the new standard, a loan is considered
impaired, based on current information and events, if it is probable
that the Corporation will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of
the loan agreement. The measurement of impaired loans is generally
based on the present value of expected future cash flows discounted at
the historical effective interest rate, except that all collateral-
dependent loans are measured for impairment based on the fair value of
the collateral. At June 30, 1995, 1st Source has not yet completed its
analysis of the impact of SFAS 114, but management feels current
policies for establishing the allowance for loan losses include those
loans that may be considered impaired under SFAS 114, therefore,
management does not expect any increase in the provision for loan
losses as a result of this adoption. In accordance with the
aforementioned, the adoption of SFAS 114 is not expected to affect the
comparability between any of the periods in the years ended December
31, 1995 and 1994.
COMPARISON OF THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 1995 AND 1994
Net income for the three month and six month periods ended June
30, 1995 was $5,112,000 and $9,966,000 respectively compared to
4,524,000 and $8,860,000 for the equivalent periods in 1994. The
primary reasons for the increase were an increase in net interest
income, a decrease in the provision for loan losses and an increase in
other income; offset by an increase in other expense.
Net income per share increased to $0.42 and $0.82 respectively for
the three month and six month periods ended June 30, 1995 from $0.37
and $0.73 in 1994. These figures have been restated for a 3 for 2
stock split that was declared on July 18, 1995. Return on average
equity was 14.17% for the six months ended June 30, 1995 compared to
14.18% in 1994. This ratio is based on shareholders' equity before the
market value adjustment for securities designated as "available for
sale" as required by SFAS No. 115. The ratio after the market value
adjustment was 14.69% for the six months ended June 30, 1995 compared
to 14.22% for the same period in 1994. The return on total average
assets was 1.23% for the six months ended June 30, 1995 compared to
1.18% in 1994.
NET INTEREST INCOME
The taxable equivalent net interest income for the three month
period ended June 30, 1995 was $18,557,000, an increase of 6.69% over
the same period in 1994, resulting in a net yield of 4.77% compared to
4.87% in 1994. The fully taxable equivalent net interest income for
the six month period ended June 30, 1995 was $36,548,000, an increase
of 8.68% over 1994, resulting in a net yield of 4.85% compared to 4.81%
in 1994.
Total average earning assets increased 9.04% and 7.74%
respectively for the three month and six month periods ended June 30,
1995 over the comparative periods in 1994. Total average investment
securities increased 10.59% and 5.44% respectively for the three month
and six month periods, due to increases in federal funds sold and
municipal securities, while a 8.52% and 8.54% increase for the three
month and six month periods for average loans occurred primarily in
commercial and real estate loans. The taxable equivalent yields on
total average earning assets were 8.95% and 8.07% for the three month
periods ended June 30, 1995 and 1994 and 8.92% and 7.94% for the six
month periods ended June 30, 1995 and 1994.
Average deposits increased 8.35% and 9.17%, respectively for the
three month and six month periods over the same periods from 1994. The
cost rate on average interest bearing funds was 4.89% and 3.72% for the
three month periods ended June 30, 1995 and 1994 and 4.74% and 3.64%
for the six month periods ended June 30, 1995 and 1994. 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. An
increase of 10.66% and 9.48%, respectively for the three month and six
month periods ended June 30, 1995 over comparative periods in 1994 in
average non-interest bearing deposits was a factor in maintaining the
1995 year to date net yield on earning assets on a level slightly above
1994's net yield on earning assets.
The following table sets forth consolidated information
regarding average balances and rates.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three months ended June 30,
1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS:
Interest bearing deposits $901 $5 2.38% $1,581 $4 0.89%
Investment securities:
Taxable 242,639 3,886 6.42% 252,960 3,722 5.90%
Tax exempt <F1> 130,735 2,929 8.99% 102,635 2,513 9.82%
Net loans <F2><F3> 1,164,069 27,674 9.54% 1,072,652 22,547 8.43%
Other investments 23,500 354 6.05% 2,521 24 3.84%
Total Earning Assets 1,561,844 34,848 8.95% 1,432,349 28,810 8.07%
Cash and due from banks 76,942 73,669
Reserve for loan losses (25,746) (23,271)
Other assets 68,393 56,481
Total $1,681,433 $1,539,228
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,170,801 13,936 4.77% $1,083,939 9,948 3.68%
Short-term borrowings 141,971 1,892 5.34% 121,319 1,024 3.38%
Long-term debt 22,573 463 8.23% 25,468 444 7.00%
Total Interest Bearing
Liabilities 1,335,345 16,291 4.89% 1,230,726 11,416 3.72%
Noninterest bearing deposits 176,985 159,938
Other liabilities 28,551 23,360
Shareholders' equity 140,552 125,204
Total $1,681,433 $1,539,228
Net Interest Income $18,557 $17,394
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.77% 4.87%
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Six months ended June 30,
1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS:
Interest bearing deposits $950 $12 2.47% $883 $5 1.09%
Investment securities:
Taxable 242,284 7,648 6.37% 255,745 7,152 5.64%
Tax exempt <F1> 122,812 5,579 9.16% 101,971 5,011 9.91%
Net loans <F2><F3> 1,136,846 53,451 9.48% 1,047,395 43,231 8.32%
Other investments 15,317 457 6.02% 3,093 54 3.51%
Total Earning Assets 1,518,209 67,147 8.92% 1,409,087 55,453 7.94%
Cash and due from banks 73,680 74,318
Reserve for loan losses (24,956) (22,957)
Other assets 68,775 54,651
Total $1,635,709 $1,515,099
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,157,592 26,642 4.64% $1,060,829 19,042 3.62%
Short-term borrowings 118,205 2,965 5.06% 123,686 1,913 3.12%
Long-term debt 24,680 992 8.11% 25,470 868 6.87%
Total Interest Bearing
Liabilities 1,300,478 30,599 4.74% 1,209,985 21,823 3.64%
Noninterest bearing deposits 171,258 156,425
Other liabilities 27,197 23,008
Shareholders' equity 136,775 125,681
Total $1,635,709 $1,515,099
Net Interest Income $36,548 $33,630
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.85% 4.81%
<FN>
<F1>Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1995 and 1994.
Tax equivalent adjustments for the three month periods were $940 in 1995 and $883 in 1994 and for the
six month periods were $1,826 in 1995 and $1,769 in 1994.
<F2>Loan income includes fees on loans for the three month periods of $651 in 1995 and $807 in 1994 and for
the six month periods of $1,412 in 1995 and $1,591 in 1994. Loan income also includes the effects of taxable
equivalent adjustments, using a 40.525% rate for 1995 and 1994. The tax equivalent adjustments for the three
month periods were $48 in 1995 and $58 in 1994 and for the six month periods were $99 in 1995 and $117 in 1994.
<F3>For purposes of this computation, nonaccruing loans are included in the daily average loan amounts outstanding.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month periods
ended June 30, 1995 and 1994 was $181,000 and $1,746,000 respectively
and was $1,141,000 and $2,644,000 for the six month periods ended June
30, 1995 and 1994 respectively. Net Recoveries of $494,000 have been
recorded for the three month period ended June 30, 1995 compared to
$269,000 of Net Charge-offs for the same period in 1994 and Net
Recoveries were $723,000 for the six month period ended June 30, 1995
compared to $761,000 of Net Charge-offs for the same period in 1994.
The reserve for loan losses was $25,732,000 or 2.13% of net loans at
June 30, 1995 compared to $23,868,000 or 2.17% of net loans at
December 31, 1994.
Nonperforming assets at June 30, 1995 were $5,769,000 compared to
$4,700,000 at December 31, 1994. At June 30, 1995, nonperforming
assets were .48% of net loans compared to .43% at December 31, 1994.
It is management's opinion that the reserve for loan losses is adequate
to absorb anticipated losses in the loan portfolio as of June 30, 1995.
OTHER INCOME
Other income for the three month periods ended June 30, 1995 and
1994 was $4,426,000 and $3,798,000 respectively and for the six month
periods was $9,085,000 in 1995 and $7,367,000 in 1994. Trust fees
increased 7.38%, service charges on deposit accounts increased 7.42%
and mortgage servicing fees, commission income and other income
increased 96.56% over the same period in 1994. The significant
increases in the last category were due to income recorded of $314,000
for the aircraft securitization and $1,122,000 growth in mortgage
servicing fees, net gains on the sale of mortgage loans and servicing,
and loan fees. There were investment securities and other losses of
$144,000 for the six month period ended June 30, 1995 compared to
$220,000 in gains during the same period in 1994.
OTHER EXPENSE
Other expense for the three month period ended June 30, 1995
was $14,161,000, an increase of 18.44% over the same period in 1994 and
was $27,528,000 for the six month period ended June 30, 1995, an
increase of 16.48% over 1994. For the six month period ended June 30,
1995, salaries and employee benefits increased 17.22%, furniture and
equipment costs increased 18.65%, insurance expense increased 10.70%,
business development and marketing expense decreased 8.90% and
miscellaneous other expenses increased 20.82% over the same period in
1994. The increase in these expenses was primarily due to the
acquisition of Trustcorp Mortgage Company in September 1994 and
increased group insurance costs.
INCOME TAXES
The provision for income taxes for the three month and six month
periods ended June 30, 1995 was $2,541,000 and $5,073,000 respectively
compared to $2,026,000 and $3,974,000 for the comparable periods in
1994. The increase was due to increased taxable income in 1995.
CAPITAL RESOURCES
The banking regulators have established guidelines for leverage
capital requirements, expressed in terms of Tier 1 or core capital as a
percentage of average assets, to measure the soundness of a financial
institution. These guidelines require all banks to maintain a minimum
leverage capital ratio of 4.00% for adequately capitalized banks and
5.00% for well capitalized banks. 1st Source's leverage capital ratio
was 8.41% at June 30, 1995.
The Federal Reserve Board has also approved final risk-based
capital guidelines for U. S. banking organizations. The guidelines
established a conceptual framework calling for risk weights to be
assigned to on and off-balance sheet items in arriving at risk-adjusted
total assets, with the resulting ratio compared to a minimum standard
to determine whether a bank has adequate capital. The minimum standard
risk-based capital ratios effective in 1995 are 4.00% for adequately
capitalized banks and 6.00% for well capitalized banks for Tier 1 risk-
based capital and 8.00% and 10.00%, respectively, for total risk-based
capital. 1st Source's Tier 1 risked-based capital ratio on June 30,
1995 was 11.38% and the total risk-based capital ratio was 13.62%.
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
anticipated 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 June 30, 1995, the consolidated statement
of financial condition was rate sensitive by $84,162,000 more assets
than liabilities scheduled to reprice within one year or 110.13%.
Management adjusts the composition of its assets and liabilities
to manage the interest rate sensitivity gap based upon its expectations
of interest rate fluctuations.
PART II. OTHER INFORMATION
Item l. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
During the second quarter of 1995, 1st Source Corporation's
shareholders elected Daniel B. Fitzpatrick, and re-elected
Philip J. Faccenda, Leo J. McKernan, and Dane A. Miller as
directors at the April 25, 1995 annual meeting. All
directors were elected for terms ending in April, 1998. The
election tally showed that 7,561,429 votes were cast
(representing 94% of all eligible shares) with all four
directors receiving a majority of the votes cast. All
directors received less than 5% negative or withheld votes.
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
(Registrant)
DATE August 10, 1995 Christopher J. Murphy III /s/
(Signature)
Christopher J. Murphy III, President
DATE August 10, 1995 Larry E. Lentych /s/
(Signature)
Larry E. Lentych, Treasurer (Chief
Accounting and Financial Officer)