SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended
September 30, 1995
1st Source Corporation 0-5907
(Exact name of registrant as specified (Commission file number)
in its charter.)
Indiana 35-1068133
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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, 1995 -
11,961,225 shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated statements of financial condition --
September 30, 1995 and December 31, 1994
b) Consolidated statements of income --
three months and nine months ended September 30, 1995
and 1994
c) Consolidated statements of cash flows --
nine months ended September 30, 1995 and 1994
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Dollars in thousands)
September 30, December 31,
1995 1994
ASSETS
Cash and due from banks $72,159 79,226
Interest bearing deposits with other banks 3,429 3,494
Federal funds sold 8,000 2,800
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $256,170 and $260,246
at September 30, 1995 and December 31, 1994) 253,294 245,753
Securities held-to-maturity, at amortized cost
(fair value of $135,083 and $105,263
at September 30, 1995 and December 31, 1994) 129,560 104,132
Total Investment Securities 382,854 349,885
Loans - net of unearned discount 1,198,789 1,100,713
Reserve for loan losses (27,732) (23,868)
Net Loans 1,171,057 1,076,845
Premises and equipment 24,965 21,306
Other assets 47,412 49,471
Total Assets $1,709,876 $1,583,027
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing 176,844 187,003
Interest bearing 1,190,882 1,114,334
Total Deposits 1,367,726 1,301,337
Federal funds purchased and securities
sold under agreements to repurchase 84,341 76,403
Other short-term borrowings 54,610 24,162
Other liabilities 32,892 23,959
Long-term debt 21,847 28,084
Total Liabilities 1,561,416 1,453,945
Shareholders' equity:
Common stock-no par value 5,429 5,170
Capital surplus 56,337 45,788
Retained earnings 92,262 90,444
Less cost of common stock in treasury (4,329) (4,036)
Unrealized depreciation of investment
securities, net (1,239) (8,284)
Total Shareholders' Equity 148,460 129,082
Total Liabilities and Shareholders' Equity $1,709,876 $1,583,027
CONSOLIDATED STATEMENTS OF INCOME
1st Source Corporation and Subsidiaries
(Dollars in thousands, except per share amounts)
Three Months Nine Months
Ended September 30 Ended September 30
1995 1994 1995 1994
Interest Income:
Loans, including fees $28,729 $24,032 $82,081 $67,147
Investment securities:
Taxable 3,699 3,519 11,347 10,671
Tax-exempt 1,902 1,631 5,655 4,873
Other 441 48 910 107
Total Interest Income 34,771 29,230 99,993 82,798
Interest Expense:
Deposits 14,654 11,055 41,296 30,097
Short-term borrowings 1,909 984 4,874 2,897
Long-term debt 445 466 1,437 1,334
Total Interest Expense 17,008 12,505 47,607 34,328
Net Interest Income 17,763 16,725 52,386 48,470
Provision for Loan Losses 1,059 1,259 2,200 3,903
Net Interest Income After
Provision for Loan Losses 16,704 15,466 50,186 44,567
Other Income:
Trust fees 1,724 1,514 5,098 4,656
Service charges on deposit accounts 1,298 1,224 3,729 3,487
Mortgage servicing fees, commission income
& other 2,029 1,004 5,453 2,746
Investment securities and other gains (losses) (16) 55 (160) 275
Total Other Income 5,035 3,797 14,120 11,164
Other Expense:
Salaries and employee benefits 8,509 7,068 24,844 21,003
Net occupancy expense 947 896 2,717 2,574
Furniture and equipment expense 1,359 1,204 4,164 3,568
Insurance expense 46 822 1,764 2,374
Other 2,516 2,228 7,416 6,333
Total Other Expense 13,377 12,218 40,905 35,852
Income Before Income Taxes 8,362 7,045 23,401 19,879
Income taxes 2,929 2,234 8,002 6,208
Net Income $5,433 $4,811 $15,399 $13,671
Per Common Share: <F1>
Net Income $0.44 $0.39 $1.26 $1.12
Dividends $0.073 $0.070 $0.220 $0.197
Weighted Average Common Shares Outstanding 12,248,563 12,181,454 12,216,560 12,174,755
<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)
Nine Months
Ended September 30
1995 1994
Operating Activities:
Net income $15,399 $13,671
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,200 3,903
Depreciation of premises and equipment 1,818 1,522
Amortization of investment security premiums
and accretion of discounts, net 703 967
Deferred income taxes (1,017) (1,652)
Realized investment securities
(gains) losses 160 (275)
Increase in interest receivable (1,625) (1,225)
Increase in interest payable 8,198 5,080
Other (903) 912
Net Cash Provided by Operating Activities 24,933 22,903
Investing Activities:
Proceeds from sales and maturities of
investment securities 56,833 15,794
Purchases of investment securities (79,047) (54,553)
Net increase in short-term investments (5,135) (13,180)
Loans sold or participated to others 48,385 105,206
Net increase in loans made to customers
and principal collections on loans (139,989) (118,965)
Principal payments received under leases 1,488 3,116
Purchase of assets to be leased (6,069) (5,404)
Purchases of premises and equipment (3,056) (6,096)
Cash paid for Mortgage Acquisition Company --- (2,603)
Other (195) 553
Net Cash Used in Investing Activities (126,785) (76,132)
Financing Activities:
Net decrease in demand deposits, NOW
accounts and savings accounts (44,171) (5,661)
Net increase in certificates of deposit 110,560 122,696
Net increase (decrease) in
short-term borrowings 38,467 (63,351)
Proceeds from long-term debt --- 3,894
Payments on long-term debt (6,237) (9)
Acquisition of treasury stock (1,184) (1,457)
Cash dividends (2,638) (2,368)
Other (12) 205
Net Cash Provided by Financing Activities 94,785 53,949
Increase (Decrease) in Cash and Cash Equivalent (7,067) 720
Cash and cash equivalents, beginning of year 79,226 77,375
Cash and Cash Equivalents, End of Period $72,159 $78,095
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.
Effective January 1, 1995, 1st Source adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS No. 114) which was amended by statement No. 118.
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. The adoption of
these standards will not have a material impact on the Company's
financial position and, therefore, will not affect the comparability between
any of the periods in the years ended December 31, 1995 and 1994.
COMPARISON OF THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1995 AND 1994
Net income for the three month and nine month periods ended
September 30, 1995 was $5,433,000 and $15,399,000, respectively,
compared to $4,811,000 and $13,671,000 for the equivalent periods in 1994.
An increase in net interest income and net recoveries on loans, together
with a decrease in the loan loss provision for 1995, were the primary
reasons for the increase in earnings in 1995 compared to the same
period in 1994.
Net income per share increased to $0.44 and $1.26, respectively, for
the three month and nine month periods ended September 30, 1995 from
$0.39 and $1.12 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 14.31% for the nine months ended September 30, 1995
compared to 14.27% 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 14.70% for the nine months ended September 30, 1995
compared to 14.43% for the same period in 1994. The return on total
average assets was 1.24% for the nine months ended September 30, 1995
compared to 1.19% in 1994.
NET INTEREST INCOME
The taxable equivalent net interest income for the three month
period ended September 30, 1995 was $18,689,000, an increase of 5.91%
over the same period in 1994, resulting in a net yield of 4.62% compared to
4.80% in 1994. The fully taxable equivalent net interest income for the
nine month period ended September 30, 1995 was $55,236,000, an
increase of 7.72% over 1994.
Total average earning assets increased 10.02% and 8.53%,
respectively, for the three month and nine month periods ended
September 30, 1995 over the comparative periods in 1994. Total average
investment securities increased 11.76% and 7.57%, respectively, for the
three month and nine month periods, due to increases in federal funds sold
and municipal securities, while a 9.45% and 8.86% increase for the three
month and nine month periods for average loans occurred primarily in
commercial, real estate and transportation and equipment loans. The
taxable equivalent yields on total average earning assets were 8.82%
and 8.20% for the three month periods ended September 30, 1995 and
1994 and 8.88% and 8.03% for the nine month periods ended
September 30, 1995 and 1994.
Average deposits increased 6.80% and 8.34%, respectively, for the
three month and nine month periods over the same periods from 1994. The
cost rate on average interest bearing funds was 4.93% and 3.97% for the
three month periods ended September 30, 1995 and 1994 and 4.81%
and 3.75% for the nine month periods ended September 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.
The year to date net yield on earning assets was 4.77% and 4.81% for
the nine month period ended September 30, 1995 and 1994, respectively.
The decrease was due, primarily, to the decline in the prime rate while
deposit costs remained virtually the same.
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 September 30,
1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS:
Interest bearing deposits $1,109 $8 2.76% $975 $4 1.49%
Investment securities:
Taxable 242,767 3,698 6.04% 252,818 3,519 5.52%
Tax exempt <F1> 130,841 2,797 8.48% 104,247 2,498 9.51%
Net loans <F2><F3> 1,201,305 28,761 9.50% 1,097,559 24,085 8.71%
Other investments 29,596 433 5.81% 3,741 45 4.73%
Total Earning Assets 1,605,618 35,697 8.82% 1,459,340 30,151 8.20%
Cash and due from banks 70,841 73,332
Reserve for loan losses (26,237) (24,553)
Other assets 70,561 58,742
Total $1,720,783 $1,566,861
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,199,022 14,654 4.85% $1,121,604 11,055 3.91%
Short-term borrowings 147,952 1,909 5.12% 101,136 984 3.86%
Long-term debt 22,035 445 8.02% 26,101 466 7.08%
Total Interest Bearing Liab 1,369,009 17,008 4.93% 1,248,841 12,505 3.97%
Noninterest bearing deposits 173,366 163,451
Other liabilities 31,978 25,883
Shareholders' equity 146,430 128,686
Total $1,720,783 $1,566,861
Net Interest Income $18,689 $17,646
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.62% 4.80%
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Nine months ended September 30,
1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS:
Interest bearing deposits $1,004 $19 2.58% $914 $9 1.27%
Investment securities:
Taxable 242,446 11,347 6.26% 254,758 10,671 5.60%
Tax exempt <F1> 125,518 8,376 8.92% 102,738 7,509 9.77%
Net loans <F2><F3> 1,158,569 82,212 9.49% 1,064,300 67,318 8.46%
Other investments 20,128 890 5.91% 3,311 98 3.98%
Total Earning Assets 1,547,665 102,844 8.88% 1,426,021 85,605 8.03%
Cash and due from banks 72,724 73,986
Reserve for loan losses (25,388) (23,495)
Other assets 69,377 56,031
Total $1,664,378 $1,532,543
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,171,554 41,296 4.71% $1,081,310 30,097 3.72%
Short-term borrowings 128,230 4,874 5.08% 116,087 2,897 3.34%
Long-term debt 23,789 1,438 8.08% 25,683 1,335 6.95%
Total Interest Bearing Liab 1,323,573 47,608 4.81% 1,223,080 34,329 3.75%
Noninterest bearing deposits 171,968 158,793
Other liabilities 28,808 23,976
Shareholders' equity 140,029 126,694
Total $1,664,378 $1,532,543
Net Interest Income $55,236 $51,276
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.77% 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 $895 in 1995 and $866 in 1994 and for the
nine month periods were $2,721 in 1995 and $2,635 in 1994.
<F2>Loan income includes fees on loans for the three month periods of $684 in 1995 and $768 in 1994 and for
the nine month periods of $2,096 in 1995 and $2,358 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 $31 in 1995 and $55 in 1994 and for the nine month periods were $130 in 1995 and $172 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
September 30, 1995 and 1994 was $1,059,000 and $1,259,000, respectively,
and was $2,200,000 and $3,903,000 for the nine month periods ended
September 30, 1995 and 1994, respectively. Net Recoveries of $941,000
have been recorded for the three month period ended September 30, 1995
compared to $80,000 of Net Charge-offs for the same period in 1994 and
Net Recoveries were $1,664,000 for the nine month period ended
September 30, 1995 compared to $841,000 of Net Charge-offs for the same
period in 1994. The reserve for loan losses was $27,732,000 or 2.31% of
net loans at September 30, 1995 compared to $23,868,000 or 2.17% of net
loans at December 31, 1994.
Nonperforming assets at September 30, 1995 were $6,964,000 compared
to $4,700,000 at December 31, 1994. At September 30, 1995, nonperforming
assets were .58% 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 September 30, 1995.
OTHER INCOME
Other income for the three month periods ended September 30, 1995
and 1994 was $5,035,000 and $3,797,000, respectively, and for the nine
month periods was $14,120,000 in 1995 and $11,164,000 in 1994. Trust fees
increased 9.49%, service charges on deposit accounts increased 6.94%
and mortgage servicing fees, commission income and other income
increased 98.58% over the same period in 1994. The significant
increases in the last category were due to income recorded of $471,000
for the aircraft securitization and $1,807,000 growth in mortgage
servicing fees, net gains on the sale of mortgage loans and servicing,
and loan fees. Much of this increase is due to the acquisition of Trustcorp
Mortgage Company at September 30, 1994 as previously discussed.
There were investment securities and other losses of $160,000 for the
nine month period ended September 30, 1995 compared to $275,000 in
gains during the same period in 1994.
OTHER EXPENSE
Other expense for the three month period ended September 30, 1995
was $13,377,000, an increase of 9.49% over the same period in 1994 and
was $40,905,000 for the nine month period ended September 30, 1995, an
increase of 14.09% over 1994. For the nine month period ended
September 30, 1995, salaries and employee benefits increased 18.29%,
furniture and equipment costs increased 16.70% and miscellaneous
other expenses increased 16.66% over the same period in 1994. The
increase in these expenses was primarily due to the acquisition of
Trustcorp Mortgage Company in September 1994. Insurance expense
decreased 25.70% from last year due to the $828,000 FDIC refund
received in September 1995.
INCOME TAXES
The provision for income taxes for the three month and nine month
periods ended September 30, 1995 was $2,929,000 and $8,002,000,
respectively, compared to $2,234,000 and $6,208,000 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 8.44% at September 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 September 30,
1995 was 11.84% and the total risk-based capital ratio was 14.10%.
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 September 30, 1995, the consolidated statement
of financial condition was rate sensitive by $33,476,000 more assets
than liabilities scheduled to reprice within one year or 104.04%.
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.
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
(Registrant)
DATE November 14, 1995 Christopher J. Murphy III /s/
(Signature)
Christopher J. Murphy III, President
DATE November 14, 1995 Larry E. Lentych /s/
(Signature)
Larry E. Lentych, Treasurer (Chief
Accounting and Financial Officer)