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, 1996
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, 1996 -
12,501,067 shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated statements of financial condition --
June 30, 1996 and December 31, 1995
b) Consolidated statements of income --
three months and six months ended June 30, 1996
and 1995
c) Consolidated statements of cash flows --
six months ended June 30, 1996 and 1995
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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Dollars in thousands)
June 30, December 31,
1996 1995
ASSETS
Cash and due from banks $106,897 $94,517
Interest bearing deposits with other banks 3,291 2,946
Federal funds sold 5,000 -
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $269,781 and $270,621
at June 30, 1996 and December 31, 1995 266,219 270,290
Securities held-to-maturity, at amortized cost
(fair value of $127,901 and $132,383
at June 30, 1996 and December 31, 1995 124,497 126,085
Total Investment Securities 390,716 396,375
Loans - net of unearned discount 1,373,094 1,259,415
Reserve for loan losses (28,540) (27,470)
Net Loans 1,344,554 1,231,945
Premises and equipment 25,620 23,383
Other assets 54,211 50,091
Total Assets $1,930,289 $1,799,257
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $198,333 $190,045
Interest bearing 1,350,067 1,251,704
Total Deposits 1,548,400 1,441,749
Federal funds purchased and securities
sold under agreements to repurchase 107,633 101,166
Other short-term borrowings 62,815 51,813
Other liabilities 31,439 30,109
Long-term debt 19,578 21,819
Total Liabilities 1,769,865 1,646,656
Shareholders' equity:
Common stock-no par value 5,700 5,429
Capital surplus 69,947 56,337
Retained earnings 92,469 96,952
Less cost of common stock in treasury (6,137) (6,497)
Unrealized appreciation (depreciation) of
investment securities, net (1,555) 380
Total Shareholders' Equity 160,424 152,601
Total Liabilities and Shareholders' Equity $1,930,289 $1,799,257
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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
1996 1995 1996 1995
Interest Income:
Loans, including fees $30,751 $27,626 $60,246 $53,352
Investment securities:
Taxable 3,851 3,887 7,568 7,648
Tax-exempt 2,051 1,988 4,024 3,753
Other 228 359 274 469
Total Interest Income 36,881 33,860 72,112 65,222
Interest Expense:
Deposits 15,779 13,936 31,025 26,642
Short-term borrowings 1,975 1,892 3,778 2,965
Long-term debt 339 463 685 992
Total Interest Expense 18,093 16,291 35,488 30,599
Net Interest Income 18,788 17,569 36,624 34,623
Provision for Loan Losses 1,193 181 2,402 1,141
Net Interest Income After
Provision for Loan Losses 17,595 17,388 34,222 33,482
Other Income:
Trust fees 1,833 1,710 3,456 3,374
Service charges on deposit accounts 1,178 1,233 2,354 2,431
Mortgage servicing fees, commission income and other 2,809 1,474 5,418 3,424
Investment securities and other gains (losses) 89 9 127 (144)
Total Other Income 5,909 4,426 11,355 9,085
Other Expense:
Salaries and employee benefits 8,911 8,245 17,563 16,335
Net occupancy expense 1,162 900 2,316 1,770
Furniture and equipment expense 1,362 1,367 2,657 2,805
Insurance expense 124 862 245 1,718
Other 3,092 2,787 5,738 4,900
Total Other Expense 14,651 14,161 28,519 27,528
Income Before Income Taxes 8,853 7,653 17,058 15,039
Income taxes 3,072 2,541 5,911 5,073
Net Income $5,781 $5,112 $11,147 $9,966
Per Common Share: <F1>
Net Income $0.45 $0.40 $0.87 $0.78
Dividends $0.080 $0.070 $0.160 $0.140
Weighted Average Common Shares Outstanding 12,808,781 12,827,400 12,792,968 12,810,309
<FN>
<F1> The computation of per share data gives retroactive recognition to a 5 percent
stock dividend declared on January 22, 1996.
</FN>
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CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Dollars in thousands)
Six Months Ended June 30
1996 1995
Operating Activities:
Net income $11,147 $9,966
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,402 1,141
Depreciation of premises and equipment 1,587 1,210
Amortization of investment security premiums
and accretion of discounts, net 328 443
Deferred income taxes 118 (387)
Realized investment securities (gains) losses (127) 144
Increase in interest receivable (560) (1,130)
Increase in interest payable 3,243 5,800
Other (4,691) (2,489)
Net Cash Provided by Operating Activities 13,447 14,698
Investing Activities:
Proceeds from sales and maturities of investment securities 58,328 37,511
Purchases of investment securities (56,100) (53,000)
Net increase in short-term investments (5,345) (36,265)
Loans sold or participated to others 76,646 44,876
Net increase in loans made to customers
and principal collections on loans (190,144) (146,949)
Principal payments received under leases 3,579 1,316
Purchase of assets to be leased (5,117) (2,785)
Purchases of premises and equipment (3,278) (2,219)
Other 1,389 (180)
Net Cash Used in Investing Activities (120,042) (157,695)
Financing Activities:
Net increase (decrease) in demand deposits, NOW
accounts and savings accounts 9,765 (33,377)
Net increase in certificates of deposit 96,886 110,518
Net increase in short-term borrowings 17,469 80,132
Payments on long-term debt (2,242) (5,929)
Acquisition of treasury stock (891) (233)
Cash dividends (2,001) (1,758)
Other (11) (12)
Net Cash Provided by Financing Activities 118,975 149,341
Increase in Cash and Cash Equivalents 12,380 6,344
Cash and cash equivalents, beginning of year 94,517 79,226
Cash and Cash Equivalents, End of Period $106,897 $85,570
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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.
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 this 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 and 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 SFAS No. 114 had no impact on the
provision for loan losses as reported.
The provision for loan losses charged to expense is based upon the
actual net loan losses incurred as determined on a basis consistent
with SFAS No. 114, plus an amount for such other factors which, in
management's judgment, deserve recognition in estimating possible loan
losses. Loans are charged against the reserve for loan losses when
deemed uncollectible.
1st Source adopted Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" (SFAS No. 122) on
January 1, 1996. The new standard requires mortgage banking
enterprises to recognize as separate assets the rights to service
mortgage loans for others, however those mortgage servicing rights are
acquired. SFAS 122 also requires that mortgage banking enterprises
assess capitalized mortgage servicing rights based on the fair value of
those rights on a disaggregated basis. As of June 30, 1996, 1st Source
has capitalized $754,000 of originated mortgage servicing rights. The
adoption of SFAS No. 122 has had no material impact on the financial
statements.
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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 June 30, 1996 is
$28 million. It has a maturity date of January, 2002, and has a
current fair value of $(825,000). The second swap also has a notional
amount of $28 million as of June 30, 1996. It has a maturity date of
March, 2001, and has a fair value of $(541,000).
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 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.
1st Source adopted Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-based Compensation" (SFAS No. 123) on
January 1, 1996. This Statement requires the fair value of stock
options and other stock-based compensation issued to employees to
either be included as compensation expense in the statement of income,
or the pro forma effect on net income and earnings per share of such
compensation expense to be disclosed in the footnotes to the financial
statements. 1st Source adopted SFAS No. 123 on a disclosure basis only
and, accordingly, the adoption of this Statement will not have a
material impact on the Company's financial position.
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COMPARISON OF THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 1996 AND 1995
Net income for the three month and six month periods ended June
30, 1996 was $5,781,000 and $11,147,000 respectively compared to
$5,112,000 and $9,966,000 for the equivalent periods in 1995. The
primary reasons for the increase were an increase in net interest
income and a strong increase in other income offset by an increase in
the provision for loan losses and only a modest increase in other
expense.
Net income per share increased to $0.45 and $0.87 respectively for
the three month and six month periods ended June 30, 1996 from $0.40
and $0.78 in 1995. Return on average equity was 14.30% for the six
months ended June 30, 1996 compared to 14.69% in 1995. The return on
total average assets was 1.22% for the six months ended June 30, 1996
compared to 1.23% in 1995.
NET INTEREST INCOME
The taxable equivalent net interest income for the three month
period ended June 30, 1996 was $19,740,000, an increase of 6.37% over
the same period in 1995, resulting in a net yield of 4.53% compared to
4.77% in 1995. The fully taxable equivalent net interest income for
the six month period ended June 30, 1996 was $38,520,000, an increase
of 5.40% over 1995, resulting in a net yield of 4.52% compared to 4.85%
in 1995.
Total average earning assets increased 12.33% and 12.89%
respectively for the three month and six month periods ended June 30,
1996 over the comparative periods in 1995. Total average investment
securities increased 6.36% and 8.20% respectively for the three month
and six month periods, due to an increase in municipal securities,
while a 15.26% and 15.25% increase for the three month and six month
periods for average loans occurred primarily in transportation and
equipment loans. The taxable equivalent yields on total average
earning assets were 8.67% and 8.97% for the three month period ended
June 30, 1996 and 1995 and 8.68% and 8.89% for the six month period
ended June 30, 1996 and 1995.
Average deposits increased 12.34% and 11.11%, respectively for the
three month and six month periods over the same periods from 1995. The
cost rate on average interest bearing funds was 4.86% and 4.91% for the
three month periods ended June 30, 1996 and 1995 and 4.88% and 4.73%
for the six month periods ended June 30, 1996 and 1995. The majority
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of the growth in deposits from last year has occurred in time deposits
of $100 thousand and over and time deposits less than one year.
The following table sets forth consolidated information
regarding average balances and rates.
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DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three months ended June 30,
1996 1995
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS:
Interest bearing deposits $2,817 $35 5.00% $901 $5 2.39%
Investment securities:
Taxable 248,880 3,851 6.22% 242,639 3,886 6.44%
Tax exempt <F1> 146,382 2,967 8.15% 130,735 2,929 9.01%
Net loans <F2><F3> 1,341,731 30,789 9.23% 1,164,069 27,674 9.56%
Other investments 14,542 192 5.32% 23,500 354 6.07%
Total Earning Assets 1,754,352 37,834 8.67% 1,561,844 34,848 8.97%
Cash and due from banks 73,521 76,942
Reserve for loan losses (28,072) (25,746)
Other assets 76,409 68,393
Total $1,876,210 $1,681,433
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,323,958 15,780 4.79% $1,170,801 13,936 4.79%
Short-term borrowings 152,049 1,974 5.22% 141,971 1,892 5.36%
Long-term debt 20,012 340 6.84% 22,573 463 8.25%
Total Interest Bearing Liabilities 1,496,019 18,094 4.86% 1,335,345 16,291 4.91%
Noninterest bearing deposits 190,102 176,985
Other liabilities 31,524 28,551
Shareholders' equity 158,565 140,552
Total $1,876,210 $1,681,433
Net Interest Income $19,740 $18,557
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.53% 4.77%
Six months ended June 30,
1996 1995
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS:
Interest bearing deposits $2,796 $69 4.99% $950 $12 2.46%
Investment securities:
Taxable 249,129 7,568 6.11% 242,284 7,648 6.35%
Tax exempt <F1> 144,132 5,846 8.16% 122,812 5,579 9.14%
Net loans <F2><F3> 1,310,208 60,322 9.26% 1,136,846 53,451 9.46%
Other investments 7,677 204 5.35% 15,317 457 6.00%
Total Earning Assets 1,713,942 74,009 8.68% 1,518,209 67,147 8.89%
Cash and due from banks 72,886 73,680
Reserve for loan losses (27,819) (24,956)
Other assets 74,901 68,776
Total $1,833,910 $1,635,709
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,295,154 31,025 4.82% $1,157,592 26,642 4.63%
Short-term borrowings 148,307 3,778 5.12% 118,205 2,965 5.04%
Long-term debt 20,426 686 6.76% 24,680 992 8.08%
Total Interest Bearing Liabilities 1,463,887 35,489 4.88% 1,300,477 30,599 4.73%
Noninterest bearing deposits 181,326 171,260
Other liabilities 31,932 27,197
Shareholders' equity 156,765 136,775
Total $1,833,910 $1,635,709
Net Interest Income $38,520 $36,548
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.52% 4.85%
<FN>
<F1> Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1996 and 1995.
Tax equivalent adjustments for the three month periods were $916 in 1996 and $940 in 1995 and for the six month
periods were $1,822 in 1996 and $1,826 in 1995.
<F2> Loan income includes fees on loans for the three month periods of $718 in 1996 and $651 in 1995 and for the six
month periods of $1,474 in 1996 and $1,412 in 1995. Loan income also includes the effects of taxable equivalent
adjustments, using a 40.525% rate for 1996 and 1995. The tax equivalent adjustments for the three month periods
were $37 in 1996 and $48 in 1995 and for the six month periods were $75 in 1996 and $99 in 1995.
<F3> For purposes of this computation, nonaccruing loans are included in the daily average loan amounts outstanding.
</FN>
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PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended
June 30, 1996 and 1995 was $1,193,000 and $181,000, respectively and
was $2,402,000 and $1,141,000 for the six month periods ended June 30,
1996 and 1995. Net Charge-Offs of $223,000 have been recorded for the
three month period ended June 30, 1996 compared to $494,000 of Net
Recoveries for the same period in 1995. Year-to-date Net Charge-Offs
of $1,332,000 have been recorded in 1996, compared to Net Recoveries of
$723,000 through June 1995. The reserve for loan losses was
$28,540,000 or 2.08% of net loans at June 30, 1996 compared to
$27,470,000 or 2.18% of net loans at December 31, 1995.
Nonperforming assets at June 30, 1996 were $8,518,000 compared to
$6,584,000 at December 31, 1995, an increase of 29.37%. At June 30,
1996, nonperforming assets were .62% of net loans compared to .52% at
December 31, 1995. 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, 1996.
OTHER INCOME
Other income for the three month periods ended June 30, 1996 and
1995 was $5,909,000 and $4,426,000, respectively and for the six month
periods was $11,355,000 in 1996 and $9,085,000 in 1995. Trust fees
increased 2.43%, service charges on deposit accounts decreased 3.17%
and other mortgage servicing fees, commission income and other income
increased 58.24% over the same period in 1995. The significant
increases in the last category were attributed primarily to increases
in mortgage servicing, salable loan fees and equipment rental income.
Investment Securities and other gains for the six month period ended
June 30, 1996 were $127,000 compared to a loss of $144,000 in 1995.
The net gains in 1996 and the net losses in 1995 were primarily due to
adjustments made to the carrying value of certain partnership
investments.
OTHER EXPENSE
Other expense for the three month period ended June 30, 1996
was $14,651,000, an increase of 3.46% over the same period in 1995 and
was $28,519,000 for the six month period ended June 30, 1996, an
increase of 3.60% over 1995. For the six month period ended June 30,
1996, salaries and employee benefits increased 7.52%, furniture and
equipment costs decreased 5.28%, net occupancy expense increased
30.85%, insurance expense decreased 85.74%, business development and
marketing expense increased 21.91% and miscellaneous other expenses
increased 15.91% over the same period in 1995. The increase in net
occupancy expense is due to the loss of a major tenant in our corporate
headquarters building. The decrease in insurance expense
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reflects an FDIC assessment factor of 0% for 1996. Business
development and marketing expense has increased due to new branches
being opened in 1996. The increase in miscellaneous expense is due to
depreciation of leased equipment.
INCOME TAXES
The provision for income taxes for the three month and six month
periods ended June 30, 1996 was $3,072,000 and $5,911,000 respectively
compared to $2,541,000 and $5,073,000 for the comparable periods in
1995. The increase was due to increased taxable income in 1996.
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 8.42% at June 30, 1996.
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 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 risked-based capital ratio on June 30,
1996 was 11.14% and the total risk-based capital ratio was 12.67%.
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 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
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interest rate forecasts. At June 30, 1996, the consolidated statement
of financial condition was rate sensitive by $40,736,000 more
liabilities than assets scheduled to reprice within one year or 95.90%.
Management adjusts the composition of its assets and liabilities
to manage the interest rate sensitivity gap based upon its expectations
of interest rate fluctuations.
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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 1996, 1st Source Corporation's
shareholders elected William P. Johnson and Rex Martin; and
re-elected Christopher J. Murphy III, Ernestine M. Raclin,
and Lawrence E. Hiler as directors at the April 23, 1996
annual meeting. Christopher J. Murphy III, Ernestine M.
Raclin, Rex Martin and Lawrence E. Hiler were elected for
terms ending in April, 1999, and William P. Johnson was
elected to a term that ends in April, 1997. The election
tally showed that 11,803,892 votes were cast (representing
94% of all eligible shares) with all directors receiving a
majority of the votes cast. All directors received less than
1% negative or withheld votes.
Also during the second quarter of 1996, 1st Source
Corporation's shareholders elected to increase the authorized
Common Stock from 15,000,000 to 40,000,000 so that additional
shares would be available for general purposes, including
acquisitions, financings, stock dividends, stock spilts or
funding of employee incentive plans. The election tally
showed that 11,969,239 votes were cast (representing 95% of
all eligilbe shares) with the proposal receiving a majority
of the votes cast.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
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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 15, 1996 Christopher J. Murphy III /s/
(Signature)
Christopher J. Murphy III, President
DATE August 15, 1996 Larry E. Lentych /s/
(Signature)
Larry E. Lentych, Treasurer (Chief
Accounting and Financial Officer)
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