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 June 30, 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 Road, 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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Check whether the registrant filed all documents and reports required
to be filed by Sections 12, 13, or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes X No
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As of June 30, 1997, there were 1,372,218 shares of the Registrant's
common stock outstanding.
SOURCE CAPITAL CORPORATION
Form 10-QSB
For the Quarter Ended June 30, 1997
INDEX
PART I - Financial Information
Item 1 - Financial Statements:
Consolidated Balance Sheets - June 30, 1997 and December 31, 1996
Consolidated Statements of Income and Retained Earnings - Three
and Six Months Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - Other Information
PART I - Financial Information
Item 1. Financial Statements
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SOURCE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31,
1997 1996
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ASSETS
Loans and leases receivable, net $29,274,673 $26,059,031
Accrued interest receivable 270,846 295,047
Cash and cash equivalents 71,240 21,506
Deferred Compensation Trust 887,319 840,881
Investment securities (at market) 552,716 740,004
Other real estate owned 898,002 916,196
Other assets 281,707 360,839
Deferred tax asset 1,628,160 1,685,535
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Total assets $33,864,663 $30,919,039
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LIABILITIES
Note payable to bank $17,425,000 $14,000,000
Mortgage contracts payable 3,203,955 3,222,379
Accounts payable and accrued expenses 296,487 543,083
Deferred compensation payable 887,319 840,881
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Total liabilities 21,812,761 18,606,343
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STOCKHOLDERS' EQUITY
Common stock, no stated par value
Authorized 10,000,000 shares; issued
and outstanding, 1,372,218 and
1,422,144 shares 7,142,745 7,462,827
Additional paid in capital 2,049,047 2,049,047
Unrealized (loss) on investment
securities (24,013) (10,480)
Retained earnings 2,884,123 2,811,302
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Total stockholders' equity 12,051,902 12,312,696
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Total liabilities and stockholders'
equity $33,864,663 $30,919,039
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The accompanying notes are an integral part of the financial
statements.
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the Three and Six Months Ended June 30, 1997 and 1996
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
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1997 1996 1997 1996
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Revenues:
Interest and lease income $1,196,594 $ 769,196 $2,247,968 $1,479,672
Interest expense (438,404) (213,752) (833,326) (409,503)
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Net operating revenue 758,190 555,444 1,414,642 1,070,169
Non-interest income:
Gain on sales of investments,
loans and real estate 178 12,757 178 29,502
Provision for loan losses 0 0 0 (30,000)
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Income before non-interest
expense 758,368 568,201 1,414,820 1,069,671
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Non-interest expenses:
Employee compensation and
benefits 326,676 240,807 570,105 423,474
Other operating expenses 178,947 145,610 343,795 251,126
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Total non-interest
expenses 505,623 386,417 913,900 674,600
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Income before income taxes 252,745 181,784 500,920 395,071
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Income tax provision:
Current (57,125) (33,775) (113,625) (74,175)
Deferred and other (31,375) (24,500) (59,375) (59,825)
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Total income tax provision (88,500) (58,275) (173,000) (134,000)
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Net income 164,245 123,509 327,920 261,071
Retained earnings, beginning of
period 2,719,878 2,101,909 2,811,302 2,177,804
Dividends paid (255,099) (213,457)
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Retained earnings, end of period $2,884,123 $2,225,418 $2,884,123 $2,225,418
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Net income per common share $ .12 $ .09 $ .24 $ .18
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Weighted average number of
common shares and common
share equivalents outstanding 1,375,356 1,443,798 1,383,914 1,443,949
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Cash dividends per share None None $ .18 $ .15
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The accompanying notes are an integral part of the financial
statements.
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1996 (Unaudited)
Six Months Ended
June 30,
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1997 1996
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Cash flows from operating activities:
Net income $ 327,920 $ 261,071
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation 12,838 10,025
Provision for loan losses 30,000
Deferred income taxes 57,375 59,825
Gain on sale of investment
securities (178) (16,745)
Gain on sale of real estate, furni-
ture & equipment (12,756)
Compensation associated with stock
options granted 8,800
Change in:
Accrued interest receivable 24,201 (113,154)
Other assets 129,193 (21,704)
Deferred compensation trust (46,438) (47,560)
Accounts payable and accrued
expenses (246,596) 80,888
Deferred compensation payable 46,438 47,560
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Net cash provided by operating
activities 313,553 277,450
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Cash flows from investing activities:
Purchases of securities (299,877)
Sale of securities 173,933 94,122
Loan origination's (8,790,284) (7,985,926)
Loan repayments 5,574,642 6,393,450
Capitalization of costs related to
other real estate owned (406) (83,275)
Proceeds from sale of other real estate 18,600 398,728
Purchase of office equipment and vehicle (62,899) (79,704)
Sale of office equipment 52,896
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Net cash used by investing
activities (3,086,414) (1,509,586)
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SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Six Months Ended June 30, 1997 and 1996 (Unaudited)
Six Months Ended
June 30,
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1997 1996
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Cash flows from financing activities:
Proceeds from line of credit 7,350,000 6,000,000
Payments of line of credit (3,925,000) (4,800,000)
Payments of mortgage contracts payable (18,424)
Payments for redemption of common stock (328,882) (8,252)
Cash dividends paid (255,099) (213,457)
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Net cash provided by financing
activities 2,822,595 978,291
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Net increase (decrease) in cash and cash
equivalents 49,734 (253,845)
Cash and cash equivalents, beginning of
period 21,506 393,374
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Cash and cash equivalents, end of period $ 71,240 $ 139,529
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Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest $ 809,276 $ 409,539
Cash paid during the period for
income taxes 312,825 79,309
The accompanying notes are an integral part of the financial
statements.
SOURCE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
The financial information given in the accompanying unaudited
financial statements reflect all adjustments which, in the opinion of
management, are necessary to a fair statement for the periods
reported. Certain 1996 amounts have been reclassified to conform with
the 1997 presentation. These reclassifications had no effect on the
net income or retained earnings as previously reported. The results
of operations for the six month period ended June 30, 1997, are not
necessarily indicative of the results to be expected for the full
year. These unaudited financial statements should be read in
conjunction with the Company's most recent audited financial
statements.
NOTE 2.
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.
The Company's provision for federal income taxes for the six months
ended June 30, 1997 and 1996, is calculated using the statutory
corporate income tax rate of 34%. The actual income tax liability to
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 Company's actual tax
liability paid for the year ended December 31, 1996 resulted in an
effective tax rate of approximately 31%.
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
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.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1996
For the six months ended June 30, 1997, the Company reported a net
income of $327,920 or $.24 per share. This compares to a net income
of $261,071 or $.18 per share, for the comparable period in 1996. Net
interest and lease margin (interest and lease income less interest
expense) increased by approximately $344,000 as compared to the six
months ended June 30, 1996. Interest and lease income of
approximately $2,247,968 and $1,480,000 in the quarter ended June 30,
1997 and 1996 represents an approximate average interest yield of
16.5% and 16.8%, respectively, on the company's average earning
assets.
Total non-interest operating expenses increased approximately 35% over
the first six months of 1996 primarily from a 35% increase in salaries
and benefits due to the addition of five new personnel. Additionally
occupancy expense increased by approximately $49,000 over the prior
year due to the Company's larger facilities in Seattle, the opening of
an office in Portland, Oregon and the expansion of its Spokane
facilities.
The Company's average earning asset portfolio grew from $17.6 million
for the six months ended June 30, 1996 to approximately $27.3 million
at June 30, 1997. The growth in the portfolio is directly
attributable to the increase in production personnel and to a slight
increase in the average term of the loan portfolio. At June 30, 1997
the Company had approximately $555,000 of non-performing loans in its
portfolio. These loans are well collateralized and management does
not expect to incur a significant loss. The Company's reserve for
loan losses of approximately $199,000 is considered adequate in
relation to the current loan portfolio.
The recorded provision for income taxes of approximately $173,000 and
$134,000 for the six months ended June 30, 1997 and 1996 is based on
the statutory income tax rate of 34%. The company expects to pay
significantly less than the estimated tax provision for the year ended
December 31, 1997, due to the utilization of net operating loss
carryovers. The Company's effective tax rate for taxes paid in 1996
was approximately 31%.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1996
For the three months ended June 30, 1997, the Company reported a net
income of $164,245 or $.12 per share. This compares to a net income
of $123,509 or $.09 per share, for the comparable period in 1996. Net
interest and lease margin (interest and lease income less interest
expense) increased from approximately $555,000 during the three months
ended June 30, 1996 to approximately $758,000 for the comparable
period in 1997, a 36.5% increase. Interest and lease income of
approximately $1,197,000 and $769,000 in 1997 and 1996 respectively,
represents an approximate average interest yield of 17.3% and 17%
respectively on the Company's average earning assets.
The Company's average earning asset portfolio grew from approximately
$18.1 million in the second quarter of 1996 to approximately $27.7
million in the quarter ended June 30, 1997. This growth was
accomplished due to significant growth in the loan portfolio in the
second half of 1996 and a near doubling of net loan production (new
loan production less loan repayments) in the second quarter of 1997 as
compared to 1996.
The increase in interest and lease income of approximately $427,000
was primarily due to the $9.6 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 $225,000
due to increased borrowings to fund the increase in the loan
portfolio. The Company's cost of funds on average borrowings
increased to 9.5% from 9.1% in 1996 due to a general increase in
interest rates, as the Company's borrowing rates are variable based on
prime and/or "LIBOR". As a result of increased leverage (more
borrowing related to funding increased lending activity) and the
slight increase in yield offset by increased cost of funds, net
interest margin on earning assets (annualized interest and lease
income, minus interest expense, divided by average earning assets for
the quarter) decreased from 12.6% in 1996 to 10.9% for the quarter
ended June 30, 1997.
At June 30, 1997 there were approximately $555,000 of loans in the
Company's portfolio, which were considered non-performing. This
compares to $755,000 of non-performing loans at March 31, 1997. These
non-performing loans and approximately $898,000 of other real estate
did not contribute to second quarter earnings.
Non-interest operating expenses increased approximately $119,000 for
the three months ended June 30, 1997 as compared to the second quarter
of 1996. The increase was primarily due to an increase of
approximately $86,000 in salaries and benefits related to the
additional of five personnel in the second quarter of 1997. Three of
the new employees are employed by the Company's wholly owned
subsidiary, Source Capital Leasing Co., which is virtually a start up
operation. The leasing subsidiary lost a total of approximately
$30,000 in the second quarter of 1997 (its first full quarter of
operation) which is significantly less than had been expected.
Financial Condition and Liquidity
---------------------------------
At June 30, 1997, the Company had approximately $71,000 of cash and
cash equivalents and $552,000 of investment securities. Cash and cash
equivalents increased by approximately $50,000 since December 31,
1996. The Company's primary sources of cash during the first six
months of 1997 were approximately $7,350,000 from short term
borrowings, $5,600,000 loan repayments, and $314,000 from operations.
The primary uses of cash during the first six months of 1997 were
approximately $8,800,000 of loan origination's, $3,900,000 of
repayment on short term borrowings, $329,000 redemption of common
stock and $255,000 payment of dividends.
The Company's line of credit, which matures annually, was renewed and
increased to $25,000,000 on May 1, 1997. The line matures April 30,
1998. In addition to the Company's line of credit its wholly owned
subsidiary has a $1,500,000 line of credit to fund its lease
portfolio. At June 30, 1997, the Company had $17,425,000 outstanding
under the line of credit. The leasing Company had no outstandings
under its line. The Company's line of credit and cash provided from
loan repayments, existing cash, cash equivalents, investment
securities, and sales of real estate owned provide sufficient cash
flows for the operating needs of the company.
Effect of Inflation and Changing Prices
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Interest rates on the Company's loan portfolio are subject to
inflation as inflationary pressures affect prime interest rate. At
June 30, 1997, interest rates on approximately 81% of the Company's
loan portfolio vary based on various indexes. The remaining loans
have fixed interest rates.
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
The following reports on Form 8-K were filed for the
three months ended June 30, 1997:
April 30, 1997 - Item 5 - Other Events
Items 1,2,3,4 and 5 of Part II are omitted from this
report as inapplicable.
SOURCE CAPITAL CORPORATION
SIGNATURES
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: August 13, 1997 By: /s/ D. Michael Jones
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D. Michael Jones
President and Chief Executive
Officer
Date: August 13, 1997 By: /s/ Lester L. Clark
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Lester L. Clark
Vice President-Secretary/Treasurer
Principal Accounting and Finance
Officer