UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR (15)d OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period _______________ to _______________
Commission file number 0-12199
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SOURCE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0853890
- ------------------------------- ------------------
(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
( Issuer's telephone number)
As of May 5, 2000, there were 1,312,715 shares of the Registrant's common stock
outstanding.
Transitional Small Business Disclosure Format (check One) Yes [ ] No [X]
SOURCE CAPITAL CORPORATION
Form 10-QSB
For the Quarter Ended March 31, 2000
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Index
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Page
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Part I - Financial Information
Item 1 - Financial Statements:
- Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 1
- Consolidated Statements of Income, Comprehensive Income and
- Retained Earnings - Three Months Ended March 31, 2000 and 1999 2
- Consolidated Statements of Cash Flows - Three months
Ended March 31, 2000 and 1999 3
- Notes to Consolidated Financial Statements 4
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II - Other Information 10
Part I - Financial Information
Item 1. Financial Statements
SOURCE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
------------
March 31, December 31,
2000 1999
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ASSETS (Unaudited)
Loans receivable, net $45,527,815 $42,833,844
Leases receivable, net 15,398,002 14,224,409
Accrued interest receivable 436,464 326,190
Cash and cash equivalents 701,365 590,630
Marketable securities 147,519 195,684
Real estate and equipment owned 690,329 594,366
Other assets 1,261,426 1,141,887
Deferred income tax 1,093,560 1,206,560
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Total assets $65,256,480 $61,113,570
============ =============
LIABILITIES
Notes payable to bank $41,242,642 $36,781,267
Mortgage contracts payable 3,093,124 3,103,269
Accounts payable and accrued expenses 591,595 879,209
Customer deposits 710,166 723,005
Convertible subordinated debentures 5,950,000 5,950,000
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Total liabilities 51,587,527 47,436,750
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STOCKHOLDERS' EQUITY
Preferred stock, no par value, 10,000,000
shares authorized, none outstanding - -
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding, 1,358,715 and 1,359,645 shares 7,047,943 7,052,881
Additional paid in capital 2,049,047 2,049,047
Accumulated other comprehensive loss (28,064) (33,568)
Retained earnings 4,600,027 4,608,460
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Total stockholders' equity 13,668,953 13,676,820
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Total liabilities and stockholders' equity $65,256,480 $61,113,570
============ =============
See accompanying notes to consolidated financial statements.
1
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
RETAINED EARNINGS
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
------------
Three Months ended March 31,
----------------------------
2000 1999
---- ----
Financing income:
Interest and fee income $ 1,809,782 $ 1,482,629
Lease financing income 573,360 667,863
Interest expense (1,046,593) (942,222)
----------- -----------
Net financing income 1,336,549 1,208,270
Gain on sale of marketable securities and equipment 93,818
11,773
Provision for loan and lease losses (123,045) (89,393)
----------- -----------
Income before non-interest expenses 1,307,322 1,130,650
Non-interest expenses:
Employee compensation and benefits 583,296 486,761
Other operating expenses 346,837 288,830
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Total non interest expenses 930,133 775,591
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Income before income taxes 377,189 355,059
Income tax provision 86,500 120,500
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Net income 290,689 234,559
Retained earnings, beginning of period 4,608,460 3,795,765
Dividends paid (299,122) (242,748)
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Retained earnings, end of period $ 4,600,027 $ 3,787,576
=========== ===========
Net income per common share - basic $ .21 $ .17
=========== ===========
Net income per common share - diluted $ .18 $ .15
=========== ===========
Weighted average number of common shares outstanding:
Basic 1,359,111 1,356,946
=========== ===========
Diluted 2,108,765 2,106,010
=========== ===========
Cash dividends per share $ .22 $ .18
=========== ===========
Net income $ 290,689 $ 234,559
Other comprehensive income, net of tax:
Unrealized gain (loss) on marketable securities 8,340 (498)
net of tax (expense) benefit (2,836) 169
----------- -----------
Comprehensive income $ 296,193 $ 234,230
=========== ===========
See accompanying notes to consolidated financial statements.
2
SOURCE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
------------
March 31, March 31,
2000 1999
---- ----
Cash flows from operating activities:
Net income $ 290,689 $ 234,559
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 22,029 15,105
Provision for loan and lease losses 123,045 89,393
Deferred income taxes 113,000 23,700
Gain on sale of equipment (3,600) --
Gain on sale of marketable securities (90,218) (11,773)
Change in:
Accrued interest receivable (110,274) (115,779)
Other assets (154,903) 15,300
Accounts payable and accrued expenses (303,653) (123,394)
Customer deposits (12,839) 92,395
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Net cash provided by (used in) operating activities (126,724) 219,506
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Cash flows from investing activities:
Proceeds from sale of marketable securities 143,887 --
Loan originations (7,301,763) (6,098,266)
Loan repayments 4,607,792 3,864,572
Lease originations (2,497,819) (3,502,701)
Collections on direct financing leases 1,101,028 1,114,440
Capitalization of costs related to
other real estate owned -- (3,959)
Proceeds from sale of other real estate and equipment 41,593 169,704
Purchase of office equipment (4,429) (50,994)
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Net cash used in investing activities (3,909,711) (4,507,204)
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Cash flows from financing activities:
Proceeds from notes payable to bank 10,272,484 11,896,079
Payments on notes payable to bank (5,811,109) (6,994,560)
Payments on mortgage contracts (10,145) (11,965)
Proceeds from exercise of stock options -- 50,000
Payments for repurchase of common stock (4,938) --
Cash dividends paid (299,122) (242,748)
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Net cash provided by financing activities 4,147,170 4,696,806
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Net increase in cash and cash equivalents 110,735 409,108
Cash and cash equivalents, beginning of period 590,630 750,218
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Cash and cash equivalents, end of period $ 701,365 $ 1,159,326
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,095,700 $ 924,093
Cash paid during the period for income taxes -- 15,000
Non-cash financing and investing transactions:
Loan converted to repossessed assets -- 198,317
Leases converted to repossessed and other assets 208,121 203,812
Leases charged off 74,368 47,342
See accompanying notes to consolidated financial statements.
3
SOURCE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
- -------
The unaudited 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.
The unaudited consolidated financial statements reflect all adjustments
(consisting only of normal recurring items), which in the opinion of management,
are necessary to fairly state the periods reported. Certain 1999 amounts have
been reclassified to conform with the 2000 presentation. These reclassifications
had no effect on the net income or retained earnings as previously reported. The
results of operations for the three-month period ended March 31, 2000, 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 for the year ended December 31, 1999.
NOTE 2.
- -------
Net income per share - basic is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Net
income per share - diluted (after adjustment for the after-tax effect of
interest on convertible subordinated debentures) is computed by dividing net
income by the weighted-average number of common shares outstanding, increased by
the additional common shares that would have been outstanding if the dilutive
potential common shares had been issued.
Earnings Per Share Computation:
For the Quarter Ended March 31, 2000
------------------------------------
Weighted- Per-Share
Net Income Average shares Amount
---------- -------------- ------
Basic EPS
Income available to common
Stockholders $ 290,689 1,359,111 $ .21
=========
Effect of Dilutive Securities
Interest on 7.5% convertible subordinated
debentures (net of 34% tax) 82,816 742,821
Common stock options -- 6,833
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Diluted EPS
Income available to common
stockholders + assumed conversions $ 373,505 2,108,765 $ .18
========= ========= ==========
4
SOURCE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 Continued:
- -----------------
Earnings Per Share Computation, Continued:
For the Quarter Ended March 31, 1999
------------------------------------
Weighted- Per-Share
Net Income Average shares Amount
---------- -------------- ------
Basic EPS
Income available to common
Stockholders $ 234,559 1,356,946 $ .17
=========
Effect of Dilutive Securities
Interest on convertible subordinated
debentures (net of 34% tax) 74,250 749,064
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Diluted EPS
Income available to common
stockholders + assumed conversions $ 308,809 2,106,010 $ .15
========== ========= =========
NOTE 3.
- -------
The Company's consolidated financial statements include certain reportable
segment information. The segments include the parent company Source Capital
Corporation who's primary business is commercial real estate lending and its
wholly owned subsidiary Source Capital Leasing Co. who's primary business is
equipment lease financing. All accounting policies of the parent and subsidiary
are the same. The parent evaluates the performance of the subsidiary based upon
multiple variables including lease income, interest expense and profit or loss
after tax. The parent does not allocate any unusual items to the subsidiary.
Company segment profit and loss components and schedule of assets as of March
31, 2000 and 1999 is as follows:
2000 1999
---- ----
Leasing Lending Leasing Lending
------- ------- ------- -------
Income commercial real estate $ -- $ 1,809,782 $ -- $ 1,482,629
Income lease financing 573,360 -- 667,863 --
Interest expense 217,995 828,598 221,802 720,420
Depreciation 7,683 14,346 3,818 11,287
Income tax expense (benefit) (15,000) 101,500 23,500 97,000
Net income (loss) (29,029) 319,718 45,905 188,654
Significant non-cash items
other than depreciation 33,743 -- 74,393 15,000
Real estate lending assets -- 53,152,283 -- 50,037,822
Leasing assets 16,265,471 -- 17,025,930 --
5
SOURCE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. Continued:
Reconciliation of segment net income (loss), total assets, notes payable and
other significant items for the quarter ended March 31, 2000 and 1999 follows:
2000 1999
---- ----
Profit or loss
Leasing net (loss) income $ (29,029) $ 45,905
Adjustment for income taxes (101,500) (97,000)
Unallocated amounts:
Revenue of real estate lending 1,849,063 1,482,629
Expense of real estate lending (1,427,845) (1,196,975)
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Consolidated net income after tax $ 290,689 $ 234,559
============ ============
Total assets
Net lease investment $ 15,398,002 $ 16,117,679
Unallocated assets of leasing 867,469 908,251
Elimination of intercompany (4,158,438) (3,596,156)
Commercial loans receivable, net 45,527,815 42,440,716
Unallocated assets of real estate lending 7,624,468 7,597,106
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Consolidated assets $ 65,259,316 $ 63,467,596
============ ============
Debt
Leasing note payable $ 11,337,642 $ 12,609,683
Real estate lending note payable 29,905,000 27,535,000
Real estate lending mortgage contract payable 3,093,124 3,135,614
Real estate lending convertible subordinated debentures 5,950,000 6,000,000
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Consolidated notes and mortgage payable $ 50,285,766 $ 49,280,297
============ ============
Real Estate
Leasing Lending
Other significant items Total Total Consolidated
----- ----- ------------
2000
Interest expense $217,995 $828,598 $1,046,593
Provision for losses 123,045 -- 123,045
1999
Interest expense $221,802 $720,420 $ 942,222
Provision for losses 74,393 15,000 89,393
6
SOURCE CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
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General
These discussions contain forward-looking statements containing words such as
"will continue to be," "will be," "continue to," "anticipates that," "to be," or
"can impact." Management cautions that forward-looking statements are subject to
risks and uncertainties that could cause the Company's actual results to differ
materially from those projected in forward-looking statements.
Three Months Ended March 31, 2000 Compared to Three Months ended March 31, 1999
- -------------------------------------------------------------------------------
For the three months ended March 31, 2000, the Company reported a net income of
$290,689 or $.18 per diluted common share. These results compare to a net income
of $234,559 or $.15 per diluted share, for the comparable period in 1999. Net
financing income (interest and lease income less interest expense) increased
from approximately $1,208,000 during the three months ended March 31, 1999 to
approximately $1,337,000 in the comparable period of 2000 (an 10.6% increase).
Finance income of approximately $2,383,000 and $2,150,000 for the three months
ended March 31, 2000 and 1999 respectively, represents an approximate average
interest yield of 16.3% and 15.3%, respectively, on the Company's average
earning assets. The Company experienced a slight decline in interest yield on
its average leasing portfolio (approximately .6%). However this decline was
offset by an increase of approximately 1.8% in yield on its loan portfolio, as
compared to first quarter 1999. The decline in yield on the Company's lease
portfolio is primarily due to competitive factors in the industry and a
tightening of credit requirements by the Company. The Company's policy of
pricing its commercial loans using a prime rate index is the primary reason for
the increase in yield on the Company's loan portfolio as there has been a
general increase in the prime rate since the second quarter of 1999. During the
past year the prime lending rate of commercial banks increased from 7.75% in the
first quarter of 1999 to 9.00% currently. The rates charged on the Company's
lease portfolio were relatively unaffected by market rates charged to loan
customers.
The increase in financing income of approximately $233,000 is directly
attributable to both the increase in interest rates and to a lesser degree the
increase of approximately $1,900,000 in the Company`s average earning assets
over the first quarter of 1999. The Company's average earning asset portfolio
grew from $56,500,000 for the three months ended March 31, 1999 to approximately
$58,400,000 at March 31, 2000. The growth in the Company's average earning
assets is primarily related to growth in the Company's loan portfolio. Loan
production in the quarter ended March 31, 2000 exceeded production in the
comparable period in 1999 by approximately $1,100,000 and is directly
attributable to an increase in production personnel in the Company's lending
operations and a general credit tightening by smaller commercial banks. The
increase in loan production was offset by an approximate $1,005,000 decline in
lease production from first quarter 1999 levels. The increase in financing
income was partially offset by an approximate $104,000 increase in interest
expense. The Company's cost of funds on average borrowings increased from
approximately 8.23% at March 31, 1999 to approximately 8.95% in the comparable
period in 2000. The Company was able to reduce its borrowing costs by funding a
portion of its loan portfolio using a "LIBOR" based rate, which is currently
more attractive than a prime based rate. The Company funds its lease portfolio
using a "LIBOR" based rate which is currently 9.05% as compared to 7.18% at
March 31, 1999. At March 31, 2000, the Company had approximately $781,000 of
loans and leases which were delinquent as to principal or interest more than 90
days, as compared to approximately $2,114,000 at March 31, 1999. Subsequent to
March 31, 2000, a delinquent loan of approximately $550,000 included in
7
the over 90 day category was paid in full. Management believes that these loans
and leases are adequately collateralized and that the Company's allowance for
loan and lease losses of approximately $555,000 is adequate as of March 31,
2000.
Total non-interest expenses increased approximately 19.9% over the first three
months of 1999 primarily due to a 19.8% increase in salaries and benefits
resulting from additional personnel over the comparable period in 1999 and an
increased accrual for profit sharing related to increased profits. Additionally,
other operating expenses increased by approximately $58,000 or 20.1% over the
prior year. Of the increase in other expense, approximately $30,000 was related
to occupancy expense in which there was a general increase in rent, insurance
and depreciation. There were other increases and decreases in the Company's
other operating expenses none of which is material when considered individually.
The provision for income taxes was approximately $86,500 and $120,500 for the
three months ended March 31, 2000 and 1999, respectively. The Company expects to
pay current income taxes significantly less than the estimated tax provision for
the year ended December 31, 1999, due to the utilization of net operating loss
carryovers and the differences between book and tax accounting for leases.
Financial Condition and Liquidity
- ---------------------------------
At March 31, 2000, the Company had approximately $701,000 of cash and cash
equivalents and $148,000 of marketable securities. Cash and cash equivalents
increased approximately $111,000 from December 31, 1999. The Company's primary
sources of cash during the first three months of 2000 were approximately
$10,272,000 from short-term borrowings, $4,608,000 loan repayments, $1,101,000
lease repayments and $144,000 from the sale of marketable securities. The
primary uses of cash during the first three months of 2000 were approximately
$7,302,000 of loan originations, $5,811,000 repayment of short term borrowings,
$2,498,000 additions to direct financing leases, $299,000 payment of dividends
and $127,000 was used in operations.
The Company's $45,000,000 line of credit, which matures annually, was renewed
(with no significant changes from prior years) and matures April 30, 2001. At
March 31, 2000, the Company had $29,905,000 outstanding under the line of
credit. In addition to the Company's line of credit, its wholly owned
subsidiary, Source Capital Leasing Co., has a $17,000,000 line of credit to fund
its lease portfolio. The leasing company's line which matured on April 30, 2000,
has been extended 90 days to provide time for the renewal process. The Company
expects the leasing line will be renewed prior to the expiration of the 90 day
extension. The leasing company had approximately $11,338,000 outstanding under
its line at March 31, 2000. The cash flows from the Company's lines of credit,
loan and lease repayments, and the existing cash, cash equivalents and
marketable securities are expected to be sufficient for the operating needs of
the Company.
Effect of Inflation and Changing Prices
- ---------------------------------------
Interest rates on the Company's loan portfolio are subject to inflation as
inflationary pressures affect the prime interest rate. At March 31, 2000,
interest rates on approximately 98% of the Company's loan portfolio were
variable based on various indexes. The remaining loans have fixed interest
rates. Loans with fixed rates and maturities of less than one year at March 31,
2000 are considered variable. The Company's line of credit agreement provides
for variable interest based on the prime rate or at the Company's option, a
"LIBOR" based rate.
Management believes that any negative effects of an increase in the prime
interest rate would be largely offset by the Company's relatively short-term
loan portfolio, balloon payments and the large percentage of variable rate
loans.
8
Rates earned on the Company's lease portfolio are fixed for the term of the
lease, however, the Company funds its portfolio by borrowing under its lease
line of credit as soon as is practicable after funding the lease. Each lease is
funded separately and the interest rate charged by the bank is fixed for the
term of the advance which correspondingly is matched to the term of the lease.
9
SOURCE CAPITAL CORPORATION
PART II - OTHER INFORMATION
Items 1,2,3,4 and 5 of Part II are omitted from this report as they are either
inapplicable or the answer is negative.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
(The balance of this page has been intentionally left blank.)
10
SOURCE CAPITAL CORPORATION
SIGNATURES
------------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SOURCE CAPITAL CORPORATION
--------------------------
(Registrant)
Date: May 10, 2000 By: /s/ D. Michael Jones
-------------------------- --------------------
D. Michael Jones
President and Chief Executive Officer
Date: May 10, 2000 By: /s/ Lester L. Clark
------------------------- -------------------
Lester L. Clark
Vice President-Secretary/Treasurer
Principal accounting and finance officer
11