-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EUIbxiuBv+ijReXryQ8Qs0dPSwGOY/fItjYPmYBQc9yq8JwQ3P/UjNfVavbX/JK9 b1aePrFEplczx+jCeRNFxQ== 0000034782-97-000012.txt : 19971113 0000034782-97-000012.hdr.sgml : 19971113 ACCESSION NUMBER: 0000034782-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 1ST SOURCE CORP CENTRAL INDEX KEY: 0000034782 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351068133 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-06233 FILM NUMBER: 97716672 BUSINESS ADDRESS: STREET 1: 100 N MICHIGAN ST CITY: SOUTH BEND STATE: IN ZIP: 46601 BUSINESS PHONE: 2192352702 MAIL ADDRESS: STREET 1: P O BOX 1602 STREET 2: P O BOX 1602 CITY: SOUTH BEND STATE: IN ZIP: 46634 FORMER COMPANY: FORMER CONFORMED NAME: FBT BANCORP INC DATE OF NAME CHANGE: 19820818 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 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 of 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 September 30, 1997 - 15,630,980 shares. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Page Consolidated statements of financial condition -- 3 September 30, 1997, and December 31, 1996 Consolidated statements of income -- 4 three months and nine months ended September 30, 1997 and 1996 Consolidated statements of cash flows -- 5 nine months ended September 30, 1997 and 1996 Notes to the Consolidated Financial Statements 6
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 1st Source Corporation and Subsidiaries (Dollars in thousands) September 30 December 31, 1997 1996 ASSETS Cash and due from banks $ 83,595 $ 137,588 Interest bearing deposits with other banks 911 600 Investment securities: Securities available-for-sale, at fair value (amortized cost of $311,538 and $303,177 at September 30, 1997 and December 31, 1996) 312,423 302,602 Securities held-to-maturity, at amortized cost (fair value of $117,905 and $125,218 at September 30, 1997 and December 31, 1996) 113,528 120,494 Total Investment Securities 425,951 423,096 Loans - net of unearned discount 1,719,611 1,455,563 Reserve for loan losses (33,649) (29,516) Net Loans 1,685,962 1,426,047 Premises and equipment 29,371 27,780 Other assets 97,320 64,656 Total Assets $2,323,110 $2,079,767 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 215,875 $ 207,280 Interest bearing 1,501,684 1,426,698 Total Deposits 1,717,559 1,633,978 Federal funds purchased and securities sold under agreements to repurchase 217,039 112,580 Other short-term borrowings 102,666 112,283 Other liabilities 37,155 30,497 Long-term debt 15,505 18,596 Total Liabilities 2,089,924 1,907,934 Guaranteed Preferred Beneficial Interests in the Company's Subordinated Debentures 44,750 -- Shareholders' equity: Common stock-no par value 5,700 5,700 Capital surplus 69,947 69,947 Retained earnings 118,623 102,399 Less cost of common stock in treasury (7,278) (6,670) Unrealized appreciation of investment securities, net 1,444 457 Total Shareholders' Equity 188,436 171,833 Total Liabilities and Shareholders' Equity $2,323,110 $2,079,767 The accompanying notes are a part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME 1st Source Corporation and Subsidiaries (Dollars in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30 September 30 1997 1996 1997 1996 Interest Income: Loans, including fees $38,471 $32,080 $107,895 $ 92,326 Investment securities: Taxable 4,295 3,726 12,540 11,294 Tax-exempt 2,042 2,040 6,132 6,064 Other 34 195 179 469 Total Interest Income 44,842 38,041 126,746 110,153 Interest Expense: Deposits 19,143 16,429 53,279 47,454 Short-term borrowings 3,330 2,005 9,154 5,783 Long-term debt 277 347 875 1,032 Total Interest Expense 22,750 18,781 63,308 54,269 Net Interest Income 22,092 19,260 63,438 55,884 Provision for Loan Losses 2,130 1,431 3,838 3,833 Net Interest Income After Provision for Loan Losses 19,962 17,829 59,600 52,051 Other Income: Trust fees 1,999 1,574 5,491 5,030 Service charges on deposit accounts 1,433 1,272 3,969 3,626 Mortgage servicing fees, and mortgage loan sale income 1,459 1,478 3,794 3,411 Equipment rental income 1,955 975 4,617 1,584 Commission, securitization and other income 2,120 1,967 5,593 4,843 Investment securities and other gains (losses) 24 0 (279) 127 Total Other Income 8,990 7,266 23,185 18,621 Other Expense: Salaries and employee benefits 10,111 9,406 29,853 26,969 Net occupancy expense 1,143 1,211 3,337 3,527 Furniture and equipment expense 1,680 1,510 4,956 4,167 Depreciation - leased equipment 1,400 671 3,409 1,100 Business development and marketing expense 650 581 2,532 1,766 Other 2,935 2,435 8,081 6,804 Total Other Expense 17,919 15,814 52,168 44,333 Income Before Income Taxes and Subsidiary Trust Distributions 11,033 9,281 30,617 26,339 Income taxes 3,831 3,258 10,288 9,169 Distribution on Preferred Securities of Subsidiary Trusts, Net of Tax 564 -- 1,184 -- Net Income $ 6,638 $ 6,023 $19,145 $ 17,170 Per Common Share: Net Income $ 0.41 $ 0.37 $ 1.19 $ 1.07 Dividends $ 0.075 $ 0.064 $ 0.222 $ 0.192 Weighted Average Common Shares Outstanding 16,171,672 16,002,776 16,143,953 15,994,873 The computation of per share data gives retroactive recognition to a 5:4 stock split declared on January 21, 1997. The accompanying notes are a part of the consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS 1st Source Corporation and Subsidiaries (Dollars in thousands) Nine Months Ended September 30 1997 1996 Operating Activities: Net income $ 19,145 $ 17,170 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,838 3,833 Depreciation of premises and equipment 5,858 2,902 Amortization of investment security premiums and accretion of discounts, net 656 552 Deferred income taxes 3,421 (26) Realized investment securities (gains) 279 (127) Increase in interest receivable (1,343) (574) Increase in interest payable 9,330 5,869 Other (36,250) (14,122) Net Cash Provided by Operating Activities 4,934 15,477 Investing Activities: Proceeds from sales and maturities of investment securities 104,016 76,432 Purchases of investment securities (106,345) (85,710) Net decrease in short-term investments (311) (3,100) Loans sold or participated to others 113,728 109,141 Net increase in loans made to customers and principal collections on loans (368,095) (257,177) Net increase in leased assets (9,027) (1,491) Purchases of premises and equipment (2,746) (4,494) Other (4,703) 699 Net Cash Used in Investing Activities (273,483) (165,700) Financing Activities: Net increase (decrease) in demand deposits, NOW accounts and savings accounts (41,715) 657 Net increase in certificates of deposit 125,297 105,838 Net increase in short-term borrowings 94,842 54,690 New long-term debt -- 140 Payments on long-term debt (3,091) (2,346) New issuance of trust preferred securities 44,750 -- Acquisition of treasury stock (2,046) (1,349) Cash dividends (3,473) (3,000) Other (8) (13) Net Cash Provided by Financing Activities 214,556 154,617 (Increase) Decrease in Cash and Cash Equivalents (53,993) 4,394 Cash and Cash Equivalents, Beginning of Year 137,588 94,517 Cash and Cash Equivalents, End of Period $ 83,595 $ 98,911 The accompanying notes are a part of the consolidated financial statements.
Notes to the Consolidated Financial Statements 1. The unaudited consolidated 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 (all of which are normal and recurring in nature) 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. The 1996 1st Source Corporation Annual Report on Form 10-K and quarterly report on Form 10-Q for the quarters ended March 31, and June 30, 1997, should be read in conjunction with these statements. 2. 1st Source has adopted Financial Accounting Standard No. 125 (SFAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," as of January 1, 1997. SFAS 125 requires that after a transfer of financial assets, an entity must recognize the financial and servicing assets controlled and liabilities incurred and derecognize financial assets and liabilities in which control is surrendered or when debt is extinguished. The impact on 1st Source's financial position and results of operations has not been material. 3. During 1997, 1st Source raised $44.75 million through the issuance of Cumulative Trust Preferred Securities. 1st Source Capital Trust I issued $27.5 million of 9.00% Cumulative Trust Preferred Securities. 1st Source Capital Trust II issued $17.25 million of floating rate Cumulative Trust Preferred Securities. 1st Source Capital Trust I and 1st Source Capital Trust II are wholly-owned consolidated subsidiaries of the Company. The Holders of the Fixed Rate Preferred Securities are entitled to receive preferential cumulative cash distributions from 1st Source Capital Trust I, at the annual rate of 9.00% of the liquidation amount of $25 per Preferred Security, accruing from the date of original issuance and payable quarterly in arrears on the last day of March, June, September and December of each year. Holders of the Floating Rate Preferred Securities are entitled to receive preferential cumulative cash distributions from 1st Source Capital Trust II, at the annual rate equal to the sum of the 3-Month Treasury plus 2.25% of the liquidation amount of $25 per Floating Rate Preferred Security accruing from the date of original issuance and payable quarterly in arrears on the last day of March, June, September and December of each year. The Company, 1st Source Capital Trust I and 1st Source Capital Trust II have executed a guarantee with regard to the trust preferred securities. The guarantee, when taken together with the company's obligations under the trust debentures, the indenture pursuant to which the trust debentures were issued, and the applicable trust document, provides a full and unconditional guarantee of the trusts' obligations under the trust preferred securities. 4. In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share," was issued by the Financial Accounting Standards Board. 1st Source is required to adopt this pronouncement as of December 31, 1997. SFAS No. 128 will require 1st Source to make a dual presentation of basic and dilutive earnings per share on the face of its consolidated statements of income. The Company does not presently anticipate that SFAS No. 128 will have a significant impact on the Company's historically reported earnings per share. 5. The Financial Accounting Standards Board has issued Statement No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. In addition, the Financial Accounting Standards Board has issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for disclosing information about operating segments in interim and annual financial statements. The Corporation will comply with the new disclosure requirements beginning in 1998. The application of the new rules will not have a material impact on the Corporation's financial condition or results of operations. PART I. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the financial and statistical data appearing elsewhere in this report and the 1996 1st Source Corporation Annual Report on Form 10-K and the quarterly report on Form 10-Q for the quarters ended March 31, and June 30, 1997. The amounts shown in this analysis have been adjusted to reflect tax-exempt income on a tax equivalent basis using a 40.525% rate. Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties which may cause actual results to differ materially from those in such statements. For a discussion of certain factors that may cause such forward-looking statements to differ materially from actual results, see the 1996 Form 10-K. During the second quarter of 1997, the Governor signed a bill passed by the Indiana Legislature that permits state-chartered banks to sell life insurance products to consumers in Indiana under the same statutory and regulatory conditions that apply to traditional insurance brokerage activities. This brings Indiana into alignment with more than 30 other states which allow their consumers the benefits of additional competition in the insurance marketplace. During the same session, the Governor signed into law two additional bills passed by the legislature. One bill permits powers of national banks for state banks. It authorizes a state-chartered bank or trust company to exercise rights and privileges that are granted to national banks domiciled in Indiana if it requests permission from the Department of Financial Institutions. The other significant bill permits Indiana state-chartered banks to own subsidiaries in states other than Indiana. Previously, only subsidiaries located in the State of Indiana could be owned by Indiana state banks. COMPARISON OF THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 Net income for the three-month and nine-month periods ended September 30, 1997, was $6,638,000 and $19,145,000 respectively, compared to $6,023,000 and $17,170,000 for the equivalent periods in 1996. 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 other expense. Net income per share increased to $0.41 and $1.19, respectively, for the three-month and nine-month periods ended September 30, 1997, from $0.37 and $1.07 in 1996. Return on average common shareholders' equity was 14.25% for the nine months ended September 30, 1997, compared to 14.45% in 1996. The return on total average assets was 1.19% for the nine months ended September 30, 1997, compared to 1.23% in 1996. NET INTEREST INCOME The taxable equivalent net interest income for the three-month period ended September 30, 1997, was $23,023,000, an increase of 13.98% over the same period in 1996, resulting in a net yield of 4.35% compared to 4.47% in 1996. The fully taxable equivalent net interest income for the nine-month period ended September 30, 1997, was $66,247,000, an increase of 12.82% over 1996, resulting in a net yield of 4.42% compared to 4.50% in 1996. Total average earning assets increased 16.95% and 14.94%, respectively, for the three-month and nine-month periods ended September 30, 1997, over the comparative periods in 1996. Total average investment securities increased 10.6% and 8.2%, respectively for the three-month and nine-month periods, due to an increase in municipal and agency securities, while a 19.72% and 17.53% increase for the three-month and nine-month periods for average loans occurred primarily in commercial mortgage, transportation and equipment loans. The taxable equivalent yields on total average earning assets were 8.64% and 8.63% for the three-month period ended September 30, 1997, and 1996, and 8.65% and 8.66% for the nine-month period ended September 30, 1997, and 1996. Average deposits increased 11.85% and 10.52%, respectively, for the three-month and nine-month periods over the same periods from 1996. The cost rate on average interest-bearing funds was 5.08% and 4.84% for the three-months ended September 30, 1997, and 1996, and 5.00% and 4.86% for the nine-month periods ended September 30, 1997 and 1996. 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 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 1997 1996 Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expens Rate Balance Expense Rate ASSETS: Investment securities: Taxable $ 283,097 $ 4,295 6.02% $ 248,113 $ 3,726 5.97% Tax exempt 153,679 2,919 7.54% 146,919 2,952 7.99% Net loans 1,661,407 38,526 9.20% 1,387,767 32,106 9.20% Other investments 3,497 33 3.74% 14,280 196 5.46% Total Earning Assets 2,101,680 45,773 8.64% 1,797,079 38,980 8.63% Cash and due from banks 75,689 77,921 Reserve for loan losses (32,326) (29,089) Other assets 114,290 85,396 Total $2,259,333 $1,931,307 LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,525,952 $19,144 4.97% $1,365,301 $16,429 4.79% Short-term borrowings 236,157 3,329 5.59% 159,505 2,004 5.00% Long-term debt 15,505 277 7.09% 19,694 348 7.03% Total Interest Bearing Liabilities 1,777,614 22,750 5.08% 1,544,500 18,781 4.84% Noninterest bearing deposits 213,338 189,725 Other liabilities 83,324 34,353 Shareholders' equity 185,057 162,729 Total $2,259,333 $1,931,307 Net Interest Income $23,023 $20,199 Net Yield on Earning Assets on a Taxable Equivalent Basis 4.35% 4.47% Nine Months Ended September 30 1997 1996 Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ASSETS: Investment securities: Taxable $ 274,197 $12,540 6.11% $ 248,788 $11,294 6.06% Tax exempt 152,017 8,819 7.76% 145,068 8,798 8.10% Net loans 1,570,527 108,017 9.20% 1,336,250 92,428 9.24% Other investments 5,402 179 4.44% 11,751 470 5.34% Total Earning Assets 2,002,143 129,555 8.65% 1,741,857 112,990 8.66% Cash and due from banks 72,286 74,576 Reserve for loan losses (31,126) (28,245) Other assets 103,147 78,425 Total $2,146,450 $1,866,613 LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,455,835 53,279 4.89% $1,318,707 $47,454 4.81% Short-term borrowings 221,850 9,154 5.52% 152,067 5,783 5.08% Long-term debt 16,750 875 6.96% 20,180 1,032 6.84% Total Interest Bearing Liabilities 1,694,435 63,308 5.00% 1,490,954 54,269 4.86% Noninterest bearing deposits 205,048 184,146 Other liabilities 67,295 32,745 Shareholders' equity 179,672 158,768 Total $2,146,450 $1,866,613 Net Interest Income $66,247 $58,721 Net Yield on Earning Assets on a Taxable Equivalent Basis 4.42% 4.50% Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1997 and 1996. Tax equivalent adjustments for the three-month periods were $876 in 1997 and $912 in 1996 and for the nine-month periods were $2,687 in 1997 and $2,733 in 1996. Loan income includes fees on loans for the three-month periods of $1,151 in 1997 and $810 in 1996 and for the nine-month periods of $2,912 in 1997 and $2,284 in 1996. Loan income also includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1997 and 1996. The tax equivalent adjustments for the three-month periods were $54 in 1997 and $27 in 1996 and for the nine-month periods were $121 in 1997 and $102 in 1996. For purposes of this computation, non-accruing loans are included in the daily average loan amounts outstanding. PROVISION FOR LOAN LOSSES The provision for loan losses for the three-month period ended September 30, 1997, and 1996, was $2,130,000 and $1,431,000, respectively, and was $3,838,000 and $3,833,000 for the nine-month periods ended September 30, 1997 and 1996. Net Charge-offs of $370,000 have been recorded for the three-month period ended September 30, 1997, compared to $431,000 of Net Charge-offs for the same period in 1996. Year-to-date Net Recoveries of $295,000 have been recorded in 1997, compared to Net Charge- Offs of $1,763,000 through September 1996. The reserve for loan losses was $33,649,000 or 1.96% of net loans at September 30, 1997, compared to $29,516,000 or 2.03% of net loans at December 31, 1996. Non-performing assets at September 30, 1997, were $9,632,000 compared to $7,773,000 at December 31, 1996, an increase of 23.92%. At September 30, 1997, non-performing assets were .56% of net loans compared to .53% at December 31, 1996. 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, 1997. OTHER INCOME Other income for the three-month periods ended September 30, 1997, and 1996 was $8,990,000 and $7,266,000, respectively, and for the nine-month periods was $23,185,000 in 1997 and $18,621,000 in 1996. For the nine- month period, trust fees increased 9.17%, service charges on deposit accounts increased 9.46%, mortgage servicing fees and mortgage loan sale income increased 11.23%, equipment rental income increased 291.48% and commission, securitization and other income increased 15.49%. The significant increase in equipment rental income was primarily due to substantial growth in operating leases. Investment Security losses and other losses for the nine-month period ended September 30, 1997, were $279,000 compared to net gains of $127,000 for the same period in 1996. The net losses in 1997 were primarily due to a write-down pertaining to a venture capital investment. The net gains in 1996 were primarily due to adjustments made to the carrying value of certain partnership investments. OTHER EXPENSE Other expense for the three-month period ended September 30, 1997, was $17,919,000, an increase of 13.31% over the same period in 1996 and was $52,168,000 for the nine-month period ended September 30, 1997, an increase of 17.67% over 1996. For the nine-month period ended September 30, 1997, salaries and employee benefits increased 10.69%, net occupancy expense decreased 5.39%, furniture and equipment expense increased 18.93%, depreciation on leased equipment increased 309.91%, business development and marketing expense increased 43.37%, and miscellaneous other expenses increased 18.77% over the same period in 1996. The increase in salaries and furniture and equipment expense is primarily due to ten new branches being opened in 1996, and two in 1997. Business development and marketing expense increased due to appreciated stock donated to the 1st Source Foundation. This action enabled 1st Source to capitalize on a tax deduction based on the appreciated value of the donated stock. The increase in miscellaneous expense is due to an increase in supplies and communications expense. The increase in depreciation of leased equipment is due to a significant volume increase of operating leases from the prior year. INCOME TAXES The provision for income taxes for the three-month and nine-month periods ended September 30, 1997, was $3,831,000 and $10,288,000, respectively, compared to $3,258,000 and $9,169,000 for the comparable periods in 1996. The provision for income taxes for the nine months ended September 30, 1997, and 1996, is at a rate which management believes approximates the effective rate for the year. The increase was due to increased taxable income in 1997. The effective tax rate for the nine months ended September 30, 1997, has declined due to the donation of appreciated stock, previously mentioned in other expense. 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 10.12% at September 30, 1997. The Federal Reserve Board has established 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 1997 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 risk- based capital ratio on September 30, 1997, was 12.65% and the total risk- based capital ratio was 14.07%. 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 the 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 rate sensitivity gaps and interest rate spreads. Maturities of rate sensitive assets are carefully maintained relative to the maturities of rate sensitive liabilities and interest rate forecasts. At September 30, 1997, the consolidated statement of financial condition was rate sensitive by $3,438,000 more assets than liabilities scheduled to reprice within one year or 100.29%. Management adjusts the composition of its assets and liabilities to manage the interest rate sensitivity gap based upon its expectations of interest rate fluctuations. 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 September 30, 1997, is $27 million. It has a maturity date of January, 2002, and has a current fair value of $(250,000). The second swap has a notional amount of $27 million as of September 30 1997. It has a maturity date of March, 2001, and has a current fair value of $(85,000). 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's 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. PART II. OTHER INFORMATION ITEM 1. 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 DATE 10/13/97 /s/ Christopher J. Murphy III (Signature) Christopher J. Murphy III, President DATE 10/13/97 /s/ Larry E. Lentych (Signature) Larry E. Lentych, Treasurer (Chief Accounting and Financial Officer) EX-27 2
9 1000 9-MOS DEC-31-1997 SEP-30-1997 83595 911 0 0 312423 113528 117905 1719911 33649 2323110 1717559 319705 37155 60255 0 0 5700 182736 2323110 107895 18581 0 126746 53279 63308 63438 3838 (279) 52168 30617 19145 0 0 19145 1.19 1.19 4.42 8545 271 0 0 29516 871 (1166) 33649 12266 0 21383
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