1st Source Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023 unless otherwise stated. 1st Source is an Indiana-based bank holding company. Amounts below are in millions of dollars unless noted.
Financial performance and condition
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior date |
|---|---|---|
| Net income available to common shareholders | $29.5; diluted EPS $1.19 | $31.1; diluted EPS $1.25 in Q1 2023 |
| Net interest income | $71.9; FTE net interest margin 3.54% | $69.6; FTE margin 3.60% in Q1 2023 |
| Provision for credit losses | $6.6 | $3.0 in Q1 2023 |
| Noninterest income / expense | $22.2 / $49.6 | $23.3 / $49.4 in Q1 2023 |
| Total assets | $8,667.8 | $8,728.0 at December 31, 2023 |
| Total loans and leases | $6,562.8 | $6,518.5 at December 31, 2023 |
| Total deposits | $7,055.3 | $7,038.6 at December 31, 2023 |
| Cash and cash equivalents | $80.9 | $129.7 at December 31, 2023 |
| Total shareholders’ equity | $1,009.9 | $989.6 at December 31, 2023 |
Interest income rose to $116.5 million from $94.5 million, while interest expense increased to $44.6 million from $24.9 million. Higher asset yields lifted net interest income, but funding costs rose faster: the yield on average earning assets was 5.73% versus 4.88%, and the cost of interest-bearing liabilities was 3.10% versus 1.89%. Return on average assets was 1.37% versus 1.52%; return on average common equity was 11.77% versus 14.18%.
Q1 cash flows were $42.0 million provided by operating activities, $23.7 million used in investing activities, and $67.0 million used in financing activities. Cash and cash equivalents declined $48.8 million. The allowance for loan and lease losses was $148.0 million, or 2.26% of loans and leases, compared with 2.33% a year earlier.
Capital ratios remained above regulatory minimums: consolidated total capital was 16.41%, Tier 1 capital 15.15%, and common equity Tier 1 13.48%. Net available liquidity was $3.29 billion, approximately 51% of deposits excluding brokered and listing-service certificates. The company reported $249.6 million of short-term borrowings, $39.4 million of long-term debt and mandatorily redeemable securities, and $58.8 million of subordinated notes.
Material changes and credit quality
- Net income available to common shareholders fell about 5% year over year. Higher credit-loss provision and lower noninterest income more than offset growth in net interest income.
- Loans and leases increased 0.7% from year-end, led by auto and light truck, aircraft, and renewable energy lending; commercial and agricultural balances declined. Deposits rose 0.2%, with growth in time and savings deposits offsetting lower non-maturity deposits.
- Net charge-offs were $6.1 million, or 0.38% of average loans, compared with net recoveries of $0.2 million in Q1 2023. Charge-offs were concentrated in two commercial and agricultural accounts. Nonperforming assets were $22.4 million, 0.34% of loans and leases, down from $24.2 million at year-end but above $18.6 million a year earlier.
- Available-for-sale securities were $1.58 billion, down from $1.62 billion at year-end. Their net unrealized loss was $143.5 million at March 31; accumulated other comprehensive loss increased to $109.3 million from $106.3 million. Management attributed unrealized losses to interest rates, market spreads, and market conditions, and said it did not expect to sell the securities before recovery.
- Noninterest income declined 5.0%, including lower equipment rental income, insurance commissions, debit card income, and other income; trust and wealth advisory and mortgage banking income increased. Noninterest expense was broadly flat.
Outlook, risks, and contingencies
Management described the economic outlook as fragile, with expected below-trend growth, elevated inflation and interest rates, tighter credit conditions, and geopolitical uncertainty. It expects these conditions to adversely affect the loan and lease portfolio over the next two years; estimates of future credit losses may vary considerably. The company also cited building consumer stress, small-business cost pressures, and constrained commercial real estate activity. The medium- and heavy-duty truck outlook was described as weak due to overcapacity concerns and lower freight rates. Management noted that non-owner-occupied office exposure is minimal and most commercial real estate exposure is owner-occupied.
Key risks include deterioration in borrower performance or collateral values, particularly in aircraft lending; the aircraft portfolio includes $291 million of foreign exposure, mainly in Mexico and Brazil. Other stated sensitivities include deposit competition and rate costs, interest-rate movements, and potential liquidity needs. The company reported $1.46 billion of loan commitments to extend credit and $17.6 million of standby letters of credit; commitment amounts do not necessarily represent future funding needs. It disclosed $66.6 million maximum exposure to loss from unconsolidated tax-advantaged investment entities. Management does not expect pending legal proceedings to materially adversely affect financial position or results. No formal earnings guidance was provided in the filing.
The company reported effective disclosure controls, no material change in internal control over financial reporting, and no material change in risk factors since its 2023 Form 10-K. It declared and paid a $0.34 per-share dividend in Q1 and had not repurchased shares under its authorization to repurchase up to one million shares.
Important facts for investors to verify
- Whether elevated deposit costs and competition continue to pressure net interest margin and funding mix.
- Trends in special-attention credits, commercial and agricultural charge-offs, nonperforming loans, and allowance adequacy.
- Performance and collateral values in aircraft, commercial real estate, and truck-related portfolios, including foreign aircraft exposures.
- Whether securities portfolio unrealized losses, liquidity sources, and deposit stability change materially as interest rates and markets evolve.
- How loan growth, credit provision, noninterest income, and expenses affect earnings in subsequent quarters; the filing provides no specific earnings forecast.