1st Source Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Unless stated otherwise, dollar amounts are in millions. 1st Source is a bank holding company with commercial banking and specialty-finance lending operations.
Financial performance and condition
| Metric | Q3 2011 | Nine months 2011 | Comparable 2010 |
|---|---|---|---|
| Net income | $11.54 | $37.01 | $11.20 Q3; $28.68 nine months |
| Net income per diluted share | $0.47 | $1.51 | $0.39 Q3; $0.96 nine months |
| Net interest income, GAAP | $36.63 | $111.07 | $37.18 Q3; $108.34 nine months |
| Provision for loan and lease losses | $1.26 | $3.53 | $5.58 Q3; $15.76 nine months |
| Noninterest income | $20.23 | $60.61 | $22.75 Q3; $64.28 nine months |
| Noninterest expense | $37.15 | $111.57 | $37.81 Q3; $114.57 nine months |
- Interest margin: Tax-equivalent net interest income was $37.22 in Q3 and $113.01 for nine months. Tax-equivalent net interest margin was 3.66% and 3.70%, respectively, versus 3.61% and 3.56% in 2010.
- Returns: Nine-month return on average common equity was 9.86% versus 6.52%; return on average assets was 1.13% versus 0.85%.
- Balance sheet at September 30: Assets were $4.31 billion, loans and leases $3.08 billion, deposits $3.45 billion, and shareholders’ equity $516.9 million. Total assets were down 3.13% and deposits down 4.84% from December 31, 2010; loans and leases increased 0.41%.
- Funding and debt: Short-term borrowings were $140.9 million, long-term debt and mandatorily redeemable securities $37.1 million, and subordinated notes $89.7 million. Equity-to-assets was 12.00%, compared with 10.94% at year-end 2010. Book value per common share rose to $21.35 from $20.12.
- Capital: Corporation total risk-based capital was 16.26%, Tier 1 risk-based capital 14.96%, and Tier 1 leverage 11.76%. The Bank’s respective ratios were 16.05%, 14.78%, and 11.61%; all exceeded the stated “well capitalized” thresholds.
- Cash flows and liquidity: Nine-month operating cash flow was $87.4 million, investing cash flow $93.6 million, and financing cash flow negative $194.8 million. Cash and cash equivalents declined $13.8 million to $83.1 million. Management said available funding sources were adequate; the Bank also reported unused borrowing capacity of approximately $255 million from correspondent banks, $169.7 million additional FHLB capacity, and $360.3 million from the Federal Reserve.
- Credit quality: Nonperforming assets were $77.0 million, down 13.2% from year-end 2010 and 22.5% year over year; they equaled 2.43% of loans and leases versus 2.81% at year-end. Nonaccrual loans and leases were $61.5 million. Nine-month net charge-offs were $6.19 million versus $14.49 million in 2010; the allowance was $84.2 million, or 2.73% of loans and leases.
Material changes versus 2010
- Nine-month net income increased 29.1%, primarily reflecting sharply lower credit-loss provisions, lower noninterest expense, and higher net interest income; lower noninterest income partly offset those gains. Q3 net income rose 3.0%.
- Noninterest income fell 5.7% year to date. Mortgage banking income declined as production and loan-sale gains fell after the company ended third-party broker business in 2010; equipment rental income also decreased. Trust fees and other income increased.
- Net interest income improved year to date despite lower earning-asset yields, as deposit and other funding costs declined more. Q3 GAAP net interest income was lower year over year.
- Nonperforming assets and net charge-offs improved. Impaired loans declined to $56.2 million from $78.1 million at December 31, 2010; loans graded 7–12 totaled $177.5 million, down from $233.1 million.
- Available-for-sale securities declined to $850.5 million from $969.0 million at year-end, while accumulated other comprehensive income increased to $18.7 million, mainly from unrealized securities gains.
Outlook, commentary, risks, and unusual items
- The filing provides no formal earnings or revenue guidance. Management cited gradual economic improvement and said liquidity was adequate, but actual results remain subject to economic, interest-rate, credit, regulatory, and other risks.
- Management identified commercial real estate-related borrowers and aircraft financing as areas of credit exposure. Aircraft values had declined; foreign aircraft loans and leases were $211.8 million, including $147.9 million in Brazil and $38.0 million in Mexico.
- Indiana public-fund collateral requirements were waived through December 31, 2011, according to the company. A future requirement could create potential collateral exposure of approximately $473 million.
- The Department of Justice opened an investigation in April 2011 under the Equal Credit Opportunity Act and Fair Housing Act concerning pricing practices of certain mortgage brokers used in prior years. The company said it was cooperating and did not expect a material adverse outcome based on its current understanding.
- A first-quarter 2011 state tax settlement reduced unrecognized tax benefits by $0.84 million and increased earnings by $0.47 million. Nine-month results also include a $1.85 million provision for unfunded loan commitments, partly offset by a gain on sale of the corporate aircraft.
- The company sold a headquarters parking garage for $1.95 million, but receipt of proceeds held in escrow depends on investing $5.40 million in South Bend properties by December 31, 2013; management said it intended to meet the commitment.
- Management reported no material changes in market risks or risk factors from the 2010 year-end disclosures. Disclosure controls were assessed as effective, with no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the improvement in credit quality and lower loan-loss provision persists, particularly in aircraft, commercial real estate, and specialty-finance portfolios.
- Deposit trends and funding costs, plus the company’s liquidity and capital position if public-fund collateral requirements change.
- The DOJ investigation’s status, scope, and any subsequent developments or financial exposure.
- Whether reduced mortgage-broker activity and lower equipment rental income continue to weigh on fee revenue.
- Execution of the South Bend investment commitment and release of the $1.95 million escrow proceeds.