1st Source Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. 1st Source is an Indiana-based bank holding company with commercial banking and specialty finance operations.
Key financial results
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior quarter |
|---|---|---|
| Net income available to common shareholders | $31.1 million | $27.4 million in Q1 2022 |
| Diluted earnings per share | $1.25 | $1.10 in Q1 2022 |
| Net interest income (GAAP) | $69.6 million | $59.6 million in Q1 2022 |
| Net interest margin (fully tax-equivalent) | 3.60% | 3.18% in Q1 2022; 3.69% in Q4 2022 |
| Return on average assets / common equity | 1.52% / 14.18% | 1.39% / 12.20% in Q1 2022 |
| Total assets | $8.33 billion | $8.34 billion at December 31, 2022 |
| Total loans and leases | $6.12 billion | $6.01 billion at December 31, 2022 |
| Total deposits | $6.80 billion | $6.93 billion at December 31, 2022 |
| Cash and cash equivalents | $94.0 million | $122.8 million at December 31, 2022 |
Earnings, cash flow, and capital
- Net income increased about 14% year over year. Higher net interest income and noninterest income more than offset increased credit provision and operating expenses.
- Interest income rose to $94.5 million from $62.0 million, while interest expense increased to $24.9 million from $2.4 million. The average yield on earning assets rose to 4.88% from 3.31%; the average cost of interest-bearing liabilities rose to 1.89% from 0.20%.
- Noninterest income was $23.3 million, nearly unchanged year over year. Noninterest expense increased 9% to $49.4 million, including higher salaries, data processing, insurance, and marketing expenses.
- Operating activities generated $46.9 million of cash; investing activities used $24.3 million and financing activities used $51.3 million. Cash and cash equivalents declined $28.8 million during the quarter, principally as funds supported loan growth.
- Shareholders’ equity was $909.2 million; the equity-to-assets ratio was 10.91%, and book value per share was $36.81. Common equity Tier 1 ratios were 13.51% at the holding company and 13.17% at the bank. The quarterly dividend was $0.32 per share.
- Short-term borrowings rose to $303.0 million from $215.5 million, primarily reflecting increased short-term FHLB borrowing. Long-term debt and mandatorily redeemable securities were $46.7 million; subordinated notes were $58.8 million.
Material changes and asset quality
- Loans and leases grew 1.8% from year-end, led by auto and light truck and construction equipment lending. Investment securities available-for-sale fell 3.5% to $1.71 billion, with securities sales used to support liquidity and loan growth.
- Deposits declined 1.8%. Management cited seasonal outflows, business customers’ use of excess funds, consumer drawdowns of stimulus balances, and increased customer rate sensitivity and deposit competition. Uninsured deposits excluding public funds were 29.14% of deposits.
- The allowance for loan and lease losses increased to $142.5 million from $139.3 million; provision expense was $3.0 million. The quarter recorded net recoveries of $0.2 million. The allowance was 2.33% of loans and leases.
- Nonperforming assets fell to $18.6 million, or 0.30% of loans and leases, from $26.9 million (0.45%) at year-end. Delinquencies of 30 days or more were 0.06% of loans and leases.
- Available-for-sale securities had $168.0 million of gross unrealized losses at quarter-end, primarily reflecting interest-rate and market movements. Management stated it did not intend to sell these securities and did not expect to be required to sell them before recovery; the quarter’s other comprehensive income reduced accumulated other comprehensive loss to $127.5 million.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management’s credit-loss forecast assumed economic growth would slow markedly in 2023 and 2024, with inflation remaining above the Federal Reserve’s target; the company said estimates could vary considerably as uncertainty evolves.
- Management highlighted tighter credit conditions and liquidity concerns, persistent inflation, higher interest rates, geopolitical uncertainty, and risks to borrowers from supply-chain disruption. Aircraft lending remains a notable concentration risk, including approximately $295 million of foreign exposure, largely in Mexico and Brazil.
- Available liquidity was reported at $3.22 billion, including securities and contingent FHLB, Federal Reserve, fed funds, brokered-deposit, and listing-service capacity. Management considered funding sources adequate, but availability of some sources is conditional. A potential requirement to collateralize public deposits could create liquidity exposure of approximately $1.06 billion.
- Off-balance-sheet loan commitments were $1.30 billion; standby letters of credit were $17.8 million. Unconsolidated tax-advantaged VIE investments had $62.1 million of unfunded commitments and $45.3 million of maximum exposure to loss.
- Unusual or notable items included $17.5 million of investment tax credits recognized for renewable-energy investments, $1.1 million of partnership investment gains, and a $1.08 million reversal of accrued legal fees. The filing reports legal proceedings but management does not expect them to materially affect financial position or results.
- The company added liquidity risk as a risk-factor disclosure following the March 2023 bank failures. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit balances and funding costs stabilize, particularly given deposit competition, uninsured deposit levels, and greater reliance on short-term borrowings.
- Whether reported contingent liquidity remains available under its stated conditions and whether any public-deposit collateral requirement changes.
- How unrealized securities losses, interest-rate exposure, and any future need to sell securities affect liquidity and capital.
- Whether loan growth, credit downgrades, and the economic outlook require further allowance increases, especially in aircraft and other collateral-sensitive portfolios.
- The ongoing financial-statement and tax effects of renewable-energy tax credits, partnership investments, and related VIE commitments.