1st Source Corporation — Form 10-Q Summary
Business and period: 1st Source is an Indiana bank holding company providing financial products and services through its subsidiaries. This unaudited filing covers the quarter and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. Unless noted otherwise, amounts are in millions.
Financial performance and condition
| Metric | Q3 2012 | Nine months 2012 | Comparable 2011 |
|---|---|---|---|
| Net income | $13.01 | $37.29 | $11.54 Q3; $37.01 nine months |
| Diluted earnings per share | $0.53 | $1.51 | $0.47 Q3; $1.51 nine months |
| Net interest income, GAAP | $37.91 | $113.27 | $36.63 Q3; $111.07 nine months |
| Noninterest income | $20.31 | $60.62 | $20.23 Q3; $60.61 nine months |
| Noninterest expense | $37.19 | $111.82 | $37.15 Q3; $111.57 nine months |
- Profit and returns: Q3 net income rose about 13% year over year; nine-month net income was nearly flat. Nine-month return on average common equity was 9.21%, versus 9.86%; return on average assets was 1.12%, versus 1.13%.
- Interest margin: Tax-equivalent net interest income was $38.42 in Q3 and $114.84 year to date, up 3.24% and 1.62%, respectively. Tax-equivalent net interest margin was 3.63% in Q3 versus 3.66%; nine-month margin was 3.70% in both years. Asset yields declined, partly offset by lower funding costs.
- Balance sheet: Total assets were $4.49 billion, up 2.61% from year-end; loans and leases were $3.27 billion, up 5.76%; deposits were $3.57 billion, up 1.38%. Available-for-sale securities were $868.31 million, down 1.66%.
- Credit quality: Nonperforming assets were $50.46 million, down 30.38% from year-end and 34.49% from September 2011; the ratio to loans and leases was 1.51%, versus 2.28% at year-end. Nine-month net charge-offs were $3.10 million, versus $6.19 million. The allowance was $83.50 million, or 2.55% of loans and leases, versus 2.73% a year earlier. Delinquencies of 30 days or more increased to 0.54% from 0.45% a year earlier.
- Cash flow: For the first nine months, operating activities provided $58.64 million, investing activities used $176.45 million, and financing activities provided $75.30 million. Cash and cash equivalents declined $42.51 million to $71.81 million.
- Capital and debt: Shareholders’ equity was $553.67 million, up 5.68%; equity-to-assets was 12.34%, versus 11.98%. Total capital ratios were 16.42% at the holding company and 15.93% at the bank. Deposits were the principal funding source; short-term borrowings were $136.64 million, long-term debt and mandatorily redeemable securities $66.96 million, and subordinated notes $89.69 million.
Changes, outlook, and risks
- Loan growth was funded in part by a $35.74 million reduction in federal funds sold and interest-bearing deposits with other banks. Noninterest income and expense were broadly flat year over year.
- Mortgage banking income increased substantially, reflecting higher loan-sale volume and improved margins. Equipment rental income declined as the average rental portfolio contracted and new lease rates faced lower pricing and greater competition. Salaries and benefits increased, while leased-equipment depreciation declined.
- A $1.61 million gain on sale of the headquarters parking garage was recognized in the third quarter, reported in other expense; the filing states the after-tax gain was $1.00 million.
- Management gave no specific earnings or financial forecast. It said existing funding sources were adequate for liquidity needs. Available borrowing included approximately $240 million from correspondent banks, $144.56 million of additional FHLB capacity, and $349.24 million from the Federal Reserve; no correspondent-bank or Federal Reserve borrowings were outstanding.
- Management cited sensitivity to interest rates, loan prepayments, economic conditions, and industries and geographies with credit concentrations. Commercial real estate and aircraft were notable credit exposures; foreign loans, all in aircraft financing, were $265.08 million, including $174.33 million in Brazil and $46.73 million in Mexico.
- The company noted proposed Basel III capital rules could exclude its $89.69 million of trust preferred securities from Tier 1 capital as the rules phase in. Management reported no material change in market risks or risk factors since year-end. It expected no material adverse effect from pending legal proceedings; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether loan growth and improving nonperforming assets continue, particularly in aircraft, commercial real estate, residential real estate, and foreign aircraft lending.
- Whether declining asset yields continue to pressure net interest margin despite lower deposit and borrowing costs.
- The sustainability of mortgage banking gains and the decline in equipment rental income.
- The adequacy of the loan-loss allowance relative to portfolio growth, delinquencies, and changing economic conditions.
- The eventual capital treatment and phase-in effects of Basel III rules on trust preferred securities.
- The parking-garage gain’s presentation and impact, and the availability of liquidity if collateral requirements or funding conditions change.