1st Source Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016 unless noted. Unaudited. 1st Source is an Indiana-based bank holding company providing financial products and services through subsidiaries. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net interest income | $43.727 | $41.289 | +5.9% |
| Net interest margin, fully taxable-equivalent | 3.53% | 3.45% | +8 bps |
| Noninterest income | $23.307 | $21.627 | +7.8% |
| Noninterest expense | $41.119 | $40.705 | +1.0% |
| Provision for loan and lease losses | $1.000 | $0.975 | +$0.025 |
| Net income | $16.206 | $13.818 | +17.3% |
| Diluted earnings per share | $0.62 | $0.53 | +$0.09 |
Return on average assets was 1.21% versus 1.07%; return on average common equity was 9.61% versus 8.56%. The effective tax rate was 34.95%, essentially unchanged year over year.
Financial condition, liquidity and capital
- Total assets were $5.502 billion, up $15.3 million from year-end. Loans and leases rose $46.8 million (1.1%) to $4.235 billion; available-for-sale securities declined $13.8 million to $836.7 million.
- Deposits were $4.337 billion, up $3.2 million. Short-term borrowings were $279.7 million, down $12.2 million; long-term debt and mandatorily redeemable securities were $85.5 million, up $11.2 million. Subordinated notes were $58.8 million.
- Cash and cash equivalents ended at $92.1 million, down $16.2 million during the quarter. Operating cash flow was $34.3 million; investing cash flow was negative $46.2 million and financing cash flow negative $4.3 million.
- Shareholders’ equity was $685.9 million; the equity-to-assets ratio was 12.47%. The company reported total capital of 15.18%, Tier 1 capital of 13.88%, and common equity Tier 1 of 12.69% on a risk-weighted basis. The quarterly cash dividend was $0.18 per share.
- Management reported $265 million of short-term federal funds borrowing capacity, $75.4 million of additional FHLB capacity, and $470.4 million available from the Federal Reserve. No federal funds or Federal Reserve borrowings were outstanding; FHLB advances outstanding were $157.9 million.
Changes, credit quality and unusual items
- Earnings growth reflected higher net interest income and noninterest income, partly offset by higher provision, operating expense and taxes. Average earning assets increased 4.35% year over year, while the yield on those assets rose 7 basis points; the cost of interest-bearing liabilities remained 0.61%.
- Noninterest income included $1.285 million of gains on available-for-sale securities, compared with $0.010 million a year earlier, from sales of marketable equity securities. Equipment rental income increased 12.5%, alongside an 11.4% increase in leased-equipment depreciation. Other income declined 31.1%, partly because the prior-year period included a partnership liquidation gain.
- Nonperforming assets were $27.5 million, down 9.7% from year-end but up 28.8% from March 2016. They equaled 0.63% of loans and leases, versus 0.70% at year-end and 0.51% a year earlier. Delinquencies of 30 days or more were 0.17% of loans and leases, versus 0.28% a year earlier. The allowance was $90.1 million, or 2.13% of loans and leases.
- Management highlighted aircraft-portfolio collateral concentration and $228.7 million of foreign aircraft outstandings, including $91.4 million in Brazil and $127.3 million in Mexico. It cited softening private-jet collateral values, geopolitical and economic risks, and no clear trend of improvement or deterioration in the aircraft portfolio. Management considered reserve ratios appropriate.
- The company recorded impairment write-downs on branches anticipated to close later in 2017. Management gave no earnings or revenue guidance and stated that it undertook no obligation to update forward-looking statements. It reported no material changes in risk factors or market risks since year-end, and did not expect pending legal proceedings to materially harm consolidated results or financial position.
Investor verification priorities
- Track aircraft credit performance, collateral values, repossessions and foreign exposures, particularly in Brazil and Mexico.
- Reconcile the year-over-year increase in nonperforming assets with the decline from year-end, and monitor allowance coverage and net recoveries.
- Assess whether loan growth and asset yields can sustain net interest income as deposit and borrowing costs change.
- Separate recurring earnings from securities-sale gains and confirm the total and timing of planned branch-closure costs.
- Monitor deposit trends, available borrowing capacity, capital ratios and the sustainability of the $0.18 quarterly dividend.