1st Source Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015 unless stated otherwise. 1st Source is an Indiana-based bank holding company with banking, specialty finance, equipment leasing, trust and insurance businesses. Amounts below are in U.S. dollars; financial statement amounts are presented in millions unless noted.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $5,245.6 million | $5,187.9 million at Dec. 31, 2015 |
| Total loans and leases | $4,032.0 million | $3,994.7 million at Dec. 31, 2015 |
| Total deposits | $4,225.1 million | $4,139.2 million at Dec. 31, 2015 |
| Net interest income | $41.3 million | $39.4 million in Q1 2015 |
| Net income | $13.8 million; diluted EPS $0.53 | $13.5 million; diluted EPS $0.51 in Q1 2015 |
| Net interest margin, tax-equivalent | 3.45% | 3.58% in Q1 2015 |
| Shareholders’ equity | $650.0 million | $644.1 million at Dec. 31, 2015 |
Net interest income after the loan-loss provision was $40.3 million, versus $39.1 million a year earlier. The provision was $1.0 million, up from $0.4 million. Noninterest income rose 9.5% to $21.6 million, led by equipment rental income, insurance commissions and other income. Noninterest expense rose 6.9% to $40.7 million, including higher leased-equipment depreciation, furniture and equipment costs, and professional fees. The effective tax rate was 34.93%.
Average earning assets grew 7.8% year over year, while average interest-bearing liabilities grew 7.2%. Management attributed margin pressure to lower loan yields and higher deposit funding costs. Return on average assets was 1.07% (1.14% in Q1 2015), and return on average common equity was 8.56% (8.79%). Cash dividends were $0.18 per share, versus $0.164 a year earlier; the company also repurchased $8.0 million of stock during the quarter.
Cash and cash equivalents were $85.2 million at quarter-end. Cash flows were $25.7 million provided by operating activities, $51.6 million used in investing activities and $31.4 million provided by financing activities; cash increased $5.5 million during the quarter. Short-term borrowings were $181.9 million, long-term debt and mandatorily redeemable securities were $68.8 million, and subordinated notes were $58.8 million. Equity-to-assets was 12.39%. The company reported capital ratios above applicable minimums; its common equity Tier 1 ratio was 12.37% at the holding company and 12.89% at the bank.
Material changes and credit quality
- From year-end, assets increased 1.1%, loans and leases 0.9%, and deposits 2.1%; short-term borrowings decreased 22.0%.
- Net interest income increased 4.7% year over year on a tax-equivalent basis, but the tax-equivalent net interest margin declined 13 basis points to 3.45%.
- Nonperforming assets were $21.4 million, or 0.51% of loans and leases, versus $20.6 million (0.50%) at year-end and $27.7 million (0.73%) a year earlier. Net recoveries were $0.2 million, compared with net charge-offs of $0.3 million in Q1 2015.
- The loan and lease loss reserve was $89.3 million, or 2.21% of loans and leases, compared with 2.30% a year earlier. Delinquencies of 30 days or more were 0.28%, down from 0.40% at March 31, 2015.
- Aircraft finance remains a notable concentration: foreign aircraft loans and leases were $208.7 million, including $81.6 million to borrowers in Brazil and $115.1 million in Mexico. Repossessions were $7.2 million, mainly aircraft-related.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said available funding sources were adequate for expected cash needs. At March 31, the bank reported approximately $265 million of short-term federal funds borrowing capacity, $185.4 million of additional FHLB borrowing capacity and $415.9 million available from the Federal Reserve, with no Federal Reserve borrowings outstanding. Management also reported a $700.7 million one-year asset-sensitive position.
Management cited geopolitical and global economic risks, including weak conditions in Brazil, China, Japan and Europe, and continued aircraft collateral and foreign-market exposure. It said it saw no clear trend of improvement or deterioration in the aircraft portfolio and considered reserve ratios appropriate. A possible future requirement to collateralize public-fund deposits could create a liquidity exposure of approximately $498 million. Loan commitments totaled $853.2 million; standby letters of credit totaled $39.6 million.
The company reported no material changes in market risks or risk factors since its 2015 Form 10-K. Management did not expect pending routine legal proceedings to materially adversely affect consolidated financial position or results. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported. The company was assessing the impact of several recently issued accounting standards.
Key investor verification points
- Track net interest margin and deposit costs, especially against continued loan growth and changing interest rates.
- Review aircraft portfolio performance, repossessions, and Brazil/Mexico exposures, including collateral values and borrower repayment trends.
- Monitor nonperforming assets, delinquencies, reserve coverage and future provision expense.
- Assess whether growth in equipment rental income continues to offset the associated depreciation and operating costs.
- Confirm access to stated borrowing facilities and evaluate the potential liquidity effect if public-fund collateral requirements change.
- Review capital ratios, share repurchases, dividends and the $853.2 million of loan commitments for subsequent developments.