1st Source Corporation — Q1 2014 Form 10-Q
Business context and period. 1st Source is an Indiana-based bank holding company providing banking and other financial services. This unaudited filing covers the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2014 / Mar. 31, 2014 | Comparable period / prior date |
|---|---|---|
| Net interest income | $38.6; taxable-equivalent $39.1 | $37.8 GAAP; $38.2 taxable-equivalent in Q1 2013 |
| Net interest margin | 3.59% taxable-equivalent | 3.64% in Q1 2013 |
| Noninterest income | $19.4 | $18.9 in Q1 2013 |
| Noninterest expense | $36.0 | $36.6 in Q1 2013 |
| Net income / diluted EPS | $13.6 / $0.55 | $12.4 / $0.50 in Q1 2013 |
| Loans and leases | $3,577.6 | $3,549.3 at Dec. 31, 2013 |
| Deposits | $3,708.4 | $3,653.7 at Dec. 31, 2013 |
| Total assets | $4,773.2 | $4,722.8 at Dec. 31, 2013 |
| Cash and cash equivalents | $93.8 | $80.1 at Dec. 31, 2013 |
| Shareholders’ equity | $596.6; 12.50% equity-to-assets | $585.4; 12.39% at Dec. 31, 2013 |
Net income increased about 9.9% year over year. Return on average assets was 1.18% (1.11% in Q1 2013), and return on average common equity was 9.30% (8.90%). The provision for loan and lease losses was $0.8 million, versus $0.8 million in Q1 2013. The company recorded net recoveries of $0.7 million, compared with net charge-offs of $0.1 million a year earlier.
Cash flow. Q1 2014 operating activities provided $18.4 million, investing activities used $38.1 million, and financing activities provided $33.4 million. Cash and cash equivalents increased $13.8 million during the quarter. In Q1 2013, the corresponding cash-flow amounts were $19.4 million, negative $34.9 million, and negative $4.0 million.
Debt and liquidity. At March 31, short-term borrowings were $297.6 million, long-term debt and mandatorily redeemable securities were $59.6 million, and subordinated notes were $58.8 million. Management reported $221.0 million of short-term federal funds borrowing capacity, $60.1 million of additional FHLB capacity, and $385.9 million available from the Federal Reserve, with no FRB borrowing outstanding. Management stated available funding sources were adequate. The company reported $139.7 million more assets than liabilities scheduled to reprice within one year.
Capital. 1st Source Corporation reported total risk-based capital of 15.94%, Tier 1 risk-based capital of 14.60%, and Tier 1 leverage capital of 12.15%. The bank’s respective ratios were 15.03%, 13.74%, and 11.43%; both entities exceeded the filing’s stated “well capitalized” thresholds. The quarterly dividend was $0.17 per share.
Material changes and management commentary
- Net interest income rose as lower funding costs and growth in average earning assets offset lower asset yields. Taxable-equivalent net interest income increased 2.27%, while net interest margin declined five basis points. Average net loans and leases grew 6.02% year over year; their yield fell 31 basis points.
- Noninterest income increased 2.37%. It included a $0.96 million gain on a partial sale of a marketable equity security; trust fees also rose, while mortgage banking income declined with lower loan-sale gains and production.
- Noninterest expense declined 1.58%. Lower collection and repossession expense—including gains on sales of other real estate and repossessions—more than offset higher marketing and charitable contributions, occupancy, and equipment costs.
- Total nonperforming assets fell to $35.9 million from $46.7 million at year-end 2013 and $48.4 million a year earlier. Nonperforming assets were 0.98% of loans and leases, versus 1.29% and 1.41%, respectively. However, loans and leases at least 30 days delinquent rose to 0.37% from 0.13% a year earlier, primarily due to aircraft financing.
- Repossessions increased to $8.0 million from $4.3 million at year-end, consisting mainly of aircraft financing. Foreign loan and lease outstandings, all in aircraft financing, were $248.1 million, including $127.3 million to borrowers in Brazil and $79.2 million in Mexico.
- Available-for-sale securities had $6.9 million of gross unrealized losses at quarter-end. Management attributed these mainly to market-rate increases and illiquidity, reported no other-than-temporary impairment, and stated it did not intend to sell the securities and did not expect to be required to sell before recovery.
Outlook, risks, contingencies, and unusual items
The filing provides no specific earnings or financial guidance. Management’s forward-looking statements are subject to risks including interest-rate and prepayment changes, competition and industry consolidation, regulatory or accounting changes, economic downturns, and adverse events in industries or regions where the company has credit concentrations. The filing highlights geographic concentration in Northern Indiana and Southwestern Michigan and collateral or foreign-market exposures in specialty finance portfolios.
Standby letters of credit totaled $19.8 million. Loan commitments and other off-balance-sheet instruments create credit and interest-rate exposure; commitment totals are not presented as amounts expected to be drawn. Management did not expect incidental legal proceedings to materially adversely affect financial position or results. No material changes to reported market risks or risk factors were identified during the quarter.
Notable items include the $0.96 million securities gain, a $0.49 million negative collection and repossession expense (reflecting gains and lower losses), and higher business development and marketing expense related to charitable contributions. The filing says disclosure controls were effective and reports no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether aircraft-portfolio delinquencies and the increase in aircraft repossessions persist, and whether foreign aircraft exposures remain well secured.
- Whether loan growth can continue without further margin compression, given the lower asset yield and five-basis-point decline in net interest margin.
- Whether reported earnings remain supported by recurring operations, apart from the securities gain and favorable collection and repossession expense.
- Whether nonperforming assets continue to decline while monitoring delinquencies, reserve adequacy, and the reserve-to-loan ratio of 2.38%.
- Whether available borrowing capacity and deposit trends continue to support liquidity and loan growth, including potential public-deposit collateral requirements.