1st Source Corp. Q1 2011 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011. 1st Source Corp. is a financial holding company headquartered in South Bend, Indiana, operating primarily through its subsidiary, 1st Source Bank. The company is classified as an accelerated filer and is not a shell company. As of April 15, 2011, there were 24,303,656 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Income | $10.61 million | $9.68 million |
| Diluted EPS | $0.43 | $0.33 |
| Total Assets | $4.41 billion | $4.49 billion (Dec 31, 2010) |
| Total Loans & Leases | $3.05 billion | $3.11 billion (Dec 31, 2010) |
| Net Interest Income | $36.86 million | $34.90 million |
| Net Interest Margin (TE) | 3.71% | 3.50% |
| Provision for Loan Losses | $2.20 million | $4.39 million |
| Noninterest Income | $18.95 million | $20.92 million |
| Noninterest Expense | $38.48 million | $37.11 million |
| Shareholders' Equity | $490.47 million | $486.38 million (Dec 31, 2010) |
| Return on Average Equity | 8.73% | 6.82% |
Material Changes vs. Prior Period
- Profitability: Net income increased 9.6% year-over-year, driven primarily by a 50% reduction in the provision for loan and lease losses and a 5.6% increase in net interest income.
- Asset Quality: Nonperforming assets decreased to $88.35 million (2.81% of net loans) from $95.97 million in Q1 2010. Net charge-offs declined to $2.91 million from $4.80 million in the prior year.
- Interest Rates: The net interest margin expanded 21 basis points to 3.71% due to a faster decline in the cost of interest-bearing liabilities (down 48 bps) compared to the yield on earning assets (down 19 bps).
- Expense Management: Noninterest expenses rose 3.7% year-over-year, largely due to a $1.68 million charge for provision on unfunded loan commitments and increased computer processing charges.
- Capital: The company repurchased a common stock warrant for $3.75 million and paid $3.90 million in dividends during the quarter.
Outlook, Risks, and Contingencies
- Legal Proceedings: In April 2011, the company received notice that the U.S. Department of Justice initiated an investigation regarding pricing practices of certain mortgage brokers from whom the company purchased mortgages in prior years. The investigation relates to the Equal Credit Opportunity Act and Fair Housing Act. Management does not expect a material adverse effect.
- Regulatory Capital: As of March 31, 2011, both 1st Source Corp. and 1st Source Bank exceeded all regulatory capital requirements, with Total Capital ratios of 15.68% and 15.55%, respectively (minimum requirement 8.00%).
- Liquidity: The company maintains significant borrowing capacity, including $208.46 million available from the Federal Home Loan Bank and $330.99 million from the Federal Reserve Bank. Potential liquidity exposure related to Indiana public fund deposit collateralization is estimated at $600 million pending legislation.
- Market Risk: The consolidated statement of financial condition was rate sensitive by $344.33 million more liabilities than assets scheduled to reprice within one year.
Investor Verification Checklist
- DOJ Investigation: Monitor updates regarding the Department of Justice investigation into historical mortgage broker pricing practices.
- Commercial Real Estate Exposure: Verify the status of the $27.59 million in impaired loans related to commercial real estate borrowers, which represents the largest industry exposure.
- Aircraft Portfolio: Review trends in the aircraft financing portfolio, which saw an increase in nonaccrual loans compared to other segments.
- Unfunded Commitments: Assess the impact of the $1.68 million provision charge on unfunded loan commitments on future expense levels.
- Dividend Policy: Confirm the sustainability of the dividend payout ratio (47.33% trailing twelve months) given the current capital position.