1st Source Corporation — Q1 2021 Form 10-Q
Business and period: Bank holding company providing banking, lending, leasing, trust and wealth advisory, and related financial services. The filing covers the three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020 unless otherwise noted. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior date |
|---|---|---|
| Net income available to common shareholders | $28.1 million | $16.4 million in Q1 2020 |
| Diluted earnings per share | $1.10 | $0.64 in Q1 2020 |
| Net interest income | $57.4 million | $54.8 million in Q1 2020 |
| Net interest margin, fully taxable-equivalent | 3.35% | 3.58% in Q1 2020 |
| Noninterest income / expense | $25.9 million / $44.1 million | $24.6 million / $46.5 million in Q1 2020 |
| Total assets | $7.51 billion | $7.32 billion at December 31, 2020 |
| Total loans and leases / deposits | $5.52 billion / $6.13 billion | $5.49 billion / $5.95 billion at December 31, 2020 |
| Allowance for loan and lease losses | $139.6 million; 2.53% of loans and leases | $140.7 million at December 31, 2020 |
| Cash and cash equivalents | $336.0 million | $243.0 million at December 31, 2020 |
| Shareholders’ equity | $891.3 million; 11.87% of assets | $886.8 million; 12.12% at December 31, 2020 |
Net income rose about 71% year over year. Provision for credit losses was $2.4 million, versus $11.4 million in Q1 2020; comparisons are affected by adoption of the current expected credit loss (CECL) standard in Q4 2020, since the prior-year provision used the incurred-loss method. Net charge-offs increased to $3.5 million from $1.8 million. Nonperforming assets were $62.8 million, up from $35.9 million a year earlier but down from $64.5 million at year-end.
Net interest income increased as lower funding costs more than offset lower yields on earning assets. Average earning assets grew 12.6% year over year, including substantial PPP-related balances, while the average earning-asset yield declined 77 basis points and the cost of interest-bearing liabilities declined 74 basis points. Net interest margin contracted 23 basis points.
Q1 cash flows were $42.5 million provided by operating activities, $149.2 million used in investing activities and $199.7 million provided by financing activities, resulting in a $92.9 million increase in cash and cash equivalents. The company reported regulatory capital ratios above the stated minimum requirements: holding-company total capital was 16.39% and common equity Tier 1 was 13.43%; the bank’s respective ratios were 15.01% and 13.00%. Short-term borrowings were $180.6 million, long-term debt and mandatorily redeemable securities $81.7 million, and subordinated notes $58.8 million.
Changes, outlook and risks
- Loans and leases increased 0.6% from year-end, largely due to PPP lending; excluding PPP loans, loan balances declined $58.5 million. Deposits increased 3.1%, supported by PPP proceeds and customer savings. Available-for-sale securities increased to $1.29 billion.
- Noninterest income increased 5.1%, led by mortgage banking, debit card, and trust and wealth advisory income. Equipment rental income fell 30.2%, reflecting lower leasing volume. Noninterest expense declined 5.1%.
- COVID-19-related loan modifications in deferment totaled $104 million, down from $129 million at year-end. Management identified ongoing stress in bus lending and hotel-related commercial real estate. Bus loans with COVID-related modifications represented approximately 56% of bus balances; hotel modifications represented approximately 43% of hotel balances.
- Management’s economic assumptions anticipated GDP growth through 2021, with GDP and unemployment not returning to pre-pandemic levels until 2022. It cautioned that pandemic-related uncertainty could cause actual credit losses to differ materially from estimates. No numerical earnings or revenue guidance was provided.
- Liquidity sources included cash, securities, deposits and borrowing facilities. At quarter-end, the company reported capacity for additional short-term bank funding of $245 million, additional FHLB borrowing of approximately $504 million subject to requirements, and FRB borrowing capacity of approximately $416 million. Management considered funding sources adequate. Potential collateral requirements on public deposits could affect liquidity; estimated exposure was approximately $700 million.
- Other risks include aircraft collateral values and foreign aircraft exposure, particularly in Mexico and Brazil; interest-rate and market risks; and possible deterioration in commercial borrowers as assistance and deferrals expire. COVID-19 modifications and CECL estimates remain sensitive to uncertain economic conditions. Unconsolidated tax-advantaged VIE investments had maximum reported exposure to loss of $50.1 million, including unfunded commitments and potential tax-credit recapture.
- Unrealized depreciation on available-for-sale securities reduced Q1 other comprehensive income by $11.1 million net of tax. Management attributed unrealized losses to interest rates, spreads and market conditions and stated it did not intend, and was not likely required, to sell the affected securities before recovery.
- Management reported no material changes in market risks or risk factors since the 2020 Form 10-K. It expected no material adverse effect from pending incidental legal proceedings. Disclosure controls were reported effective, with no material first-quarter change in internal control over financial reporting.
Key facts for investors to verify
- Track bus and hotel credit performance, nonaccrual loans, charge-offs, and the allowance as pandemic-related accommodations expire.
- Assess earnings quality and comparability, including CECL adoption, PPP fee recognition and balances, and the lower net interest margin.
- Monitor the runoff and forgiveness of PPP loans and the impact of deposit growth, excess liquidity, and securities purchases on future asset yields.
- Review capital, liquidity capacity and potential public-deposit collateral requirements alongside repurchases and the $0.29 quarterly dividend.
- Evaluate aircraft portfolio concentration and foreign exposure, and the sensitivity of securities and mortgage servicing rights to rates and market assumptions.