1st Source Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. 1st Source is an Indiana-based bank holding company providing banking and other financial services.
Financial results and key metrics
- Net income: $11.7 million, up from $10.6 million in Q1 2011; diluted EPS was $0.48 versus $0.43. Return on average assets was 1.08%, compared with 0.97%; return on average common equity was 8.84%, versus 8.73%.
- Net interest income: $37.4 million GAAP, compared with $36.9 million. Tax-equivalent net interest income was $37.9 million, up 1.0%; tax-equivalent net interest margin was 3.77%, versus 3.71%.
- Noninterest income and expense: Income rose 8.3% to $20.5 million, led by mortgage banking income of $1.9 million versus $0.4 million. Noninterest expense declined 1.1% to $38.0 million. Salaries and benefits increased 9.0% to $20.3 million.
- Credit costs: Provision for loan and lease losses was $2.3 million, versus $2.2 million. Net charge-offs declined to $1.5 million from $2.9 million. The allowance was $82.4 million, or 2.62% of loans and leases, compared with 2.82% a year earlier.
- Balance sheet: Assets were $4.38 billion, up 0.2% from year-end. Loans and leases were $3.15 billion, up 1.8%; deposits were $3.51 billion, down 0.4%. Shareholders’ equity was $531.9 million; equity-to-assets was 12.13%.
- Liquidity and cash flows: Cash and cash equivalents were $57.6 million at quarter-end, down from $114.3 million at year-end. Q1 operating cash flow was $16.6 million, investing cash flow was negative $74.0 million, and financing cash flow was positive $0.6 million. Management said available funding sources were adequate. It reported $265 million of short-term bank borrowing capacity, $169.8 million of additional FHLB capacity, and $343.4 million available from the Federal Reserve.
- Debt and capital: Short-term borrowings were $143.8 million, long-term debt and mandatorily redeemable securities $39.8 million, and subordinated notes $89.7 million. The bank’s total risk-based capital ratio was 16.14%; its Tier 1 risk-based and Tier 1 leverage ratios were 14.88% and 11.82%, respectively.
- Dividends and shares: The quarterly dividend was $0.16 per common share. The company repurchased 104,471 shares during the quarter.
Material changes and management commentary
- Management attributed higher earnings primarily to increased noninterest income. Lower deposit funding costs helped offset lower earning-asset yields; the yield on average earning assets fell 18 basis points, while the cost of interest-bearing liabilities fell 25 basis points.
- Mortgage banking income increased with higher loan-sale production and improved margins. Equipment rental income fell 11.4%, reflecting a smaller rental portfolio and lower new-lease rates amid competition.
- Nonperforming assets declined to $70.4 million from $72.5 million at year-end and $88.3 million a year earlier. They equaled 2.19% of loans and leases, versus 2.28% at year-end and 2.81% a year earlier. Delinquencies of 30 days or more were 0.33%, versus 0.56% a year earlier.
- The effective tax rate rose to 33.46% from 29.93%, partly because tax-exempt interest was lower relative to pretax income. Q1 2011 also benefited from a state tax settlement that increased earnings by $0.47 million.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management’s statements are forward-looking and subject to risks including interest-rate changes, economic conditions, competitive pressures, regulation, and credit concentrations.
- Management highlighted commercial real estate and aircraft-related credit risks, including weaker real estate values and declining aircraft values. Foreign loan and lease exposure, all in aircraft financing, was $224.1 million, including $150.3 million to borrowers in Brazil and $42.6 million in Mexico.
- Potential collateral requirements on Indiana public-fund deposits could create liquidity exposure of approximately $447 million; management said none was currently required, though legislation could change this.
- The Department of Justice is investigating mortgage-broker pricing practices related to mortgages purchased in prior years. The company said it is cooperating and does not expect a material adverse outcome based on its present understanding.
- Standby letters of credit totaled $15.6 million. Receipt of $1.95 million held in escrow from a parking-garage sale depends on the company investing $5.40 million in South Bend properties by December 31, 2013; the company expected to meet the commitment.
- Management reported no material changes in risk factors or market risks since year-end and no material changes in internal control over financial reporting. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether loan growth, asset quality, and the reserve remain consistent with the company’s credit-risk assumptions, especially in commercial real estate, aircraft, and specialty-finance portfolios.
- Whether mortgage banking gains and improved net interest margin persist as rates, refinancing activity, and funding costs change.
- How liquidity and funding would be affected if Indiana public-fund collateral requirements change, and whether reported borrowing capacity remains available on stated terms.
- Any developments in the Department of Justice investigation and the South Bend escrow commitment.
- The sustainability of earnings after the prior-year tax settlement benefit and amid higher salary and incentive costs.