1st Source Corporation — Q3 2022 Form 10-Q
Business context and reporting period. 1st Source is an Indiana-based bank holding company providing banking and financial services. This unaudited filing covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2022 / September 30, 2022 | Comparable period / prior date |
|---|---|---|
| Net interest income | $68.9; fully taxable-equivalent (FTE) net interest margin 3.60% | Q3 2021: $62.2; FTE margin 3.34% |
| Net income available to common shareholders | Q3: $32.7; diluted EPS $1.32 | Q3 2021: $32.5; diluted EPS $1.29 |
| Nine-month net income available to common shareholders | $89.4; diluted EPS $3.59 | Nine months 2021: $90.8; diluted EPS $3.59 |
| Net interest income, nine months | $192.0; FTE margin 3.37% | Nine months 2021: $176.6; FTE margin 3.28% |
| Noninterest income | Q3: $22.0; nine months: $68.0 | Q3 2021: $25.5; nine months 2021: $76.3 |
| Noninterest expense | Q3: $45.3; nine months: $136.3 | Q3 2021: $48.1; nine months 2021: $137.4 |
| Total assets | $8,097.5 | December 31, 2021: $8,096.3 |
| Total loans and leases | $5,762.1 | December 31, 2021: $5,346.2 |
| Total deposits | $6,621.2 | December 31, 2021: $6,679.1 |
| Cash and cash equivalents | $117.6 | December 31, 2021: $525.2 |
| Shareholders’ equity | $826.1; equity-to-assets ratio 10.20% | December 31, 2021: $916.3; ratio 11.32% |
| Allowance for loan and lease losses | $135.7, or 2.36% of loans and leases | December 31, 2021: $127.5 |
Cash flow, margins, and capital
- For the first nine months, operating activities provided $131.7 million of cash; investing activities used $574.7 million; financing activities provided $35.4 million. Cash and cash equivalents fell $407.6 million to $117.6 million.
- Q3 FTE net interest income rose 10.9% year over year, supported by higher asset yields and loan growth. The FTE margin increased to 3.60% from 3.34%. For nine months, FTE net interest income rose 8.8% and margin was 3.37%, versus 3.28%.
- Regulatory capital ratios remained above stated “well capitalized” thresholds: holding-company total capital ratio 16.50%, CET1 13.50%; bank total capital ratio 15.40%, CET1 13.24%.
- The quarterly common dividend was $0.32 per share. Nine-month dividends paid were $23.96 million. Book value per common share was $33.50, down from $37.04 at year-end.
Material changes versus comparable periods
- Q3 net income available to common shareholders increased slightly year over year, while nine-month net income decreased about 1.5%; nine-month EPS was unchanged at $3.59.
- Loan and lease balances increased 7.8% from year-end, led by auto and light truck, construction equipment, and aircraft lending. Approximately $69 million of PPP loans were forgiven; remaining PPP loans were $6.35 million.
- Available-for-sale securities declined to $1,801.2 million from $1,863.0 million. Their net unrealized losses rose to $213.1 million from $13.0 million, principally reflecting rate and market movements. Nine-month other comprehensive loss, net of tax, was $152.4 million; accumulated other comprehensive loss reached $162.3 million.
- Deposits decreased 0.9% from year-end, while short-term borrowings increased to $340.5 million from $200.0 million, largely due to short-term FHLB funding supporting loan growth.
- Noninterest income fell 13.7% in Q3 and 10.9% year to date. Lower mortgage banking and equipment rental income were significant factors. Noninterest expense declined 5.7% in Q3 and 0.8% year to date.
Outlook, risks, contingencies, and unusual items
- Outlook and credit commentary: Management assumed economic growth would slow markedly in 2022 and 2023, with inflation remaining above the Federal Reserve’s 2% target. It cited a weakened domestic growth outlook, the war in Ukraine, inflation, supply-chain disruption, labor constraints, and geopolitical uncertainty. Management said estimates of future credit losses could vary considerably as conditions change. No earnings or revenue guidance was provided.
- Credit quality: Management reported improving credit quality, declining special-attention credit outstandings, and minimal Q3 charge-offs. Q3 net charge-offs were $0.30 million; nine-month net recoveries were $0.34 million. Nonperforming assets were $28.0 million, 0.48% of loans and leases, versus $41.3 million and 0.77% at year-end 2021.
- Portfolio risks: Management highlighted the bus segment and small-business borrowers as areas of concern, along with aircraft collateral volatility and $239.8 million of foreign aircraft exposure, primarily in Mexico and Brazil. Other disclosed risks include collateral-value declines as rates rise, energy-price volatility and driver availability in trucking, and risks from slower growth and persistent supply disruptions.
- Liquidity: Management said funding sources were adequate. At quarter-end, the company reported $213.1 million of FHLB advances and stated it could borrow an additional $337.7 million from the FHLB, subject to requirements; it also cited $468.0 million of potential Federal Reserve borrowing capacity and $230.0 million of additional short-term bank borrowing capacity. A potential future requirement to collateralize public-fund deposits could create approximately $981 million of liquidity exposure.
- Investment securities: The company attributed unrealized losses to interest rates, spreads, and market conditions, not credit losses; it said it did not intend, and was not more likely than not required, to sell the securities before recovery of amortized cost.
- Other items: The company settled previously reported IOI Integrated Systems/Najeeb Khan claims on September 23, 2022, for a payment it described as not material. Management reported no material changes in risk factors or market risk since year-end and no material adverse effect expected from other legal proceedings.
Most important facts for investors to verify
- Whether higher market rates continue to improve net interest income and margin, and how quickly deposit costs and borrowing costs reprice.
- The extent and potential capital or liquidity implications of further unrealized losses in the available-for-sale securities portfolio.
- Whether loan growth is accompanied by deterioration in credit quality, especially in aircraft, bus, small-business, and other collateral-sensitive portfolios.
- How deposit trends, short-term borrowing reliance, and available borrowing capacity evolve as cash balances have declined.
- Whether mortgage banking, equipment rental, and trust-fee pressures persist, and whether expense trends offset weaker fee income.