Business context and reporting period
1st Source Corporation is an Indiana bank holding company providing banking and specialty finance services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. Financial statement amounts below are in millions of dollars unless noted.
Financial performance and condition
| Metric | Q2 2021 / June 30, 2021 | Comparable period / prior date |
|---|---|---|
| Net income available to common shareholders | $30.2; diluted EPS $1.19 | Q2 2020: $18.5; $0.72 |
| Six-month net income available to common shareholders | $58.3; diluted EPS $2.29 | Six months 2020: $34.9; $1.36 |
| Net interest income | Q2: $56.9; six months: $114.3 | Q2 2020: $54.0; six months 2020: $108.8 |
| Net interest margin, fully taxable-equivalent | Q2: 3.15%; six months: 3.25% | Q2 2020: 3.24%; six months 2020: 3.40% |
| Provision (recovery) for credit losses | Q2: recovery of $3.0; six months: recovery of $0.6 | Q2 2020: provision of $10.4; six months 2020: provision of $21.7 |
| Total assets | $7,718.7 | December 31, 2020: $7,316.4 |
| Loans and leases, gross | $5,483.0 | December 31, 2020: $5,489.3 |
| Deposits | $6,345.4 | December 31, 2020: $5,946.0 |
| Cash and cash equivalents | $469.4 | December 31, 2020: $243.0 |
| Shareholders’ equity | $901.2; equity-to-assets ratio 11.68% | December 31, 2020: $886.8; 12.12% |
| Allowance for loan and lease losses | $136.4; 2.49% of loans and leases | December 31, 2020: $140.7 |
| Nonperforming assets | $58.8; 1.06% of loans and leases | December 31, 2020: $64.5; 1.16% |
For the first six months, operating cash flow was $86.6 million, investing cash flow was negative $243.0 million, and financing cash flow was positive $382.9 million. Cash and cash equivalents increased $226.4 million from year-end. Total debt and mandatorily redeemable securities were $81.3 million; subordinated notes were $58.8 million; short-term borrowings were $172.3 million.
Reported regulatory capital ratios exceeded the filing’s “well capitalized” thresholds: holding-company total capital was 16.58%, Tier 1 capital 15.32%, and common equity Tier 1 13.62%; corresponding bank ratios were 15.38%, 14.11%, and 13.37%.
Material changes versus prior periods
- Q2 net income rose to $30.2 million from $18.5 million, and first-half net income rose to $58.3 million from $34.9 million. Management attributed the improvement to higher net interest income, lower credit-loss provisions, higher noninterest income for the half year, and lower noninterest expense.
- Net interest income increased, but net interest margin narrowed year over year as asset yields fell in the low-rate environment; lower funding costs partly offset the decline.
- Q2 included a $3.0 million recovery of credit-loss provision, compared with a $10.4 million provision a year earlier. The company reduced COVID-related qualitative reserve adjustments and revised economic forecast factors.
- Noninterest income was $24.9 million in Q2, down 1.4% year over year; first-half income was $50.8 million, up 1.8%. Q2 securities losses were $0.7 million, primarily associated with portfolio repositioning. Equipment rental income continued to decline.
- Noninterest expense was $45.2 million in Q2, up 0.8% year over year, and $89.3 million for the half year, down 2.2%. Salary and professional-fee costs increased, while leased-equipment depreciation declined.
- Total assets and deposits expanded, while gross loans were nearly flat versus year-end. PPP loan forgiveness reduced balances; core loan products increased during Q2.
- Accumulated other comprehensive income fell to $7.6 million from $18.4 million at year-end, largely reflecting the change in unrealized available-for-sale securities values. The company repurchased $20.4 million of stock and paid $15.0 million in common dividends during the first half.
Outlook, risks and unusual items
Management reported stronger-than-expected GDP growth, improving employment conditions, and an improved credit outlook, but continued to expect pandemic-related adverse effects on loan and lease portfolios over the next two years, potentially more severe in the second year of its forecast. The filing provides no earnings or revenue guidance.
COVID-19-related loan and lease modifications in deferment totaled $65 million at June 30, 2021, down from $129 million at year-end. Management highlighted continuing uncertainty in bus lending and hotel-related commercial real estate; bus-sector net charge-offs were $4.5 million year to date. The company also cited risks from aircraft collateral values and foreign exposure, particularly in Mexico and Brazil, as well as broader economic, geopolitical, trade, and supply-chain uncertainty.
PPP loans outstanding were $315.1 million, net of unearned discount, and are guaranteed by the SBA. The company had secured forgiveness for more than $527 million of PPP loans by June 30, 2021. A $0.6 million first-half recovery of mortgage-servicing-rights impairment partly offset earlier impairment charges.
Liquidity included $469.4 million of cash and cash equivalents. Management reported access to additional short-term bank funding, FHLB advances, and Federal Reserve borrowing capacity, and considered available funding adequate. Potential collateral requirements on public fund deposits could create liquidity exposure of approximately $949 million if requirements change. Loan commitments to extend credit totaled $1.17 billion. Management did not expect pending legal proceedings to materially adversely affect consolidated financial position or results. No material changes to market risks or risk factors were reported; disclosure controls were considered effective.
Important facts for investors to verify
- Whether credit quality and reserve adequacy remain appropriate as pandemic-related support and borrower deferrals expire, especially for bus and hotel exposures.
- How PPP forgiveness, deposit growth, and excess liquidity affect future loan growth, asset yields, and net interest margin.
- Whether lower credit-loss provisions and improving economic assumptions are sustainable; the 2020 comparison used the incurred-loss method, while 2021 reflects CECL.
- Changes in aircraft collateral values, foreign borrower exposure, and repossessed assets.
- The scale and performance of stock repurchases: 439,216 shares were acquired during the first half, and the board authorized a new repurchase authorization of approximately 2.0 million shares on July 22, 2021.