1st Source Corporation — Q1 2019 Form 10-Q
Business context and reporting period
1st Source Corporation is an Indiana-based bank holding company offering banking, specialty finance, equipment leasing, and related services. This unaudited filing covers the three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income | $22.2 million | $19.1 million in Q1 2018; up 16.1% |
| Diluted earnings per share | $0.86 | $0.73 in Q1 2018 |
| Net interest income | $54.9 million | $50.5 million in Q1 2018; up 8.7% |
| Net interest margin | 3.78% GAAP-derived; 3.79% fully tax-equivalent | 3.69% and 3.71%, respectively, in Q1 2018 |
| Provision for loan and lease losses | $4.9 million | $3.8 million in Q1 2018 |
| Noninterest income / expense | $24.1 million / $45.2 million | $23.8 million / $45.6 million in Q1 2018 |
| Total assets | $6.38 billion | $6.29 billion at December 31, 2018 |
| Total loans and leases | $4.93 billion | $4.84 billion at December 31, 2018 |
| Total deposits | $5.12 billion | $5.12 billion at December 31, 2018 |
| Cash and cash equivalents | $67.7 million | $99.1 million at December 31, 2018 |
| Total short-term borrowings | $255.4 million | $199.3 million at December 31, 2018 |
| Long-term debt and subordinated notes | $71.4 million and $58.8 million | $71.1 million and $58.8 million at December 31, 2018 |
| Operating cash flow | $32.2 million provided | $34.3 million provided in Q1 2018 |
| Investing / financing cash flow | $106.5 million used / $42.8 million provided | $223.8 million used / $162.6 million provided in Q1 2018 |
Return on average common shareholders’ equity was 11.61%, versus 10.67% in Q1 2018; return on average assets was 1.43%, versus 1.31%. The company paid a quarterly dividend of $0.27 per share, up from $0.22. Shareholders’ equity was $778.4 million and the equity-to-assets ratio was 12.20%. Regulatory capital ratios remained above stated minimums: the corporation’s total capital ratio was 14.58% and common equity Tier 1 ratio was 12.28%.
Material changes versus prior periods
- Loan and lease balances grew $90.7 million, or 1.88%, from year-end, with growth in commercial and agricultural lending and aircraft financing. Average loans and leases increased 5.87% year over year.
- Higher asset yields supported earnings: average earning-asset yield rose to 4.76% from 4.34%. Funding costs also increased; the rate on average interest-bearing liabilities rose to 1.32% from 0.85%, with interest-bearing deposit costs rising to 1.18% from 0.72%.
- Net charge-offs increased to $3.5 million from $0.3 million in Q1 2018. The provision rose primarily because of a $3.0 million charge-off and loan growth.
- Nonperforming assets declined to $24.7 million, or 0.49% of loans and leases, from $35.3 million (0.71%) at year-end and $36.1 million (0.74%) a year earlier. Nonaccrual loans and leases fell, while repossessions increased.
- Available-for-sale securities increased to $1.00 billion from $990.1 million at year-end. Their net unrealized loss narrowed, contributing $7.3 million of after-tax other comprehensive income in Q1, compared with a $6.9 million loss in Q1 2018.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management said available funding sources were adequate for expected cash-flow needs. At quarter-end, stated additional borrowing capacity included $228 million from correspondent banks, $401.4 million from the FHLB, and $758.7 million from the Federal Reserve, subject to applicable conditions.
- Management highlighted risks from slower global growth, trade and tariff disputes, political and economic uncertainty in Latin America, and concentration in aircraft finance. Foreign loans and leases were $221.3 million, principally in Brazil and Mexico; solar-related loans and leases totaled $111.1 million.
- A large syndicated aircraft exposure had been placed on nonaccrual in 2018 and incurred further charge-offs in Q1 2019. Its remaining balance was less than $1 million, with collection anticipated from escrowed funds. The company also reported $8.9 million of loans transferred to real estate or repossessed assets during the quarter.
- Unrealized losses on investment securities were attributed primarily to market-rate changes, not credit deterioration; management said it did not intend, and was not likely required, to sell the securities before recovery. No material change in market-risk disclosures or risk factors was reported.
- A $1.32 million gain on the sale of an office building was recorded, and the company leased back part of the property. The company adopted the new lease standard on January 1, 2019; the filing describes no material impact from adoption. Adoption of the expected-credit-loss standard was still in progress, and its impact could not yet be reasonably estimated.
- Loan commitments to extend credit were $1.07 billion; standby letters of credit were $29.8 million. These off-balance-sheet commitments are subject to credit and funding risk. Management did not expect existing legal proceedings to materially adversely affect financial position or results.
Important facts for investors to verify
- Whether loan growth continues without a further rise in charge-offs, provisions, or repossessions, especially in aircraft and specialty-finance portfolios.
- Trends in deposit pricing and funding mix, given the sharp year-over-year rise in interest expense and the increase in short-term borrowings from year-end.
- Credit and geographic concentration exposure, particularly aircraft financing and Brazil/Mexico lending, and the resolution of the remaining syndicated aircraft balance.
- Implementation assumptions and eventual capital or earnings impact of the expected-credit-loss accounting standard.
- Availability and conditions of stated contingent borrowing capacity, and the potential liquidity impact if public-fund collateral requirements change.