1st Source Corporation — Q3 2023 Form 10-Q
Business context and period. 1st Source Corporation is an Indiana-based bank holding company. This unaudited filing covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022. Unless otherwise noted, amounts below are in millions of dollars.
Financial results and condition
| Metric | Q3 / September 30, 2023 | Comparable period / prior date |
|---|---|---|
| Net income available to common shareholders | $32.9; diluted EPS $1.32 | Q3 2022: $32.7; $1.32 diluted EPS |
| Nine-month net income available to common shareholders | $96.5; diluted EPS $3.87 | 2022: $89.4; $3.59 diluted EPS |
| Net interest income | Q3: $69.2; nine months: $207.3 | Q3 2022: $68.9; nine months 2022: $192.0 |
| Net interest margin, fully taxable-equivalent | Q3: 3.46%; nine months: 3.51% | Q3 2022: 3.60%; nine months 2022: 3.37% |
| Total assets | $8,525.1 | December 31, 2022: $8,339.4 |
| Total loans and leases | $6,353.6 | December 31, 2022: $6,011.2 |
| Total deposits | $6,967.5 | December 31, 2022: $6,928.3 |
| Allowance for loan and lease losses | $144.1; 2.27% of loans and leases | $139.3 at year-end; 2.36% at September 30, 2022 |
| Cash and cash equivalents | $111.1 | $122.8 at year-end |
| Shareholders’ equity | $924.3; equity-to-assets ratio 10.84% | $864.1 and 10.36% at year-end |
- Profitability and revenue: Q3 net income was nearly flat year over year, while nine-month net income rose about 7.9%. Nine-month noninterest income increased 3.8% to $70.5 million; noninterest expense rose 9.1% to $148.8 million. Q3 noninterest income increased 11.1% to $24.5 million and expense increased 10.7% to $50.2 million.
- Cash flow: Operating activities provided $143.8 million for the first nine months, versus $131.7 million in 2022. Cash and cash equivalents declined $11.7 million over the period, mainly as loan growth was funded using liquidity and financing sources.
- Funding and debt: Noninterest-bearing deposits declined to $1,680.7 million from $1,998.2 million at year-end; time deposits increased to $1,689.1 million from $1,140.5 million. Short-term borrowings were $272.1 million, including $223.8 million of other short-term borrowings. Long-term debt and mandatorily redeemable securities were $46.5 million; subordinated notes were $58.8 million.
- Liquidity and capital: Management reported $3.06 billion of net available liquidity, about 48% of deposits excluding brokered and listing-service certificates of deposit. The company’s actual total capital ratio was 16.12% and its bank’s was 15.09%; both exceeded stated well-capitalized thresholds. Management said funding sources were adequate for cash-flow needs.
Changes, outlook and risks
- Growth and portfolio mix: Loans and leases increased 5.7% from year-end, led by construction equipment and commercial real estate. Securities available-for-sale declined 9.6%, with sales and maturities used to support liquidity and loan growth. The loan-to-asset ratio rose to 74.53% from 72.08% at year-end.
- Rate environment: Higher asset yields supported nine-month net interest income and margin, but deposit and borrowing costs rose sharply. Interest-bearing deposit cost was 2.60% in Q3 versus 0.56% a year earlier. Q3 FTE margin fell to 3.46% from 3.60% year over year.
- Credit quality: Nonperforming assets were $17.1 million, or 0.27% of loans and leases, down from $26.9 million and 0.45% at year-end. Delinquencies of 30 days or more were 0.10%. The nine-month provision was $4.0 million, down from $7.9 million; the company recorded $0.9 million of net recoveries year to date. Management cited stable credit metrics but noted risks from slower growth, tighter credit, inflation, higher rates and geopolitical uncertainty.
- Investment securities: The $1.61 billion available-for-sale portfolio had $198.6 million of gross unrealized losses at September 30, and all 698 securities were in a loss position. Management attributed losses to interest rates, market spreads and conditions, reported no credit-loss allowance on the portfolio, and said it did not expect to need to sell securities before recovery of amortized cost. Accumulated other comprehensive loss increased in magnitude to $151.3 million from $147.7 million at year-end.
- Business and expense items: Nine-month equipment rental income fell 28.7%, reflecting a smaller portfolio, customer preferences and pricing pressure. Other income benefited from $3.43 million of renewable-energy tax-equity investment sale gains year to date, including $2.32 million in Q3. Expense increases included salaries, data processing, FDIC insurance and provisions for unfunded commitments.
- Outlook and risk disclosures: The filing gives no numerical earnings or revenue guidance. Management’s credit-loss forecast assumes slowing economic growth and inflation remaining above the Federal Reserve’s 2% target, and it cautions future loss estimates may vary considerably. Other highlighted risks include liquidity access, competition for deposits, collateral values, foreign aircraft exposure (notably Mexico and Brazil), cyber threats and third-party technology dependence. Management reported no material change in market risk since year-end and no expected material adverse effect from pending legal proceedings.
- Other notable items: The company repurchased 260,887 shares in September at an average $39.45. After quarter-end, on October 19, 2023, the board terminated the prior repurchase plan and authorized a new plan for up to 1 million shares. Disclosure controls were reported effective, with no material third-quarter change in internal control over financial reporting.
Key facts for investors to verify
- How deposit pricing, deposit mix and use of short-term funding affect margins and liquidity as rates and competition evolve.
- Whether loan growth, especially in commercial real estate and construction equipment, changes credit performance, allowance needs or collateral risk.
- The size and sensitivity of unrealized securities losses, and the company’s ability to avoid selling securities before recovery of amortized cost.
- Exposure to foreign aircraft borrowers and the impact of economic, political and collateral-value changes in Mexico and Brazil.
- Whether recent investment-sale gains and other unusual income items recur, and how expense growth compares with revenue growth.
- Execution and capital effects of the new post-quarter share repurchase authorization; also monitor the $1.45 billion of loan commitments, which are not necessarily expected to be fully drawn.