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Investor Relations · Jan 23rd, 2020
- Net income improved to $91.96 million for the year of 2019, up 11.58% from 2018 and improved to $21.94 million for the fourth quarter of 2019, up 2.31% over the fourth quarter of 2018.
- Diluted net income per common share improved to $3.57 for the year of 2019, up 12.97% from 2018 and improved to $0.86 for the fourth quarter of 2019, up 4.88% from the prior year’s fourth quarter of $0.82.
- Return on average assets increased to 1.41% and return on average common shareholders’ equity increased to 11.50% for the full year of 2019 from 1.34% and 11.09%, respectively in 2018. For the fourth quarter of 2019, return on average assets was 1.30% and return on average common shareholders’ equity was 10.56% down from 1.36% and 11.22%, respectively in the fourth quarter of 2018.
- Net charge-offs of $5.05 million for the full year of 2019 compared to $13.88 million in 2018 and $0.64 million in the fourth quarter of 2019 compared to $2.53 million in the fourth quarter of 2018. Nonperforming assets to loans and leases of 0.37% at December 31, 2019 compared to 0.71% at December 31, 2018.
- Average loans and leases grew $244.91 million in the full year of 2019, up 5.15% from 2018 and grew $210.64 million, up 4.36% from the fourth quarter of 2018.
- Average deposits grew $313.07 million in the full year of 2019, up 6.31% from 2018 and grew $326.48 million, up 6.42% from the fourth quarter of 2018.
- Net interest income increased $9.96 million in the full year of 2019, up 4.66% from 2018 and decreased $0.55 million, or 0.98% from the fourth quarter of 2018.
- Noninterest income increased $4.08 million in the full year of 2019, up 4.20% from 2018 and increased $1.42 million, up 5.87% from the fourth quarter of 2018. Excluding leased depreciation, noninterest income increased 7.34% for the year and 11.17% for the quarter.
- Noninterest expenses increased $2.54 million in the full year of 2019 or 1.36% from 2018 and increased $1.66 million or 3.47% from the fourth quarter of 2018. Excluding leased depreciation, noninterest expense increased 2.29% for the year and 5.36% for the quarter.
1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported a record high net income of $91.96 million for 2019, an improvement of 11.58% compared to $82.41 million earned in 2018. Fourth quarter net income was $21.94 million, an increase of 2.31% compared to $21.45 million earned in the fourth quarter of 2018. The annual net income comparison was positively impacted by increased net interest income of $9.96 million primarily due to rising lending rates during 2018 and higher average loan and lease balances and a $3.63 million decrease in the provision for loan and lease losses primarily due to fewer charge-offs during the year. Non-recurring 2019 items included $2.25 million ($0.83 million in the fourth quarter) of negative valuation adjustments on repossessed assets, a $1.31 million gain on the sale of our former headquarters building, $0.96 million ($0.64 million in the fourth quarter) in rental income from a repossessed asset and $0.88 million ($0.44 million in the fourth quarter) in FDIC insurance premium credits.
Diluted net income per common share for the year was a record high at $3.57, up 12.97% from the $3.16 earned a year earlier. Diluted net income per common share for the fourth quarter was $0.86, up 4.88% from the $0.82 earned in the fourth quarter of the previous year.
At its January 2020 meeting, the Board of Directors approved a cash dividend of $0.29 per common share, up 7.41% from the $0.27 per common share declared a year ago. The cash dividend is payable to shareholders of record on February 4, 2020 and will be paid on February 14, 2020.
According to Christopher J. Murphy III, Chairman and CEO, “1st Source Corporation again achieved record earnings in 2019 and it was our 32nd consecutive year of dividend growth. Sustained organic growth in average loans and leases and deposits combined with pragmatic and disciplined credit quality decisions continue to yield positive results. Early in the year, we benefited from higher net interest margins. However, due to several Federal Reserve reductions in interest rates during 2019, these margins decreased in the latter part of the year due to lower loan rates and continued competitive rate pressure on deposits.
“We ended the year with statewide recognition of our leadership in small business lending. For the seventh year in a row, the Indiana Small Business Administration (SBA) awarded 1st Source Bank with the Gold Level award in the Community Lender category. The award recognized the Bank’s production of the most SBA loans in the state of Indiana among banks with less than $10 billion in assets. This is a welcome affirmation of our commitment to small businesses throughout the communities we serve. 1st Source Bank was also honored as the first recipient of the inaugural Indiana Rural Lender of the Year award, which recognized us for making the most SBA loans in rural areas of the state. As a community bank with a mission of helping individuals directly or through their businesses realize their dreams, these awards are important proof that our efforts in supporting small businesses and small communities across northern Indiana have been successful, and that we are truly delivering on our mission through the work we do every day.
“I’m also pleased to report that our employees collectively volunteered more than 22,000 hours of their time during 2019 to help individuals and organizations. Community involvement is a pillar of the 1st Source culture, and the commitment our team members show toward the organizations and causes that they are passionate about is inspiring. It is through community leadership, teamwork, integrity, outstanding customer service, and superior quality in all that we do that we are able to help people achieve security, build wealth and realize their dreams.” Mr. Murphy concluded.
FULL YEAR AND FOURTH QUARTER 2019 FINANCIAL RESULTS
Loans
Annual average loans and leases of $5.00 billion increased $244.91 million, up 5.15% from the full year 2018. Quarterly average loans and leases of $5.05 billion increased $210.64 million, up 4.36% in the fourth quarter of 2019 from the year ago quarter and have decreased $44.72 million from the third quarter due to several large payoffs and a decline in seasonal activity in our specialty finance lending offsetting loan growth.
Deposits
Annual average deposits for 2019 were $5.28 billion, an increase of $313.07 million, up 6.31% from 2018. Quarterly average deposits of $5.41 billion grew $326.48 million, up 6.42% for the quarter ended December 31, 2019 compared to the year ago quarter and have increased $51.03 million, up 0.95% compared to the third quarter.
Net Interest Income and Net Interest Margin
For the twelve months of 2019, tax-equivalent net interest income was $224.55 million, an increase of $9.84 million, up 4.58% compared to the full year 2018. Fourth quarter 2019 tax-equivalent net interest income of $55.46 million decreased $0.58 million, or 1.03% from the fourth quarter a year ago and decreased $1.91 million, or 3.32% from the third quarter.
Net interest margin for the year ending December 31, 2019 was 3.67%, a decrease of four basis points from the 3.71% for the year ending December 31, 2018. Net interest margin on a tax-equivalent basis for the year ending December 31, 2019 was 3.68%, a decrease of five basis points from the 3.73% for the year ending December 31, 2018.
Fourth quarter 2019 net interest margin was 3.51%, a reduction of 26 basis points from the 3.77% for the same period in 2018 and a decrease of 16 basis points from the third quarter. Fourth quarter 2019 net interest margin on a fully tax-equivalent basis was 3.52%, a decrease of 26 basis points from the 3.78% for the same period in 2018 and a decrease of 16 basis points from the 3.68% in the third quarter. The decreased yield during the quarter was negatively impacted by one basis point due to zero net interest recoveries in the fourth quarter of 2019 vs. net interest recoveries of $0.31 million during the fourth quarter of 2018. Additionally, the margin continued to see pressure from deposit competition and Federal Reserve interest rate decreases. Loan rates have repriced at a faster pace than deposit rates.
Noninterest Income
Noninterest income for the twelve months ended December 31, 2019 was $101.13 million, up $4.08 million or 4.20% compared to the twelve months ended December 31, 2018. Fourth quarter 2019 noninterest income of $25.58 million increased $1.42 million, or 5.87% from the fourth quarter a year ago and decreased slightly from the third quarter.
Noninterest income during the twelve months ended December 31, 2019 was higher compared to a year ago mainly due to improved mortgage banking income driven by gains on a higher volume of loan sales, increased debit card income from increased customer use, fewer losses on the sale of available-for-sale securities, increased customer swap fees, higher claim proceeds on bank owned life insurance and nonrecurring rental income derived from a repossessed asset. These positives were offset by reduced equipment rental income due to a decrease in the size of the average equipment rental portfolio and less trust and wealth advisory fees resulting from a lower value of assets under management during the first nine months of 2019 compared to the same period in 2018.
The decrease in noninterest income from the third quarter was mainly due to less claim proceeds on bank owned life insurance, fewer partnership investment gains, a reduction in equipment rental income due to a decrease in the size of the average equipment rental portfolio, and decreased debit card income. These negatives were offset by nonrecurring rental income on a repossessed asset and an increase in trust and wealth advisory fees due to stock market recoveries which helped improve the market value of trust assets under management.
Noninterest Expense
Noninterest expense for the twelve months ended December 31, 2019 was $189.01 million, an increase of $2.54 million, or 1.36% compared to the same period a year ago. Fourth quarter 2019 noninterest expense of $49.35 million increased $1.66 million, or 3.47% from the fourth quarter a year ago and increased $2.24 million or 4.76% from the prior quarter. Excluding depreciation on leased equipment, noninterest expenses were up 5.36% and 2.29% for the fourth quarter and twelve months ended December 31, 2019, respectively.
The increase in noninterest expense for 2019 from 2018 was primarily due to higher salaries as a result of normal merit increases and a slight increase in full-time equivalent employees, increased group insurance costs, a rise in furniture and equipment expense due to increased software maintenance costs, and valuation adjustments on repossessed assets. These increases were offset by higher gains on the sale of fixed assets, reduced insurance expenses due to FDIC assessment credits, lower leased equipment depreciation resulting from a reduction in the average equipment rental portfolio, decreased incentive compensation from fewer vestings of share-based compensation arrangements and reduced professional fees from consulting services.
The increase in noninterest expense from the third quarter was mainly due to higher group insurance costs, increased professional fees from consulting services, valuation adjustments on repossessed assets and a rise in furniture and equipment expense due to increased software maintenance costs and computer processing charges. These increases were offset by a decrease in the interest rate swap valuation provision and lower leased equipment depreciation resulting from a reduction in the average equipment rental portfolio.
Credit
The reserve for loan and lease losses as of December 31, 2019 was 2.19% of total loans and leases compared to 2.14% at September 30, 2019 and 2.08% at December 31, 2018. Net charge-offs that have been recorded for the full year of 2019 were $5.05 million compared to net charge-offs of $13.88 million in 2018. The majority of the 2019 net charge-offs were related to one relationship within the aircraft portfolio and one relationship in the medium and heavy duty truck portfolio. Overall, Aircraft accounted for 38% and Medium and Heavy Duty Truck accounted for 22% of total net charge-offs for the year. Net charge-offs of $0.64 million were recorded for the fourth quarter of 2019 compared with net charge-offs of $2.53 million in the same quarter a year ago and up from the $0.31 million of net recoveries in the third quarter.
The provision for loan and lease losses was $15.83 million for the twelve months ended December 31, 2019 and $2.95 million for the fourth quarter of 2019, a decrease of $3.63 million and $1.75 million, respectively, compared with the same periods in 2018. The ratio of nonperforming assets to loans and leases was 0.37% as of December 31, 2019, compared to 0.34% on September 30, 2019 and 0.71% on December 31, 2018.
Capital
As of December 31, 2019, the common equity-to-assets ratio was 12.51%, compared to 12.15% at September 30, 2019 and 12.11% a year ago. The tangible common equity-to-tangible assets ratio was 11.38% at December 31, 2019 compared to 11.04% at September 30, 2019 and 10.92% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 12.55% at December 31, 2019 compared to 12.26% at September 30, 2019 and 12.38% a year ago. During 2019, 325,787 shares were repurchased for treasury reducing common shareholders’ equity by $15.09 million.