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Press Release · Jan 19th, 2023
FULL YEAR AND QUARTERLY HIGHLIGHTS
- Net income was a record $120.51 million for the year of 2022, up 67% from 2021 and was $31.07 million for the fourth quarter of 2022, down 5.10% from the previous quarter and up 12.07% from the fourth quarter of 2021. Diluted net income per common share was a record $4.84 for the year of 2022, up 2.98% from 2021 and was $1.25 for the fourth quarter of 2022, down 5.30% from the previous quarter and up 12.61% from the prior year’s fourth quarter.
- Cash dividend of $0.32 per common share was approved, up 3.23% from the cash dividend declared a year ago.
- Average loans and leases net of Paycheck Protection Program (PPP) loans grew $402.04 million in 2022, up 7.82% from 2021 and grew $215.70 million during the fourth quarter, up 3.84% (15.36% annualized growth) from the previous quarter.
- Tax-equivalent net interest income was $264.10 million for the year, up 11.39% from 2021 and was $71.67 million in the fourth quarter, up 3.70% from the previous quarter and up 19.10% from the fourth quarter of 2021. Tax-equivalent net interest margin was 3.45% for 2022, up 22 basis points from 2021 and was 3.69% for the fourth quarter of 2022, up nine basis points from the prior quarter and up 60 basis points from the fourth quarter of 2021.
- Due to strong loan growth, $13.25 million was provided and charged against earnings to the provision for credit losses for the full year of 2022 compared to the recognition of a $4.30 million recovery in the provision for credit losses during 2021. During the fourth quarter, $5.34 million was recognized in the provision for credit losses compared to a provision of $3.17 million in the previous quarter and a recovery in the provision of $1.12 million in the fourth quarter of 2021.
South Bend, IN — 1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported record net income of $120.51 million for 2022, an increase of 1.67% compared to $118.53 million earned in 2021. Fourth quarter net income was $31.07 million, an increase of 12.07% compared to $27.72 million earned in the fourth quarter of 2021. Diluted net income per common share for the year was a record $4.84, up 2.98% from the $4.70 earned a year earlier. Diluted net income per common share for the fourth quarter was $1.25, up 12.61% from the $1.11 earned in the fourth quarter of the previous year.
At its January 2023 meeting, the Board of Directors approved a cash dividend of $0.32 per common share, up 3.23% from the $0.31 per common share declared a year ago. The cash dividend is payable to shareholders of record on February 6, 2023 and will be paid on February 16, 2023.
Christopher J. Murphy III, Chairman and Chief Executive Officer, commented, “We are pleased to announce record net income for the second year in a row and we reached our 35th consecutive year of dividend growth. We were able to grow average loans and leases by $402.04 million or 7.82% net of PPP from 2021. Given such strong loan and lease growth, we added $13.25 million to our provision for credit losses during the year compared to a $4.30 million recovery of provision for credit losses recorded during 2021. Our tax-equivalent net interest margin was 3.45% for the year compared to 3.23% in the prior year. As mentioned previously, the expansion in our net interest margin has largely been the result of seven Federal Reserve rate increases during 2022. We are hopeful that these rate increases will successfully stymie historically elevated levels of inflation but anticipate pressure on our net interest margin as we move forward into 2023. Our credit quality remained stable as we had net charge-offs to average loans and leases of only 0.03% in 2022 compared to 0.16% in 2021. I am extremely proud my colleagues were able to achieve such positive results during 2022.
“I am pleased also to report the U.S. Small Business Administration (SBA), Indiana District, recently recognized 1st Source Bank with a Gold Level Award in the Community Lender category for the tenth consecutive year. The award honors 1st Source Bank for delivering the greatest number of SBA loans in Indiana in 2022 among Community Banks with less than $10 billion in assets. Over the last decade our team members have proven their commitment to our values and mission in serving our business clients well. This award is a tremendous testament to them and the trust our clients have put in us, and we are proud to support our clients as they strive to start, grow and expand their community-based businesses.
“Lastly, as recently reported, our Board of Directors made two promotions with an eye on the future of our organization. Effective December 1, 2022, Andrea G. Short, President of 1st Source Bank also became the Bank’s CEO. In her new role, Ms. Short has Personal Banking, Business Banking, Specialty Finance, Wealth Advisory Services, Credit, and the Operations functions of the Bank reporting up through her. She remains an Executive Vice President of 1st Source Corporation. Ms. Short is a CPA and joined 1st Source’s Tax Department in 1998 and in 2001 was promoted to Assistant Vice President and Tax Director. She successfully moved up the ranks as Senior Vice President and Controller, then Executive Vice President and Chief Financial Officer, and finally as President of the Bank and Executive Vice President of the Corporation. In addition, Kevin C. Murphy has been named Chief Digital Officer and been promoted to Executive Vice President of the Bank and 1st Source Corporation. Other than interning with 1st Source as a CSR during his high school and college years, Mr. Murphy officially joined the Bank in 2006. His career has taken him through many different areas and management roles in the Bank: IT Web Development, Branch Systems, Treasury Products and Customer Support, Electronic Banking, Central Region President, Chief Information Officer and most recently as Group Head of IT, Marketing, and Digital Strategy. These two colleagues have demonstrated their belief in our values, selfless leadership, and their long-term commitment to the Mission and success of 1st Source. I continue as Chairman, President, and CEO of 1st Source Corporation and Chairman of 1st Source Bank, and look forward to continuing to work closely with Ms. Short and Mr. Murphy as well as the rest of our leadership team to build a strong and stable future for 1st Source, our clients, and shareholders,” Mr. Murphy concluded.
FULL YEAR AND FOURTH QUARTER 2022 FINANCIAL RESULTS
Loans
Annual average loans and leases of $5.57 billion increased $402.04 million, up 7.82% net of PPP loans from the full year 2021. Quarterly average loans and leases of $5.84 billion increased $631.29 million, up 12.13% net of PPP loans in the fourth quarter of 2022 from the year ago quarter and have increased $215.70 million net of PPP loans from the third quarter. PPP forgiveness and customer payments totaled $74.88 million for the full year of 2022 with less than $1 million remaining. Strong growth primarily within our specialty finance group portfolios drove total average loans and leases higher during the year.
Deposits
Annual average deposits for 2022 were $6.71 billion, an increase of $368.85 million, up 5.82% from 2021. Quarterly average deposits of $6.76 billion grew $57.89 million, up 0.86% for the quarter ended December 31, 2022 compared to the year ago quarter and have increased $85.23 million, up 1.28% compared to the third quarter. Deposit growth over the last year came from increased business, consumer and public funds. The deposit mix changed as the year progressed with clients moving their funds from non-maturity accounts to certificates of deposit due to the rate environment. Additionally, brokered deposits grew during the fourth quarter compared to the third quarter and the prior year’s fourth quarter.
Net Interest Income and Net Interest Margin
For the twelve months of 2022, tax-equivalent net interest income was $264.10 million, an increase of $27.00 million, up 11.39% compared to the full year 2021. Fourth quarter 2022 tax-equivalent net interest income of $71.67 million increased $11.49 million, up 19.10% from the fourth quarter a year ago and increased $2.55 million, or 3.70% from the third quarter. We recognized $2.70 million in PPP loan fees during the full year of 2022 and $0.12 million during the fourth quarter compared to $16.84 million in 2021 and $3.58 million in the previous fourth quarter.
Net interest margin for the year ending December 31, 2022 was 3.44%, an increase of 22 basis points from the 3.22% for the year ending December 31, 2021. Net interest margin on a tax-equivalent basis for the year ending December 31, 2022 was 3.45%, an increase of 22 basis points from the 3.23% for the year ending December 31, 2021. Non-recurring items during the year including PPP loans fees and net interest recoveries contributed six-basis points to the 22-basis point increase.
Fourth quarter 2022 net interest margin was 3.68%, an increase of 59 basis points from the 3.09% for the same period in 2021 and an increase of nine basis points from the prior quarter. Fourth quarter 2022 net interest margin on a fully tax-equivalent basis was 3.69%, an increase of 60 basis points from the 3.09% for the same period in 2021 and an increase of nine basis points from the 3.60% in the prior quarter. PPP loan fees and net interest recoveries had a positive three-basis point impact on the fourth quarter net interest margin compared to a positive 17-basis point impact during the fourth quarter of 2021.
Seven Federal Reserve rate increases totaling 425 basis points during 2022 contributed to net interest margin expansion as loans repriced faster than deposits during the year.
Noninterest Income
Noninterest income for the twelve months ended December 31, 2022 was $91.26 million, down $8.83 million or 8.82% compared to the twelve months ended December 31, 2021. Fourth quarter 2022 noninterest income of $23.28 million decreased $0.55 million, or 2.30% from the fourth quarter a year ago and increased $1.27 million or 5.78% from the third quarter.
Noninterest income during the twelve months ended December 31, 2022 was lower compared to a year ago mainly from a decline in mortgage banking origination volumes resulting in lower income from loans sold in the secondary market. Demand for mortgages has continued to decline with steep increases in interest rates that drove a precipitous decline in market activity. Noninterest income in 2022 was also impacted by lower equipment rental income due to a decrease in the size of the average equipment rental portfolio as demand for operating leases continues to decline, reduced trust and wealth advisory income based on lower market valuations of assets under management, fewer insurance commissions and a one-time write down of $0.37 million on small business capital investments. These decreases were offset by partnership investment gains on sale of renewable energy tax equity investments of $2.24 million, and increased deposit fee income.
The increase in noninterest income from the third quarter was mainly due to the aforementioned higher partnership investment gains on sale of renewable energy tax equity investments of $2.24 million offset by the aforementioned one-time $0.37 million write-down on small business capital investments and losses on the sale of available-for-sale securities.
Noninterest Expense
Noninterest expense for the twelve months ended December 31, 2022 was $184.70 million, a decrease of $1.45 million, or 0.78% compared to the same period a year ago. Fourth quarter 2022 noninterest expense of $48.38 million declined $0.37 million, or 0.76% from the fourth quarter a year ago and increased $3.05 million or 6.72% from the prior quarter.
The decrease in noninterest expense for 2022 from 2021 was primarily due to lower leased equipment depreciation resulting from a reduction in the average equipment rental portfolio, a $3.00 million charitable contribution made in 2021 not present in 2022, reduced legal fees, less incentive compensation awards and fewer group insurance claims. Those decreases were offset mainly by higher base salaries due to normal merit increases, an increase in the provision for unfunded loan commitments, a rise in software maintenance costs related to technology projects, and a higher valuation provision for interest rate swaps with customers.
The increase in noninterest expense from the third quarter was mainly due to a seasonal increase in group insurance claims, a rise in the provision for unfunded loan commitments, higher legal fees, and increased snow removal costs due to seasonal weather conditions offset by a lower valuation provision for interest rate swaps with customers.
Additionally, we had a one-time federal income tax adjustment during the fourth quarter 2022 related to disallowed compensation of $0.44 million which increased our fourth quarter effective tax rate.
Credit
The allowance for loan and lease losses as of December 31, 2022 was 2.32% of total loans and leases compared to 2.36% at September 30, 2022 and 2.38% at December 31, 2021. The allowance calculation includes PPP loans which are guaranteed by the SBA. Excluding those loans from the calculation results in an allowance which was unchanged at December 31, 2022 and September 30, 2022 and 2.42% at December 31, 2021.
Net charge-offs that have been recorded for the full year of 2022 were $1.47 million compared to net charge-offs of $8.86 million in 2021. This resulted in a charge-off ratio of 0.03% for 2022 compared to 0.16% for 2021. Net charge-offs of $1.81 million were recorded for the fourth quarter of 2022 compared with net charge-offs of $5.15 million in the same quarter a year ago and $0.30 million of net charge-offs in the previous quarter. Overall, construction equipment accounted for 75% of the net charge-offs for the year.
The provision for credit losses was $13.25 million for the twelve months ended December 31, 2022 and $5.34 million for the fourth quarter of 2022, an increase of $17.55 million and $6.46 million, respectively, compared with the same periods in 2021. The ratio of nonperforming assets to loans and leases was 0.45% as of December 31, 2022, compared to 0.48% on September 30, 2022 and 0.77% on December 31, 2021.
Capital
As of December 31, 2022, the common equity-to-assets ratio was 10.36%, compared to 10.20% at September 30, 2022 and 11.32% a year ago. The tangible common equity-to-tangible assets ratio was 9.45% at December 31, 2022 compared to 9.26% at September 30, 2022 and 10.39% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 13.19% at December 31, 2022 compared to 13.50% at September 30, 2022 and 13.72% a year ago.
Book value per share declined to $35.04 primarily due to non-credit-related, negative market value adjustments to our investment securities available-for-sale portfolio during the year. Market value adjustments of $137.83 million reduced common shareholders’ equity and were the result of interest rate increases, market spreads and market conditions subsequent to purchase.
During 2022, 149,819 shares were repurchased for treasury reducing common shareholders’ equity by $6.84 million. No shares were repurchased during the fourth quarter 2022.