1st Source Corporation Reports Record Second Quarter Results
Increased Cash Dividend Declared
- Net income improved to $21.96 million, up 31.77% over the second quarter of 2017. Diluted net income per common share improved to $0.84 from the prior year’s second quarter of $0.64.
- Return on average assets increased to 1.43% and return on average common shareholders’ equity increased to 11.96% from 1.20% and 9.59%, respectively in the second quarter of 2017.
- Net charge-offs of $0.14 million and nonperforming assets to loans and leases of 0.89% compared to $0.94 million and 0.66%, respectively in the second quarter of 2017.
- Average loans and leases grew $462.09 million, up 10.73% from the second quarter of 2017.
- Average deposits grew $506.50 million, up 11.37% from the second quarter of 2017.
- Net interest income increased $7.31 million, up 15.94% from the second quarter of 2017.<
- Noninterest income increased $0.89 million, up 3.68% from the second quarter of 2017 (increased 2.80% excluding leased equipment depreciation).
- Noninterest expenses increased $4.77 million or 11.61% from the second quarter of 2017 (increased 12.59% excluding leased equipment depreciation).
1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported a record high net income of $21.96 million for the second quarter of 2018, an improvement of 31.77% compared to $16.67 million reported in the second quarter a year ago, bringing the 2018 year-to-date net income to $41.08 million compared to $32.88 million in 2017, an increase of 24.96%. Income before taxes was $27.50 million compared to $26.15 million in the second quarter of 2017 and $52.49 million for the first six months of 2018 compared to $51.07 million for the same period in 2017. The year-to-date pretax income comparison was positively impacted by increased net interest income of $14.11 million primarily due to rising lending rates, higher average loan and lease balances, and recognition of a $0.62 million unaccreted purchase loan discount and $0.41 million prepayment penalty on two separate early loan payoffs. These positives were offset by a $4.87 million increase in the provision for loan and lease losses to support loan and lease growth along with additional specific reserves on nonaccrual loans and a $9.21 million rise in noninterest expense. Non-recurring 2018 costs were approximately $2.40 million.
Diluted net income per common share for the second quarter of 2018 was a record high $0.84, versus $0.64 in the second quarter of 2017. Diluted net income per common share for the first half of 2018 was $1.57 compared to $1.26 earned a year earlier.
At its July 2018 meeting, the Board of Directors approved a cash dividend of $0.25 per common share, up 31.58% from the $0.19 per common share declared a year ago, and up 4.17% from the $0.24 per common share in the prior quarter. The cash dividend is payable to shareholders of record on August 6, 2018 and will be paid on August 15, 2018.
According to Christopher J. Murphy III, Chairman, “We are pleased with our record net income in the second quarter as 1st Source Corporation continues to experience healthy growth in loans and leases and deposits. Credit quality remains stable with some deterioration in the nonperforming loan ratio but with year-to-date net charge-offs of only $479,000 or 0.02% of average loans and leases. Average loans and leases were up a solid 10.73% for the quarter, compared to the same period a year ago. Average deposits were also up with a strong increase of 11.37% from this time last year. Net interest income has increased 15.94% from the second quarter 2017, and noninterest income increased 3.68% while noninterest expense growth increased by 11.61% over the same quarter in 2017.”
“We have had a busy summer with renovations in the South Bend region. In May, we celebrated the completion of our Granger Martin’s banking center remodel, leading the way to bring side-by-side banking to the S.R. 23 corridor, in the Mishawaka-Granger area. In August, we will complete the remodels for our BankMart and Granger banking centers. Also coming in August, we will open a banking center on the campus of Indiana University South Bend - subject to final regulatory approval. With many of our own colleagues achieving a diploma or attending classes at the University, it is an outstanding partner for us. This expansion will help build upon our already strong relationship with the University and underscores our commitment to relationship banking, distinctive convenience, and community partnerships.”
“We are pleased to announce that Forbes has identified 1st Source Bank as the top ranked bank headquartered in Indiana. Forbes recently conducted a survey to rank the best banks and credit unions in every state. Banks and credit unions were rated by more than 25,000 respondents on overall recommendations and satisfaction, as well as five subdimensions: trust, terms and conditions, branch services, digital services, and financial advice. We remain grateful to our customers and the community for this award. As always, we are committed to providing outstanding service to our clients whether they prefer to bank with us in person, online, or with their mobile device using our highly rated app.” Mr. Murphy concluded.
SECOND QUARTER 2018 FINANCIAL RESULTS
Average loans and leases of $4.77 billion increased $462.09 million, up 10.73% in the second quarter of 2018 from the year ago quarter and have increased $181.58 million, up 3.96% from the first quarter. Year-to-date average loans and leases of $4.68 billion increased $431.99 million, up 10.17% from the first six months of 2017.
Average deposits of $4.96 billion grew $506.50 million, up 11.37% for the quarter ended June 30, 2018 from the year ago quarter and have increased $253.03 million, up 5.37% compared to the first quarter. Average deposits for the first six months of 2018 were $4.84 billion, an increase of $458.26 million, up 10.47% from the same period a year ago.
Net Interest Income and Net Interest Margin
Second quarter 2018 net interest income of $53.17 million increased $7.31 million, up 15.94% from the second quarter a year ago and increased $2.64 million, up 5.22% from the first quarter.
For the first six months of 2018, tax-equivalent net interest income was $104.12 million, an increase of $13.61 million, up 15.04% compared to the same period a year ago.
Second quarter 2018 net interest margin was 3.69%, an improvement of 16 basis points from the 3.53% for the same period in 2017 and remained stable with the first quarter. Second quarter 2018 net interest margin on a fully tax-equivalent basis was 3.71%, an increase of 14 basis points from the 3.57% for the same period in 2017 and also remained stable with the first quarter.
Net interest margin for the first six months of 2018 was 3.69%, an increase of 18 basis points from the 3.51% for the same period in 2017. Net interest margin on a fully tax-equivalent basis for the first six months of 2018 was 3.71%, an increase of 16 basis points from the 3.55% for the same period in 2017.
Second quarter 2018 noninterest income of $25.02 million increased $0.89 million, up 3.68% from the second quarter a year ago and increased $1.22 million, up 5.11% from the first quarter.
For the first six months of 2018, noninterest income was $48.83 million, an increase of $1.39 million, up 2.92% compared to the same period a year ago.
The growth in noninterest income during 2018 compared to a year ago was mainly due to higher equipment rental income resulting from an increase in the average lease portfolio, improved debit card income due to growth in those transactions, higher customer swap fees, improved insurance commissions due to new business, and increased trust and wealth advisory fees, which were offset by reduced gains on the sale of available-for-sale equity securities and lower mortgage banking income.
The increase in noninterest income from the first quarter of 2018 was primarily the result of seasonal trust and wealth advisory tax fees, increased equipment rental income resulting from an increase in the average lease portfolio, and further improvement in debit card income offset by lower insurance contingent commissions and reduced partnership investment gains.
Second quarter 2018 noninterest expense of $45.88 million increased $4.77 million or 11.61% from the second quarter a year ago and was flat from the prior quarter.
For the first six months of 2018, noninterest expense was $91.43 million, an increase of $9.21 million, or 11.20% compared to the same period a year ago.
Excluding depreciation on leased equipment, noninterest expenses were up 12.59% and 11.49% for the second quarter and first six months of 2018, respectively.
The increase in noninterest expense from the same periods a year ago was primarily due to higher salaries as a result of normal merit increases and incentive compensation, increased group insurance costs, a rise in furniture and equipment expense due to increased software maintenance costs and computer processing charges, higher depreciation on leased equipment as the lease portfolio grew and higher valuation adjustments on repossessed assets. In addition, non-recurring 2018 costs were approximately $2.40 million due to consulting fees for a customer relationship management project, a regulatory compliance project, and information technology projects of $1.20 million, repossessed asset valuation adjustments of $0.90 million, and trust losses of $0.30 million.
Noninterest expense was relatively flat from the first quarter of 2018. Increased group insurance costs were offset by reduced valuation adjustments on repossessed assets as the primary factors.
The reserve for loan and lease losses as of June 30, 2018 was 2.13% of total loans and leases compared to 2.10% at March 31, 2018 and June 30, 2017. Net charge-offs of $0.14 million were recorded for the second quarter of 2018 compared with net charge-offs of $0.94 million in the same quarter a year ago and down from the $0.34 million of net charge-offs in the first quarter. Year-to-date net charge-offs of $0.48 million have been recorded in 2018, compared to net charge-offs of $0.37 million for the first half of 2017.
The provision for loan and lease losses was $4.82 million for the second quarter and $8.60 million for the first six months of 2018, an increase of $2.08 million and $4.87 million, respectively, compared with the same periods in 2017.
The ratio of nonperforming assets to loans and leases was 0.89% as of June 30, 2018, compared to 0.66% on June 30, 2017 and 0.74% on March 31, 2018.
As of June 30, 2018, the common equity-to-assets ratio was 11.71%, compared to 11.99% at March 31, 2018 and 12.29% a year ago. The tangible common equity-to-tangible assets ratio was 10.52% at June 30, 2018 and 10.75% at March 31, 2018 compared to 10.98% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 12.15% at June 30, 2018 compared to 12.22% at March 31, 2018 and 12.43% a year ago.
ABOUT 1ST SOURCE CORPORATION
1st Source common stock is traded on the NASDAQ Global Select Market under “SRCE” and appears in the National Market System tables in many daily newspapers under the code name “1st Src.” Since 1863, 1st Source has been committed to the success of the communities it serves. For more information, visit www.1stsource.com.
1st Source serves the northern half of Indiana and southwest Michigan and is the largest locally controlled financial institution headquartered in the area. While delivering a comprehensive range of consumer and commercial banking services through its community bank offices, 1st Source has distinguished itself with highly personalized services. 1st Source Bank also competes for business nationally by offering specialized financing services for new and used private and cargo aircraft, automobiles for leasing and rental agencies, medium and heavy-duty trucks, and construction equipment. The Corporation includes 79 banking centers, 23 1st Source Bank Specialty Finance Group locations nationwide, eight Wealth Advisory Services locations and ten 1st Source Insurance offices.
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, the matters discussed in this document express “forward-looking statements.” Generally, the words “believe,” “contemplate,” “seek,” “plan,” “possible,” “assume,” “expect,” “intend,” “targeted,” “continue,” “remain,” “estimate,” “anticipate,” “project,” “will,” “should,” “indicate,” “would,” “may” and similar expressions indicate forward-looking statements. Those statements, including statements, projections, estimates or assumptions concerning future events or performance, and other statements that are other than statements of historical fact, are subject to material risks and uncertainties. 1st Source cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.
1st Source may make other written or oral forward-looking statements from time to time. Readers are advised that various important factors could cause 1st Source’s actual results or circumstances for future periods to differ materially from those anticipated or projected in such forward-looking statements. Such factors, among others, include changes in laws, regulations or accounting principles generally accepted in the United States; 1st Source’s competitive position within its markets served; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen downturns in the local, regional or national economies or in the industries in which 1st Source has credit concentrations; and other risks discussed in 1st Source’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K, which filings are available from the SEC. 1st Source undertakes no obligation to publicly update or revise any forward-looking statements.
NON-GAAP FINANCIAL MEASURES
The accounting and reporting policies of 1st Source conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures are used by management to evaluate and measure the Company’s performance. Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. These include taxable-equivalent net interest income (including its individual components), net interest margin (including its individual components), the efficiency ratio, tangible common equity-to-tangible assets ratio and tangible book value per common share. Management believes that these measures provide users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency. Other financial holding companies may define or calculate these measures differently.
Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a FTE basis is also used in the calculation of the Company’s efficiency ratio. The efficiency ratio, which is calculated by dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or losses and lease depreciation), measures how much it costs to produce one dollar of revenue. Securities gains or losses and lease depreciation are excluded from this calculation to better match revenue from daily operations to operational expenses. Management considers the tangible common equity-to-tangible assets ratio and tangible book value per common share as useful measurements of the Company’s equity.
See the table marked “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of certain non-GAAP financial measures used by the Company with their most closely related GAAP measures.