1st Source Corporation Reports Second Quarter Results
- Net income was $18.50 million, down 20.88% from the second quarter of 2019. Diluted net income per common share was $0.72, down from the prior year’s second quarter of $0.91.
- Cash dividend of $0.28 per common share approved, up 3.70% from the $0.27 per common share declared a year ago.
- Return on average assets of 1.04% and return on average common shareholders’ equity of 8.63% compared to 1.45% and 11.89%, respectively in the second quarter of 2019.
- Average loans and leases grew $466.76 million, up 9.16% from the previous quarter and $563.77 million, up 11.27% from the second quarter of 2019. Excluding the Paycheck Protection Program, growth was relatively flat from the previous quarter and loan balances increased 1.79% from the second quarter of 2019.
- Average deposits increased $538.20 million, or 10.21% from the previous quarter and grew $545.67 million, up 10.36% from the second quarter of 2019.
- Net recoveries were $0.11 million and nonperforming assets to loans and leases were 1.20% compared to net charge-offs of $1.19 million and 0.41%, respectively in the second quarter of 2019.
- Provision was made to the loan and lease losses reserve of $10.38 million compared to $4.25 million in the second quarter of 2019.
- Net interest income decreased $2.43 million, or 4.30% from the second quarter of 2019.
- Noninterest income decreased $0.42 million, or 1.65% from the second quarter of 2019. Excluding leased equipment depreciation, noninterest income increased 4.33%.
- Noninterest expenses decreased $2.53 million, down 5.34% from the second quarter of 2019. Excluding leased equipment depreciation, noninterest expense decreased 3.10%.
1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported net income of $18.50 million for the second quarter of 2020, up 12.73% from the $16.41 million reported in the first quarter of 2020 and down 20.88% from the $23.39 million reported in the second quarter a year ago, bringing the 2020 year-to-date net income to $34.92 million compared to $45.58 million in 2019, a decrease of 23.40%. The year-to-date net income comparison was negatively impacted by an increased provision for loan and lease losses of $12.56 million primarily due to sizeable impairments in a few accounts, the negative economic impact on our portfolio from COVID-19 and higher special attention loan balances in the first half of 2020. Additionally, net interest income decreased $2.53 million due to lower loan rates resulting from the Federal Reserve’s actions to lower interest rates and stimulate the economy in response to the economic effects of COVID-19. Non-recurring 2020 items which added to net income included $0.55 million in FDIC insurance premium credits received, bank owned life insurance claims of $0.09 million and a trust recovery of $0.17 million offset by $0.55 million in mortgage servicing rights impairment charges which reduced net income.
Diluted net income per common share for the second quarter of 2020 was up 12.50% to $0.72 versus $0.64 for the first quarter of 2020 and was down 20.88% versus $0.91 in the second quarter of 2019. Diluted net income per common share for the first half of 2020 was $1.36 compared to $1.76 a year earlier, a 22.73% decrease.
At its July 2020 meeting, the Board of Directors approved a cash dividend of $0.28 per common share, up 3.70% from the $0.27 per common share declared a year ago and equal to that declared in the previous quarter. The cash dividend is payable to shareholders of record on August 4, 2020 and will be paid on August 14, 2020.Christopher J. Murphy III, Chairman and Chief Executive Officer, commented, “The second quarter results reflect a continuation of the impact of COVID-19 which began at the end of the first quarter. We focused our efforts and are pleased to have been able to help our customers deal with the uncertainties caused by the coronavirus pandemic. We believe we remain well-positioned for the long-term, are well-capitalized and have appropriate reserves with a strong balance sheet. That said, the near-term level of uncertainty remains unprecedented both in severity and length of the economic downturn tied to the coronavirus. The gradual easing of shelter-in-place in our markets is promising however, rising infection rates across the country could have further negative impacts on our clients and the markets we serve. In this environment of uncertainty, it is hard to predict what can or will happen and the impact it will have on us. While these are tumultuous times, we will continue our longstanding practice of providing straight talk, sound advice, always keeping our clients’ best interests in mind for the long-term.
“We have provided over 3,350 clients with Paycheck Protection Program (PPP) loans, totaling more than $590 million, helping them save over 59,000 jobs in Indiana and Michigan. From what we can glean from the Government’s release of the PPP program data through quarter end, we are the leading SBA lender among banks headquartered in Indiana with less than $10 billion in assets, having provided the highest number of PPP loans to businesses within the state among this group. Through the end of the quarter, 77% of the 3,350 PPP loans disbursed were for less than $150,000. We truly are serving our small business clients.
“In addition, we have approved and processed more than $835 million of loan modifications across our loan portfolios as of June 30, 2020. The majority of these in dollar terms are for customers primarily in the transportation (including auto rental and bus) and the hotel industries. We continue to take a long-term view of dealing with COVID-19 and its impact on the markets we serve. We are pleased to have entered this period well-capitalized, with appropriate reserves and a strong balance sheet so we are able to properly help our clients.
“During the second quarter, our net interest margin experienced the full impact of the 150 basis point decrease in the target Federal Funds Rate in March 2020 by the Federal Reserve. This resulted in a compression of our net interest margin as our earning assets repriced faster than interest-bearing liabilities. We also saw an increase in nonaccrual loans and leases during the second quarter as clients began to feel the full impact of business closures and stay-at-home orders in markets we serve. The majority of our present nonaccrual loans are tied to four customer relationships in our auto and light truck and construction equipment portfolios. During the second quarter, we recorded a provision for loan and lease losses of $10.38 million as we continue to monitor the negative impacts of the coronavirus pandemic for the intermediate and longer term. Continuing a positive trend from the first quarter, our residential mortgage loan business remained on record pace with high production volumes and profitable results.
“In April, Keefe, Bruyette & Woods, Inc. (KBW) announced their annual Bank Honor Roll list, with 1st Source being named among those recognized. The Bank Honor Roll consists of banking institutions that have had 10 consecutive years of increased earnings per share. 1st Source is among the 15 banks in the nation included in the Bank Honor Roll this year, with roughly 375 banking institutions having been analyzed in consideration for the list. To be considered for this recognition, banks must be publicly traded institutions with more than $500 million in assets. Given the economic uncertainty resulting from the coronavirus pandemic, this was welcome confirmation that our history of strong, steady practices focusing on our clients’ best interests for the long-term has been successful.
“During the second quarter, we announced that the 1st Source Bank Board of Directors had elected Mr. Jim Seitz, Vice Chairman of the Board through the next Annual Meeting and Ms. Andrea Short, Chief Financial Officer, to the additional position as President of 1st Source Bank. Jim has served as President for eight years and has been an officer here for 35 years. Throughout his career, he has committed himself to delivering outstanding client service and supporting his colleagues in the strongest manner possible. He leaves a wonderful legacy of servant leadership, and his guidance to our Board and Andrea in the coming year will be helpful in the transition.
“Andrea earned her promotion to President of 1st Source Bank by demonstrating a strong track record of initiating and leading change, driving results, and by strengthening operational risk management and compliance. She was elected Chief Financial Officer of 1st Source Bank in 2013 and will continue in this capacity as well as serving as President. I am deeply grateful for and congratulate my two long-term colleagues as they enter these exciting new chapters in their lives. 1st Source has benefited tremendously from their dedication and leadership, and we look forward to their continued impact on our organization.
“Coincident with these promotions, a number of other promotions and changes were made to assure strong leadership for 1st Source for the future. All of our Consumer and Small Business Branch sales and service efforts, deposit offerings, and consumer and mortgage lending have been brought under the leadership of Mr. Ron Zeltwanger. Our Regional Presidents will report to Ron and he will report to Andrea Short. Similarly, Mr. Larry Mayers will direct all of our efforts serving business clients including our very successful SBA lending unit, Retirement Planning services, and our business banking practice groups across all regions. He also picks up direct responsibility for our national Solar financing business and will continue as our Fort Wayne Regional President. The business and operating units serving St. Joseph County, Indiana and Southwestern Michigan have been combined into the Central Region and Ms. Shelli Alexander was promoted to Regional President leading this unit. Also, a new group was created under the leadership of Mr. Kevin Murphy bringing together Marketing, Information Technology, our Virtual Branch, and digital strategy efforts serving clients and improving internal operations. Lastly, our Wealth Advisory Services and Insurance Group will now report to Mr. John Griffith, EVP and Chief Administrative Officer, giving new focus to its growth and profitability. All of these changes continue our process of building strong leadership for the future.” Mr. Murphy concluded.
SECOND QUARTER 2020 FINANCIAL RESULTS
Average loans and leases of $5.57 billion increased $563.77 million, up 11.27% in the second quarter of 2020 from the year ago quarter and have increased $466.76 million, up 9.16% from the first quarter. Year-to-date average loans and leases of $5.33 billion increased $401.60 million, up 8.15% from the first six months of 2019. Loan growth is primarily from PPP originations.
Average deposits of $5.81 billion grew $545.67 million for the quarter ended June 30, 2020, up 10.36% from the year ago quarter and have increased $538.20 million, or 10.21% from the first quarter. Average deposits for the first six months of 2020 were $5.54 billion, an increase of $378.77 million, up 7.34% from the same period a year ago. Deposit growth is primarily from PPP loan fundings and government stimulus payments.
Net Interest Income and Net Interest Margin
Second quarter 2020 net interest income of $54.00 million decreased $2.43 million, or 4.30% from the second quarter a year ago and decreased $0.84 million, down 1.54% from the previous quarter. For the first six months of 2020, tax-equivalent net interest income was $109.13 million, a decrease of $2.60 million, or 2.33% compared to the same period a year ago.
Second quarter 2020 net interest margin was 3.23%, a decrease of 50 basis points from the 3.73% for the same period in 2019 and decreased 34 basis points from the previous quarter. Second quarter 2020 net interest margin on a fully tax-equivalent basis was 3.24%, a decrease of 50 basis points from the 3.74% for the same period in 2019 and was lower by 34 basis points compared to the previous quarter. The margin continues to experience pressure from the numerous Federal Reserve interest rate decreases during the second half of 2019 and the first three months of 2020. Additionally, PPP loans had a negative impact on the net interest margin of four basis points for the quarter.
Net interest margin for the first six months on 2020 was 3.39%, a decrease of 36 basis points from the 3.75% for the same period in 2019. Net interest margin on a fully-taxable-equivalent basis for the first half of 2020 was 3.40%, a decrease of 37 basis points from the 3.77% for the first half of 2019. PPP loans had a negative impact of five basis points on the year-to-date net interest margin.
Second quarter 2020 noninterest income of $25.24 million decreased $0.42 million, or 1.65% from the second quarter a year ago and increased $0.62 million, or 2.51% from the first quarter of 2020. For the first six months of 2020, noninterest income was $49.86 million, relatively flat from the same period a year ago.
Noninterest income during the three months ended June 30, 2020 was lower compared to a year ago mainly from lower service charges on deposit accounts due to fewer overdraft and non-sufficient fund transactions and less equipment rental income due to a reduction in the size of the average equipment rental portfolio offset by improved mortgage banking income driven by gains on a higher volume of loan sales. Additionally, we recognized a $0.55 million impairment charge on our mortgage servicing rights during the second quarter of 2020 as prepayment speeds increased.
The increase in noninterest income from the first quarter of 2020 was primarily the result of improved mortgage banking income driven by gains on a higher volume of loan sales, seasonal trust and wealth advisory tax fees, and higher customer swap fees, and increased debit card income offset by lower equipment rental income due to a reduction in the size of the average equipment rental portfolio, decreased service charges on deposit accounts due to fewer overdraft and non-sufficient fund transactions, and a $0.55 million impairment charge on our mortgage servicing rights during the second quarter of 2020.
Second quarter 2020 noninterest expense of $44.83 million decreased $2.53 million, or 5.34% from the second quarter a year ago and decreased $1.71 million, down 3.67% from the prior quarter. Excluding depreciation on leased equipment, noninterest expenses were down 3.10% from the second quarter a year ago and down 3.47% from the prior quarter. For the first six months of 2020, noninterest expense was $91.36 million, a decrease of $1.20 million, down 1.29% compared to the same period a year ago.
The decrease in noninterest expense during the second quarter of 2020 compared to a year ago was mainly due to lower leased equipment depreciation from a reduction in the average equipment rental portfolio, less professional consulting fees, decreased group insurance costs on fewer claims and lower business development expenses. These decreases were offset by higher salaries as a result of normal merit increases and a rise in general collection and repossession costs.
The decrease in noninterest expense from the prior quarter was primarily the result of reduced business development expenses, a decrease in the valuation provision for interest rate swaps with customers, and higher deferred salary expense on PPP loan originations. These decreases were offset by increased incentives, fewer gains on the sale of operating lease equipment and higher collection and repossession expenses.
The reserve for loan and lease losses as of June 30, 2020 was 2.31% of total loans and leases compared to 2.35% at March 31, 2020 and 2.05% at June 30, 2019. The reserve calculation includes PPP loans which are guaranteed by the SBA. Excluding these loans from the calculation results in a reserve of 2.54% at June 30, 2020 compared to 2.35% at March 31, 2020. Net recoveries of $0.11 million were recorded for the second quarter of 2020 compared with net charge-offs of $1.19 million in the same quarter a year ago and $1.81 million of net charge-offs in the prior quarter.
The provision for loan and lease losses was $10.38 million for the second quarter of 2020, an increase of $6.13 million compared with the same period in 2019 and a decrease of $0.98 million from the first quarter of 2020. The ratio of nonperforming assets to loans and leases was 1.20% as of June 30, 2020, compared to 0.68% on March 31, 2020 and 0.41% on June 30, 2019. Excluding PPP loans, the ratio of non-performing assets to loans and leases was 1.33% at June 30, 2020 and 0.68% at March 31, 2020.
As of June 30, 2020, the common equity-to-assets ratio was 11.74%, compared to 12.63% at March 31, 2020 and 11.95% a year ago. The tangible common equity-to-tangible assets ratio was 10.73% at June 30, 2020 compared to 11.53% at March 31, 2020 and 10.82% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 12.76% at June 30, 2020 compared to 12.57% at March 31, 2020 and 11.83% a year ago. All of the June 30, 2020 calculations except the regulatory capital ratios are impacted by the inclusion of PPP loan balances at the close of the quarter. There were no shares repurchased for treasury during 2020.