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Investor Relations · Jul 21st, 2022
QUARTERLY RESULTS
- Net income was $29.31 million for the quarter, down $0.91 million or 3.01% from the second quarter of 2021. Excluding tax-effected PPP income, net income was a record $28.47 million for the quarter, up $1.06 million or 3.87% from the second quarter of 2021. Diluted net income per common share was $1.18, down $0.01 from the prior year’s second quarter of $1.19.
- Cash dividend of $0.32 per common share was approved, up 3.22% from the cash dividend declared a year ago.
- Small Business Administration (SBA) forgiveness and customer pay downs of Paycheck Protection Program (PPP) loans amounted to $29.84 million during the quarter which contributed to the recognition of $1.03 million in PPP-related loan fees in the quarter down from $158.41 million in forgiveness and $2.59 million in fees in the second quarter of 2021.
- Average loans and leases net PPP loans grew $168.96 million in the second quarter, up 3.20% (12.8% annualized growth) from the previous quarter and $335.87 million, up 6.58% from the second quarter of 2021.
- Tax-equivalent net interest margin was 3.32%, up 17 basis points from the second quarter a year ago.
- Mortgage banking income was $1.06 million, down $1.80 million, or 62.85% from the second quarter a year ago.
1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported quarterly net income of $29.31 million for the second quarter of 2022, down 3.01% from the $30.22 million reported in the second quarter a year ago, bringing the 2022 year-to-date net income to $56.70 million compared to $58.33 million in 2021. Excluding tax-effected PPP income, net income was a record $28.47 million for the quarter, up $1.06 million or 3.87% from the second quarter of 2021. Diluted net income per common share for the second quarter of 2022 was $1.18 versus $1.19 in the second quarter of 2021. Diluted net income per common share for the first half of 2022 was $2.28 compared to $2.29 a year earlier.
At its July 2022 meeting, the Board of Directors approved a cash dividend of $0.32 per common share, up 3.22% from the $0.31 per common share declared a year ago. The cash dividend is payable to shareholders of record on August 2, 2022 and will be paid on August 12, 2022.
Christopher J. Murphy III, Chairman and Chief Executive Officer, commented, “We are pleased to announce another strong quarter. Average loans grew $335.87 million or 6.58% net of Paycheck Protection Program (PPP) loans from the second quarter last year. Average deposits increased $517.14 million, up 8.24% from the prior year second quarter. At the end of the second quarter, we had helped clients submit PPP loan forgiveness to the SBA for over 99% of all PPP loans we originated. Our tax-equivalent net interest margin for the quarter was 3.32% compared to 3.15% in the prior year second quarter. The increase in margin this quarter helped defray the expected reduction in PPP loan fees and mortgage banking income since the same period last year. It remains to be seen whether the numerous Federal Reserve rate hikes during the first half of 2022 and any future adjustments can successfully tame runaway inflation as we move further into 2022 and beyond.
“We were very pleased to learn during the second quarter that 1st Source was the recipient of multiple honors that recognize our commitment to our clients, shareholders and team members. 1st Source was named among the Keefe, Bruyette & Woods, Inc. (KBW) Bank Honor Roll for the fourth consecutive year. We are proud to be one of the 17 honorees, placing us among the top 5% of eligible banks in the country. To be considered, banks must be publicly traded institutions with more than $500 million in total assets and 10 consecutive years of increased earnings per share. It is our focus on quality earnings, investing for the future, building a strong balance sheet, capital, and reserves that earned 1st Source this recognition and allowed us to continue to meet the challenges the pandemic presented. Receiving this recognition for the fourth year in a row is a great honor, and welcome confirmation of the success of our continued focus on the long-term has been successful.
“1st Source was also recognized by Forbes twice in recent months. We were named to the Forbes ‘Best Employers for Diversity’ list. We were also included on the Forbes ‘Best In State Banks’ list, ranking #3 in Indiana. Both lists were compiled in partnership with market research firm Statista, and both were the result of surveys conducted of our employees and clients, respectively. First and foremost, an inclusive culture that welcomes and values all people as part of our workforce is extremely important to us and to our future success as a financial institution and employer. Being named to this list signals to us that our momentum in the vital area of diversity, equity and inclusion is being felt, embraced, and celebrated by our team. Additionally, being named among the ‘Best In State Banks’ in Indiana by our clients is an equally important and gratifying recognition for us. We strive every day to show our clients they have made the right choice for their financial future by entrusting us to be their partner. Being named one of the best banks in Indiana by our clients lets us know that hard work is paying off, and that we are living our mission to help people achieve security, build wealth and realize their dreams in all that we do.”
“In addition, 1st Source was recognized by the Business Development Corporation (BDC) as the top lender of SBA 504 loans for the years 2020 and 2021 and one of the top long term small business lenders in the state. In both years, 1st Source had the highest number of SBA 504 loan approvals, as well as the highest dollar amount in approvals with the BDC. This honor as top SBA 504 lender by the BDC is our latest recognition for small business lending. We have also received the Community Lender ‘Gold Level Award’ by the Indiana District of the U.S. Small Business Administration as the top SBA lender of banks our size in the state nine years in a row (which was detailed in a previous earning release). Small businesses have been challenged greatly throughout the pandemic, and we made it our focus to serve small businesses in any way we were able. This recognition shows the positive impact of our laser-like focus on small businesses, and we’re proud of the dedication and superior service our business banking and support teams have provided along the way.
“Lastly, we announced in April the election of Isaac P. Torres to our Board of Directors. Mr. Torres is President and Chief Executive Officer of InterCambio Express, Inc., an internet-based money transfer service with a U.S.A. headquarters in Elkhart, Ind. and a Mexican subsidiary located in Puebla, Mexico. Mr. Torres has expertise in internet-based industries and international payment systems as well as extensive skills in finance, accounting, compliance and international business. We are pleased our shareholders voted to add such a strong leader to our Board of Directors and we are certain Mr. Torres will help the Company deliver on its mission to help our clients achieve security, build wealth and realize their dreams by living our values and keeping our clients’ best interest in mind for the long-term. His background and experience blend well with our already strong Board, and his strategic guidance and unique perspective will add value to the future of our organization. At the time of this election, three current board members – John F. Affleck-Graves, Chaired Professor of Finance, and former Executive Vice President and Chief Financial Officer of the University of Notre Dame, Daniel B. Fitzpatrick, founder, Chairman and Chief Executive Officer of Quality Dining, Inc., and Christopher J. Murphy IV, co-founder, owner and Chief Executive Officer of Catharsis Productions, LLC – were also re-elected to continue their service on the 1st Source Corporation Board of Directors. All four above mentioned directors have been elected to terms that end April 2025 and will be subject to re-election at that time,” Mr. Murphy concluded.
SECOND QUARTER 2022 FINANCIAL RESULTS
Loans
Second quarter average loans and leases of $5.47 billion increased $335.87 million, up 6.58% net of PPP loans from the year ago quarter and increased $168.96 million, up 3.20% net of PPP loans from the previous quarter. Year-to-date average loans and leases of $5.40 billion increased $261.18 million, up 5.12% net of PPP loans from the first six months of 2021. PPP forgiveness and customer payments totaled $29.84 million in the second quarter of 2022 and $66.44 million in the first half of 2022. PPP loans of $9.13 million remained outstanding which is net of $0.21 million in unearned fees as of June 30, 2022. The solar, auto and light truck, aircraft and construction equipment portfolios all grew in the second quarter of 2022 compared to the second quarter of 2021 and the previous quarter.
Deposits
Average deposits of $6.80 billion grew $517.14 million for the quarter ended June 30, 2022, up 8.24% from the year ago quarter and increased $178.92 million, up 2.70% from the previous quarter. Average deposits for the first six months of 2022 were $6.71 billion, an increase of $576.44 million, up 9.40% from the same period a year ago. Deposit growth over the last year came from business and consumer clients while brokered deposits have declined. The second quarter increase over the linked quarter was primarily attributable to seasonal public fund deposit inflows.
Net Interest Income and Net Interest Margin
Second quarter 2022 tax-equivalent net interest income of $63.59 million increased $6.53 million, up 11.45% from the second quarter a year ago and grew $3.86 million, up 6.46% from the previous quarter. For the first six months of 2022, tax-equivalent net interest income was $123.31 million, an increase of $8.73 million, up 7.61% from the first half of 2021. We recognized $1.03 million in PPP loan fees during the quarter and $2.50 million during the first half of 2022 compared to $2.59 million in the previous year quarter and $6.57 million during the first half of 2021.
Second quarter 2022 net interest margin was 3.31%, an increase of 17 basis points from the 3.14% for the same period in 2021 and an increase of 14 basis points from the previous quarter. On a fully tax-equivalent basis, second quarter 2022 net interest margin was 3.32%, an increase of 17 basis points from the 3.15% for the same period in 2021 and was higher by 14 basis points compared to the previous quarter. Non-recurring items during the quarter contributed 11 basis points of the 17-basis point increase. Those items include PPP loans of two basis points, lower interest expense on mandatorily redeemable securities due to book value adjustments of four basis points and net interest recoveries of five basis points.
Net interest margin for the first six months of 2022 was 3.24% which was equal to the first six months of 2021. Similarly, net interest margin on a fully-tax-equivalent basis for the first half of 2022 was 3.25% which was equal to the prior year. PPP loans had a positive impact on the net margin of six basis points for the first half of 2022 and the first half of 2021.
Multiple Federal Reserve rate increases during 2022 contributed to net interest margin expansion as loans repriced faster than deposits during the second quarter of 2022 following significant compression after rate decreases during the first quarter of 2020 in response to the COVID-19 pandemic.
Noninterest Income
The reduction for both periods is mainly from reduced mortgage banking volumes resulting in lower income from loans retained and those originated and sold in the secondary market. Demand for mortgages has continued to decline as refinancing slowed and the number of homes for sale remains low. Equipment rental income continued to shrink as demand for leases declined. This was offset by a rise in service charges on deposit accounts and the absence of losses on the sale of investment securities. In addition to these, the decrease in noninterest income from the prior quarter was mainly due to decreased insurance commissions due to seasonal contingent commissions and this was offset by increased debit card income from a higher volume of debit card transactions.
Noninterest Expense
Second quarter 2022 noninterest expense of $45.66 million increased $0.46 million, or 1.01% from the second quarter a year ago and increased $0.32 million, or 0.70% from the prior quarter. For the first six months of 2022, noninterest expense was $90.99 million, an increase of $1.65 million, or 1.85% compared to the same period in 2021.
The increase in noninterest expense from the second quarter a year ago was mainly the result of a higher loan loss provision for unfunded loan commitments, increased data processing charges for technology projects, and higher business development costs tied to fewer COVID-19 restrictions and offset by decreased leased equipment depreciation as the average equipment rental portfolio continues to decline and lower collection and repossession expense.
The increase in noninterest expense from the prior quarter was primarily the result of increased legal and professional consulting fees, a rise in business development and marketing expense tied to marketing campaigns and higher data processing charges offset by a decrease in collection and repossession expense, lower net occupancy expense from snow removal costs during the previous quarter and decreased leased equipment depreciation.
Credit
The allowance for loan and lease losses as of June 30, 2022 was 2.39% of total loans and leases compared to 2.41% at March 31, 2022 and 2.49% at June 30, 2021. The allowance calculation includes PPP loans which are guaranteed by the SBA. Excluding these loans from the calculation results in an allowance of 2.40% at June 30, 2022, compared to 2.43% at March 31, 2022 and 2.63% at June 30, 2021. Net recoveries of $0.40 million were recorded for the second quarter of 2022 compared with net charge-offs of $0.16 million in the same quarter a year ago and $0.23 million of net recoveries in the prior quarter. The majority of recoveries during the quarter were related to the aircraft and consumer portfolios.
The provision for credit losses was $2.50 million for the second quarter of 2022, an increase of $5.53 million compared with the same period in 2021 and an increase of $0.27 million from the previous quarter. The ratio of nonperforming assets to loans and leases was 0.60% as of June 30, 2022, compared to 0.66% on March 31, 2022 and 1.06% on June 30, 2021. Excluding PPP loans, the ratio of non-performing assets to loans and leases was unchanged at June 30, 2022, 0.67% at March 31, 2021 and 1.13% at June 30, 2021. While nonperforming assets showed improvement during the quarter, the allowance for loan and lease losses increased at June 30, 2022 due to loan growth, economic uncertainty stemming from the war in Ukraine, inflationary pressures and prolonged supply chain disruptions.
Capital
As of June 30, 2022, the common equity-to-assets ratio was 10.66%, compared to 10.79% at March 31, 2022 and 11.68% a year ago. The tangible common equity-to-tangible assets ratio was 9.72% at June 30, 2022 compared to 9.85% at March 31, 2022 and 10.70% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 13.79% at June 30, 2022 compared to 13.88% at March 31, 2022 and 13.62% a year ago. During the second quarter of 2022, 104,400 shares were repurchased for treasury reducing common shareholders’ equity by $4.66 million.
Book value per share declined to $34.74 primarily due to non-credit-related, negative market value adjustments to our investment securities available-for-sale portfolio during the quarter. Market value adjustments were the result of changes in interest rates, market spreads and market conditions subsequent to purchase.