1st Source Corporation announces third quarter earnings

QUARTERLY HIGHLIGHTS

• Net income improved to $14.26 million and diluted net income per common share improved to $0.55 from the prior year's quarter.
• Return on average assets of 1.05% and return on average common shareholders' equity of 8.47%.
• Net charge-offs of $4.63 million and nonperforming assets to loans and leases of 0.68%. 
• Average loans and leases grew $278.36 million or 7.12% from the third quarter of 2015.
• Average deposits grew $357.46 million or 8.95% from the third quarter of 2015. 
• Net interest income increased $0.49 million or 1.15% from the third quarter of 2015.
• Noninterest income increased $1.53 million or 7.25% from the third quarter of 2015 (increased 4.96% excluding equipment rental income). 
• Noninterest expenses increased slightly from the third quarter of 2015 (decreased 1.75% excluding leased equipment depreciation). 

 

South Bend, IN - 1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported net income of $14.26 million for the third quarter of 2016, compared to $13.93 million reported in the third quarter a year ago bringing the 2016 year-to-date net income to $42.56 million compared to $43.07 million in 2015. The year-to-date net income comparison was negatively impacted by a reduction in net interest recoveries of $1.45 million, a higher provision for loan and lease losses of $2.93 million, and by the writedown of an available-for-sale equity investment. These negatives were partially offset by gains of $1.86 million on a Volcker Rule required liquidation of a partnership investment and gains of $0.99 million on the sale of investment securities available-for-sale.

 

Diluted net income per common share for the third quarter of 2016 was $0.55, versus $0.53 in the third quarter of 2015. Diluted net income per common share was $1.63 for the first nine months of 2016 and 2015.

 

At its October 2016 meeting, the Board of Directors approved a cash dividend of $0.18 per common share. The cash dividend is payable to shareholders of record on November 1, 2016 and will be paid on November 11, 2016. This brings dividends this year to $0.720 per common share compared to $0.671 per common share at the same time last year.

 

According to Christopher J. Murphy III, Chairman, “We again saw healthy growth in loans, leases and deposits this quarter as we continued to add new clients to the bank. Average loans and leases were up a solid 7.12% from a year ago along with a strong average deposit increase of 8.95% during that same period. We had a steady performance overall, with expenses held flat and net income up slightly for the quarter compared to third quarter 2015.”

 

“While we are pleased with this growth, recent consolidation of clients in some of the industries we serve is likely to lead to payoffs and reduced opportunities in these industries. Also, continued low interest rates are a challenge to holding our net interest margin stable.”

 

“Earlier this month, we opened our 81st banking center in a fast growing area of Elkhart, Indiana, and next month we will open a new larger office in the heart of downtown Warsaw, Indiana, replacing our current downtown location. As always, we remain committed to helping our clients achieve security, build wealth and realize their dreams by giving straight talk and sound advice, keeping their best interests in mind for the long term.” Mr. Murphy concluded.

 

 

Average loans and leases of $4.19 billion increased $278.36 million, or 7.12% in the third quarter of 2016 from the year ago quarter and have increased $84.23 million, or 2.05% from the second quarter. Year to date average loans and leases of $4.10 billion increased $305.36 million, or 8.04% from the first nine months of 2015.

 

Deposits

Average deposits of $4.35 billion grew $357.46 million, or 8.95% for the quarter ended September 30, 2016 from the year ago quarter and have increased $52.85 million, or 1.23% compared to the second quarter. Average deposits for the first nine months of 2016 were $4.27 billion an increase of $355.35 million or 9.08% from the same period a year ago.

 

Net Interest Income and Net Interest Margin

Third quarter 2016 net interest income of $42.69 million increased $0.49 million, or 1.15% from the third quarter a year ago and increased $0.40 million, or 0.95% from the second quarter.

 

For the first nine months of 2016, net interest income was $126.28 million, an increase of $2.97 million, or 2.41% compared to the same period a year ago. Net interest recoveries for the first nine months of 2016 were down $1.45 million from the first nine months of 2015, resulting in a 4 basis point reduction to the net interest margin.

 

Third quarter 2016 net interest margin was 3.35%, a decrease of 19 basis points from the 3.54% for the same period in 2015 and decreased 6 basis points from the 3.41% in the second quarter. Third quarter 2016 net interest margin on a fully tax-equivalent basis was 3.39%, a decrease of 18 basis points from the 3.57% for the same period in 2015 and decreased 6 basis points from the 3.45% in the second quarter.

 

Net interest margin for the first nine months of 2016 was 3.39%, a decrease of 17 basis points from the 3.56% for the same period in 2015.Net interest margin on a fully tax-equivalent basis for the first nine months of 2016 was 3.43%, a decrease of 17 basis points from the 3.60% for the same period in 2015.

 

Noninterest Income

Noninterest income increased $1.53 million or 7.25% and $4.18 million or 6.69% in the three and nine month periods ended September 30, 2016, respectively over the same periods a year ago. The increase in noninterest income during the third quarter was mainly due to higher equipment rental income related to an increase in the average equipment rental portfolio and gains on the sale of available-for-sale equity securities, which was offset by lower monogram fund income and decreased customer swap fees. The increase in noninterest income during the first nine months of 2016 was primarily due to higher equipment rental income related to an increase in the average equipment rental portfolio, gains on the liquidation of a partnership investment required by the Volcker Rule and gains on the sale of available-for-sale equity securities, which was offset by lower monogram fund income, an other than temporary writedown on an available-for-sale equity security and decreased customer swap fees.

 

Noninterest expense was flat for the quarter ended September 30, 2016 and increased $4.51 million or 3.85% for the first nine months of 2016, respectively over the comparable periods a year ago. The increase in noninterest expense was primarily due to higher depreciation on leased equipment, furniture and equipment and increased loan and lease collection and repossession expenses offset by reduced residential mortgage foreclosure expenses, business development and marketing and lower FDIC insurance assessments. Depreciation on leased equipment was higher as a result of an increase in the average equipment rental portfolio. Excluding depreciation on leased equipment, noninterest expenses were up 1.67%. Furniture and equipment expense was higher due to increased software maintenance costs, depreciation on new equipment with banking center remodels and computer processing charges. Loan and lease collection and repossession expenses increased mainly due to lower recoveries on repurchased mortgage loans, fewer gains on the sale of other real estate owned and repossessions.

 

Credit

The reserve for loan and lease losses as of September 30, 2016 was 2.13% of total loans and leases compared to 2.20% at June 30, 2016 and 2.22% at September 30, 2015. Net charge-offs of $4.63 million were recorded for the third quarter of 2016 compared with net recoveries of $0.04 million in the same quarter a year ago. Year to date, net charge-offs of $4.31 million have been recorded in 2016, compared to net recoveries of $0.39 million for the first nine months of 2015.

 

Due primarily to an increase in loan and lease outstandings, the provision for loan and lease losses for the third quarter 2016 increased $1.08 million compared with the same period in 2015 and was comparable to the second quarter. The provision for loan and lease losses for the first nine months of 2016 was $5.09 million up $2.93 million from the same period in 2015.

 

The ratio of nonperforming assets to net loans and leases was 0.68% as of September 30, 2016, comparable to the  0.66% on September 30, 2015 and up from the 0.49% on June 30, 2016.

 

As of September 30, 2016 and June 30, 2016, the common equity-to-assets ratio was 12.30%, compared to 12.52% a year ago. The tangible common equity-to-tangible assets ratio was 10.93% at September 30, 2016 and 10.90% at June 30, 2016 compared to 11.04% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 12.35% at September 30, 2016 compared to 12.20% at June 30, 2016 and 12.48% a year ago. During 2016, the Company repurchased $8.03 million of common stock in several open market transactions.

 

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 81 community banking centers in 17 counties, 8 trust and wealth management locations, 10 1st Source Insurance offices, as well as 22 specialty finance locations nationwide.

 

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.

 

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