1st Source Corporation Reports Record Third Quarter Results
QUARTERLY HIGHLIGHTS
• Net income improved to $19.89 million, up 15.75% over
the third quarter of 2017. Diluted net income per common share improved to
$0.76 from the prior year’s third quarter of $0.66.
• Return on average assets increased to 1.27% and return
on average common shareholders’ equity increased to 10.50% from 1.19% and
9.61%, respectively in the third quarter of 2017.
• Net charge-offs of $10.86 million and nonperforming
assets to loans and leases of 1.00% compared to $0.16 million and 0.64%,
respectively in the third quarter of 2017.
• Average loans and leases grew $434.68 million, up
9.91% from the third quarter of 2017.
• Average deposits grew $562.95 million, up 12.43% from
the third quarter of 2017.
• Net interest income increased $7.13 million, up 15.10%
from the third quarter of 2017.
• Noninterest income decreased $1.53 million, or 5.99%
from the third quarter of 2017 (decreased 8.13% excluding leased equipment
depreciation).
• Noninterest expenses increased $2.88 million or 6.48%
from the third quarter of 2017 (increased 7.57% excluding leased equipment
depreciation).
1st Source Corporation (NASDAQ:
SRCE), parent company of 1st Source Bank, today reported third quarter net
income of $19.89 million, an improvement of 15.75% compared to $17.18 million
reported in the third quarter a year ago. This brought 2018 year-to-date net
income to a record of $60.97 million compared to $50.06 million in 2017, an
increase of 21.80%. Income before taxes was $24.92 million compared to $26.74
million in the third quarter of 2017 and $77.42 million for the first nine
months of 2018 compared to $77.81 million for the same period in 2017. The
year-to-date pretax income comparison was positively impacted by increased net
interest income of $21.25 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 $9.40 million increase in
the provision for loan and lease losses to support loan and lease growth along
with higher charge-offs and a $12.09 million rise in noninterest expense which
includes a $1.29 million increase in repossessed asset write downs.
Non-recurring 2018 costs were approximately $3.65 million.
Diluted net
income per common share for the third quarter of 2018 was $0.76, versus $0.66
in the third quarter of 2017. Diluted net income per common share for the first
nine months of 2018 was $2.33 compared to $1.92 earned a year earlier.
At its
October 2018 meeting, the Board of Directors approved a cash dividend of $0.25
per common share, up 25% from the $0.20 per common share declared a year ago.
The cash dividend is payable to shareholders of record on November 5, 2018 and
will be paid on November 15, 2018.
According
to Christopher J. Murphy III, Chairman, “We are pleased with our increase in
revenue in the third quarter as 1st Source Corporation experienced growth in
average loans and leases and average deposits with some month end seasonal
adjustments. Average loans and leases were up a solid 9.91% for the quarter,
compared to the same period a year ago. Average deposits also increased with
strong growth of 12.43% from this time last year. Net interest income has
increased 15.10% from the third quarter 2017 while noninterest income decreased
5.99% and noninterest expense increased by 6.48% over the same quarter in
2017.”
“Our
biggest credit challenge in the quarter was with larger charge-offs and write
downs. We have written our assets down to what we believe are realizable
values. The majority of the charge-offs is from one large syndicated aircraft
account in which we are a small participant. This credit is unique in both size
and complexity within our portfolio.”
“We were
recently honored to be a part of the annual Jimmy and Rosalynn Carter Work
Project with Habitat for Humanity. Mishawaka, Indiana was selected as the
location for this week-long Carter Build event, and 1st Source Bank sponsored
one of the homes. Members of our staff from across northern Indiana and
southwestern Michigan volunteered their time and talents to help build this
home for a deserving family. Community leadership is one of 1st Source’s values
and this was just one more way we demonstrate it.”
THIRD QUARTER 2018 FINANCIAL RESULTS
Loans
Average
loans and leases of $4.82 billion increased $434.68 million, up 9.91% in the
third quarter of 2018 from the year ago quarter and have increased $52.07
million, up 1.09% from the second quarter. Year-to-date average loans and
leases of $4.73 billion increased $432.89 million, up 10.08% from the first
nine months of 2017.
Deposits
Average
deposits of $5.09 billion grew $562.95 million, up 12.43% for the quarter ended
September 30, 2018 from the year ago quarter and have increased $129.75
million, up 2.62% compared to the second quarter. Average deposits for the
first nine months of 2018 were $4.92 billion, an increase of $493.54 million,
up 11.15% from the same period a year ago.
Net Interest Income and Net Interest Margin
Third
quarter 2018 net interest income of $54.36 million increased $7.13 million, up
15.10% from the third quarter a year ago and increased $1.19 million, up 2.24%
from the second quarter. For the first nine months of 2018, tax-equivalent net
interest income was $158.68 million, an increase of $20.50 million, up 14.83%
compared to the same period a year ago.
Third
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 second
quarter. Third 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 second quarter.
Net
interest margin for the first nine months of 2018 was 3.69%, an increase of 17
basis points from the 3.52% for the same period in 2017. Net interest margin on
a fully tax-equivalent basis for the first nine months of 2018 was 3.71%, an
increase of 15 basis points from the 3.56% for the same period in 2017.
Noninterest Income
Third quarter
2018 noninterest income of $24.06 million decreased $1.53 million, or 5.99%
from the third quarter a year ago and was lower by $0.96 million, or 3.85% from
the second quarter. For the first nine months of 2018, noninterest income was
relatively flat at $72.89 million compared to the same period a year ago.
Noninterest
income during the three and nine months ended September 30, 2018 was lower
compared to a year ago mainly due to reduced gains on the sale of
available-for-sale equity securities. Other factors include decreased mortgage
banking income, and lower customer swap fees offset by higher equipment rental
income resulting from an increase in the average lease portfolio, improved
debit card income due to growth in those transactions, improved insurance
commissions due to new business, and increased trust and wealth advisory fees.
Noninterest Expense
Third
quarter 2018 noninterest expense of $47.34 million increased $2.88 million or
6.48% from the third quarter a year ago and increased $1.47 million or 3.19%
from the prior quarter. For the first nine months of 2018, noninterest expense
was $138.78 million, an increase of $12.09 million, or 9.55% compared to the
same period a year ago. Excluding depreciation on leased equipment, noninterest
expenses were up 7.57% and 10.12% for the third quarter and first nine 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, equipment, and technology costs due to increased
software maintenance and computer processing charges, higher depreciation on
leased equipment due to growth in the lease portfolio and higher loan and lease
collection expenses. In addition, non-recurring 2018 costs were approximately
$3.65 million due to consulting fees of $1.45 million for a customer
relationship management project, a regulatory compliance project, and
information technology projects, repossessed asset valuation adjustments of
$1.90 million, and trust losses of $0.30 million.
Credit
The reserve
for loan and lease losses as of September 30, 2018 was 2.04% of total
loans and leases compared to 2.13% at June 30, 2018 and 2.10% at
September 30, 2017. Net charge-offs of $10.86 million were recorded for
the third quarter of 2018 compared with net charge-offs of $0.16 million in the
same quarter a year ago and up from the $0.14 million of net charge-offs in the
second quarter. The majority of the third quarter charge-offs was related to
one relationship within the aircraft portfolio. Year-to-date net charge-offs of
$11.34 million have been recorded in 2018, compared to net charge-offs of $0.53
million for the first nine months of 2017.
The
provision for loan and lease losses was $6.16 million for the third quarter and
$14.76 million for the first nine months of 2018, an increase of $4.54 million
and $9.40 million, respectively, compared with the same periods in 2017. The
ratio of nonperforming assets to loans and leases was 1.00% as of
September 30, 2018, compared to 0.64% on September 30, 2017 and 0.89%
on June 30, 2018.
Capital
As of
September 30, 2018, the common equity-to-assets ratio was 11.92%, compared
to 11.71% at June 30, 2018 and 12.24% a year ago. The tangible common
equity-to-tangible assets ratio was 10.73% at September 30, 2018 and
10.52% at June 30, 2018 compared to 10.95% a year earlier. The Common
Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 12.38%
at September 30, 2018 compared to 12.15% at June 30, 2018 and 12.52%
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 its clients, individuals, businesses and 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 80
banking centers, 22 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.