Market Overview

1st Source Corporation Reports Record Second Quarter Results, Cash Dividend Declared

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QUARTERLY HIGHLIGHTS

  • Net income was a record $23.39 million, up 6.47% over the second quarter of 2018. Diluted net income per common share was also a record of $0.91, up from the prior year's second quarter of $0.84.
  • Return on average assets of 1.45% and return on average common shareholders' equity of 11.89% compared to 1.43% and 11.96%, respectively in the second quarter of 2018.
  • Net charge-offs of $1.19 million and nonperforming assets to loans and leases of 0.41% compared to $0.14 million and 0.89%, respectively in the second quarter of 2018.
  • Average loans and leases grew $231.03 million, up 4.84% from the second quarter of 2018.
  • Average deposits grew $303.44 million, up 6.12% from the second quarter of 2018.
  • Net interest income increased $3.26 million, up 6.13% from the second quarter of 2018.
  • Noninterest income increased $0.64 million, up 2.56% from the second quarter of 2018 (increased 5.04% excluding leased equipment depreciation).
  • Noninterest expenses increased $1.48 million, up 3.22% from the second quarter of 2018 (increased 4.49% excluding leased equipment depreciation).

1st Source Corporation (NASDAQ:SRCE), parent company of 1st Source Bank, today reported a record high net income of $23.39 million for the second quarter of 2019, an improvement of 6.47% compared to $21.96 million reported in the second quarter a year ago, bringing the 2019 year-to-date net income to $45.58 million compared to $41.08 million in 2018, an increase of 10.96%. The year-to-date net income comparison was positively impacted by increased net interest income of $7.67 million primarily due to higher loan rates and higher average loan and lease balances. It was negatively impacted by a $1.12 million rise in noninterest expense. Non-recurring 2019 items included a negative $1.10 million valuation adjustment on a repossessed asset and $1.32 million gain on the sale of our former headquarters building.

Diluted net income per common share for the second quarter of 2019 was up 8.3% to a record high of $0.91, versus $0.84 in the second quarter of 2018. Diluted net income per common share for the first half of 2019 was $1.76 compared to $1.57 earned a year earlier, a 12.1% increase.

At its July 2019 meeting, the Board of Directors approved a cash dividend of $0.27 per common share, up 8.0% from the $0.25 per common share declared a year ago. The cash dividend is payable to shareholders of record on August 5, 2019 and will be paid on August 15, 2019.

Christopher J. Murphy III, Chairman and Chief Executive Officer, commented, "We are pleased with our record net income in the second quarter as 1st Source Corporation continues to experience organic growth in loans and leases and deposits. Seasonal trends within our specialty finance group portfolios contributed to an increase in average loans and leases during the quarter of 4.84%. Credit quality was also a bright spot for the quarter – the ratio of nonperforming assets to loans and leases of 0.41% was the lowest it has been in over ten years.

"Recently, 1st Source was recognized as one of the 18 banks in the nation to be included in the Keefe, Bruyette & Woods, Inc. (KBW) Bank Honor Roll, with nearly 375 banking institutions having been screened in consideration for the list. Every year, the Bank Honor Roll consists of banking institutions that have had 10 consecutive years of increased earnings per share, and this year's list in unique in that the banks included have done so since the 2009 financial crisis. To be considered for this recognition, banks must be publicly traded institutions with more than $500 million in total assets. For the last 156 years, 1st Source has been built upon strong, steady practices, and our mission has always included giving straight talk and sound advice while keeping our clients' best interests in mind for the long-term. Being named among 18 institutions in our industry that have proven their strength since such a tumultuous time for our country is a welcome confirmation that we continue to be strong and steady and deliver on our mission.

"The second quarter of the year also saw further investment in our banking centers - specifically our Niles and Erskine banking centers located inside the Martin's Super Market stores in Niles, Michigan and South Bend, Indiana, respectively. The two locations underwent complete renovations and have been converted to our signature side-by-side banking model. Side-by-side banking invites the client behind the ‘teller line,' allowing for the Bank's clients and bankers to have a more transparent and inclusive experience. These renovations were part of an overall initiative to update our existing locations and continue our investment in the communities where we live, do business and raise families."

SECOND QUARTER 2019 FINANCIAL RESULTS

Loans

Average loans and leases of $5.00 billion increased $231.03 million, up 4.84% in the second quarter of 2019 from the year ago quarter and have increased $143.21 million, up 2.95% from the first quarter. Year-to-date average loans and leases of $4.93 billion increased $250.11 million, up 5.34% from the first six months of 2018.

Deposits

Average deposits of $5.26 billion grew $303.44 million for the quarter ended June 30, 2019, up 6.12% from the year ago quarter and have increased $205.55 million, up 4.06% compared to the first quarter. Average deposits for the first six months of 2019 were $5.16 billion, an increase of $327.05 million, up 6.76% from the same period a year ago.

Net Interest Income and Net Interest Margin

Second quarter 2019 net interest income of $56.43 million increased $3.26 million, up 6.13% from the second quarter a year ago and increased $1.48 million, up 2.69% from the first quarter. For the first six months of 2019, tax-equivalent net interest income was $111.73 million, an increase of $7.62 million, up 7.32% compared to the same period a year ago.

Second quarter 2019 net interest margin was 3.73%, an improvement of four basis points from the 3.69% for the same period in 2018 and decreased five basis point from the first quarter. Second quarter 2019 net interest margin on a fully tax-equivalent basis was 3.74%, an increase of three basis points from the 3.71% for the same period in 2018 and was lower by five basis points compared to the first quarter. The margin continued to see pressure from deposit competition and rate increases.

Net interest margin for the first six months of 2019 was 3.75%, an increase of six basis points from the 3.69% for the same period in 2018. Net interest margin on a fully-taxable-equivalent basis for the first half of 2019 was 3.77%, an increase of six basis points from the 3.71% for the first half of 2018.

Noninterest Income

Second quarter 2019 noninterest income of $25.66 million increased $0.64 million, up 2.56% from the second quarter a year ago and increased $1.54 million, up 6.38% from the first quarter. For the first six months of 2019, noninterest income was $49.79 million, an increase of $0.96 million, up 1.96% compared to the same period a year ago.

The growth in noninterest income during 2019 compared to a year ago was mainly due to higher debit card income from increased customer use, higher insurance commissions primarily from increased business and higher contingent commissions, reduced losses on the sale of available-for-sale securities, increased customer swap fees and higher claim proceeds on bank owned life insurance. These positives were offset by lower trust and wealth advisory fees resulting from a lower value of assets under management due to stock market movements and reduced net gains on partnership investments.

The increase in noninterest income from the first quarter of 2019 was primarily the result of seasonal trust and wealth advisory tax fees, increased debit card income, growth in deposit account fees, higher customer swap fees, and increased claim proceeds on bank owned life insurance. These positives were offset by reduced insurance commissions from seasonal contingent commissions.

Noninterest Expense

Second quarter 2019 noninterest expense of $47.35 million increased $1.48 million, up 3.22% from the second quarter a year ago and increased $2.15 million, up 4.75% from the first quarter. Excluding depreciation on leased equipment, noninterest expenses were up 4.49% from the second quarter a year ago and up 5.88% from the first quarter. For the first six months of 2019, noninterest expense was $92.56 million, an increase of $1.12 million, or 1.23% compared to the same period a year ago.

The increase in noninterest expense during 2019 compared to a year ago was mainly due to higher salaries as a result of normal merit increases, increased group insurance costs, a rise in furniture and equipment expense due to increased software maintenance costs and equipment depreciation, and growth in the provision for unfunded loan commitments. These increases were offset by higher gains on the sale of fixed assets, decreased incentive compensation from fewer vestings of share-based compensation arrangements, lower business development and marketing costs from fewer marketing promotions, and reduced professional fees from consulting services.

The growth in noninterest expense from the first quarter was primarily the result of fewer gains on the sale of fixed assets, increased business development and marketing expenses, growth in the provision for unfunded loan commitments, and higher group insurance costs, offset by lower repossessed asset valuation adjustments.

Credit

The reserve for loan and lease losses as of June 30, 2019 was 2.05% of total loans and leases compared to 2.07% at March 31, 2019 and 2.13% at June 30, 2018. Net charge-offs of $1.19 million were recorded for the second quarter of 2019 compared with net charge-offs of $0.14 million in the same quarter a year ago and down from the $3.54 million of net charge-offs in the first quarter. The majority of the second quarter charge-off was related to one relationship within the medium and heavy duty truck portfolio.

The provision for loan and lease losses was $4.25 million for the second quarter of 2019, a decrease of $0.57 million compared with the same period in 2018 and a decrease of $0.67 million from the first quarter. The ratio of nonperforming assets to loans and leases was an improved 0.41% as of June 30, 2019, compared to 0.49% on March 31, 2019 and 0.89% on June 30, 2018.

Capital

As of June 30, 2019, the common equity-to-assets ratio was 11.95%, compared to 12.20% at March 31, 2019 and 11.71% a year ago. The tangible common equity-to-tangible assets ratio was 10.82% at June 30, 2019 compared to 11.03% at March 31, 2019 and 10.52% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 11.83% at June 30, 2019 compared to 12.28% at March 31, 2019 and 12.15% a year ago. During the second quarter of 2019, 141,627 shares were repurchased for treasury reducing common shareholders' equity by $6.42 million. During 2019, common shareholders' equity declined by $13.68 million due to 295,787 shares acquired for treasury.

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, 18 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.

(charts attached)

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1st SOURCE CORPORATION

2nd QUARTER 2019 FINANCIAL HIGHLIGHTS

(Unaudited - Dollars in thousands, except per share data)

 

Three Months Ended

 

Six Months Ended

 

June 30,

March 31,

June 30,

 

June 30,

June 30,

 

2019

2019

2018

 

2019

2018

AVERAGE BALANCES

 

 

 

 

 

 

Assets

$

6,487,744

 

$

6,290,386

 

$

6,167,017

 

 

$

6,389,610

 

$

6,053,924

 

Earning assets

6,067,871

 

5,896,697

 

5,776,822

 

 

5,982,757

 

5,665,419

 

Investments

1,001,142

 

987,593

 

948,335

 

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