1st Source Corporation Reports Third Quarter Results, Cash Dividend Declared

1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported net income of $20.06 million for the third quarter of 2020, up 8.41% from the $18.50 million reported in the second quarter of 2020 and down 17.92% from the $24.44 million reported in the third quarter a year ago, bringing the 2020 year-to-date net income to $54.97 million compared to $70.02 million in 2019, a decrease of 21.49%. The year-to-date net income comparison was negatively impacted by an increased provision for loan and lease losses of $18.15 million primarily due to sizeable impairments in a few accounts, the negative economic impact on our clients from COVID-19 and higher special attention loan balances in the first nine months of 2020. Additionally, net interest income decreased $4.86 million due to lower loan and investment 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. These negatives were offset by improved noninterest income driven primarily by higher mortgage financing income. 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 $0.30 million and a trust recovery of $0.17 million. These additions to income were offset by $1.40 million of negative valuation adjustments on repossessed assets and $0.81 million in mortgage servicing rights impairment charges.

Diluted net income per common share for the third quarter of 2020 was up 8.33% to $0.78 versus $0.72 for the second quarter of 2020 and was down 17.89% versus $0.95 in the third quarter of 2019. Diluted net income per common share for the first nine months of 2020 was $2.14 compared to $2.72 a year earlier, a 21.32% decrease.

At its October 2020 meeting, the Board of Directors approved a cash dividend of $0.28 per common share, equal to that declared in the previous quarter and down 3.45% from the $0.29 per common share declared a year ago. The cash dividend is payable to shareholders of record on November 3, 2020 and will be paid on November 13, 2020.

Christopher J. Murphy III, Chairman and Chief Executive Officer, commented, “The third quarter continued to provide operating and financial challenges but I am pleased with our overall results and our efforts to work with clients through these difficult times. Although our net income is down from the third quarter of 2019, we did see improvement from the second quarter 2020 while also providing $9.30 million to the reserve for loan and lease losses as we continue to work through the immediate and longer term negative impacts on our clients from the coronavirus pandemic. Continuing a positive trend from the first and second quarters, our residential mortgage loan business increased its production volumes and profitability enjoying the second highest quarterly volume in 10 years due to record low long term interest rates.

“During the quarter, we began working with our Paycheck Protection Program (PPP) clients to submit loan forgiveness applications to the Small Business Administration (SBA) and were pleased with the SBA’s announcement of a streamlined loan forgiveness application for loans $50,000 or less. Of the 3,540 PPP loans we originated, 1,972 loans were for $50,000 or less. Our focus now is to help all of our small business clients successfully complete this forgiveness process. As of mid-October, we had submitted over $100 million in PPP loan forgiveness requests to the SBA. While uncertainty remains concerning the forgiveness process, we anticipate the process to be finished or nearly finished by the end of the second quarter of 2021.

“Last quarter, we reported on COVID-19 related loan modifications across our portfolios. That number peaked at approximately $1 billion and by the close of the quarter over 80% had completed their modification term and did not require further deferral. Clients in certain industries in our loan portfolios though have been negatively impacted more than others. These include transportation (particularly auto rental and charter bus) clients and hotel industry clients. For those, further deferrals were required as these industries slowly return back to more normal operations. We will continue to take a long-term view of working with our clients who need further deferral extensions where appropriate.

“During the third quarter, we saw an increase in nonaccrual loans and leases predominately from our bus segment. The majority of the remaining nonaccrual loans are tied to four customer relationships in our auto and light truck and construction equipment portfolios.

“Throughout the pandemic, our focus has remained on keeping our clients, our colleagues, and families safe so we can deliver the highest level of service. In the spring, we made the decision to provide by-appointment client service in our banking center lobbies to ensure everyone’s safety, both clients and colleagues, allowing us to screen visitors for symptoms, and conduct swift and accurate contract tracing if needed. This approach has served us well and, with a few exceptions, we have made the decision to keep this approach in place for the time being. Our drive-up teller lanes are serving clients well and our ATMs, Online Banking, Mobile App and Telephone Banking are accessible 24/7. We have opened our supermarket banking centers and, in some locations where virus levels are low, we have opened banking facilities where we do not have drive-up teller lanes to conduct transactions at a distance.

“As mentioned earlier this year, we have a dedicated executive pandemic response team that meets regularly and is closely monitoring developments and providing guidance for additional precautions and initiatives. This group will continue to review and analyze data from local health departments to make the best decisions possible for the health and safety of our team members, clients and communities.” Mr. Murphy concluded.

THIRD QUARTER 2020 FINANCIAL RESULTS

Loans

Average loans and leases of $5.67 billion increased $578.26 million, up 11.36% in the third quarter of 2020 from the year ago quarter and have increased $104.46 million, up 1.88% from the second quarter. Year-to-date average loans and leases of $5.45 billion increased $460.72 million, up 9.24% from the first nine months of 2019. Loan growth is primarily from PPP originations when compared to 2019.

Deposits

Average deposits of $5.89 billion grew $526.04 million for the quarter ended September 30, 2020, up 9.81% from the year ago quarter and have increased $78.86 million, or 1.36% from the second quarter. Average deposits for the first nine months of 2020 were $5.66 billion, an increase of $427.97 million, up 8.18% from the same period a year ago. Deposit growth is primarily from PPP loan fundings and increased consumer deposit levels compared to 2019.

Net Interest Income and Net Interest Margin

Third quarter 2020 net interest income of $54.87 million decreased $2.33 million, or 4.07% from the third quarter a year ago and increased $0.87 million, or 1.61% from the previous quarter. For the first nine months of 2020, tax-equivalent net interest income was $164.13 million, a decrease of $4.97 million, or 2.94% compared to the same period a year ago.

Third quarter 2020 net interest margin was 3.19%, a decrease of 48 basis points from the 3.67% for the same period in 2019 and decreased four basis points from the previous quarter. Third quarter 2020 net interest margin on a fully tax-equivalent basis was 3.20%, a decrease of 48 basis points from the 3.68% for the same period in 2019 and was lower by four 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 six basis points for the quarter.

Net interest margin for the first nine months of 2020 was 3.32%, a decrease of 40 basis points from the 3.72% for the same period in 2019. Net interest margin on a fully-taxable-equivalent basis for the first nine months of 2020 was 3.33%, a decrease of 41 basis points from the 3.74% for the first nine months of 2019. PPP loans had a negative impact of five basis points on the year-to-date net interest margin.

Noninterest Income

Third quarter 2020 noninterest income of $28.04 million increased $2.28 million, or 8.83% from the third quarter a year ago and increased $2.80 million, or 11.09% from the second quarter of 2020. For the first nine months of 2020, noninterest income was $77.90 million, an increase of $2.35 million, or 3.11% from the same period a year ago.

The growth in noninterest income during the third quarter and first nine months of 2020 compared to a year ago was mainly from improved mortgage financing income driven by gains on a higher volume of loan sales offset by 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. Additionally, we recognized $0.81 million of impairment charges on our mortgage servicing rights during 2020 as prepayment speeds accelerated.

The increase in noninterest income from the second quarter of 2020 was primarily the result of improved mortgage banking income driven by higher margins on loan sales, increased debit card income, and higher service charges on deposit accounts offset by decreased customer swap fees, lower equipment rental income due to a reduction in the size of the average equipment rental portfolio, and reduced trust and wealth advisory fees as a result of seasonal tax activity in the second quarter.

Noninterest Expense

Third quarter 2020 noninterest expense of $47.04 million decreased $0.06 million, or 0.13% from the third quarter a year ago and increased $2.22 million, or 4.95% from the prior quarter. Excluding depreciation on leased equipment, noninterest expenses were up 3.52% from the third quarter a year ago and up 6.72% from the prior quarter. For the first nine months of 2020, noninterest expense was $138.40 million, a decrease of $1.26 million, down 0.90% compared to the same period a year ago.

The increase in noninterest expense from the prior quarter was primarily the result of lower deferred salary expense on PPP loan originations, negative valuation adjustments on repossessed assets and higher professional consulting fees. These increases were offset by lower leased equipment depreciation from a reduction in the average equipment rental portfolio and a decline in general collection and repossession costs.

Credit

The reserve for loan and lease losses as of September 30, 2020 was 2.43% of total loans and leases compared to 2.31% at June 30, 2020 and 2.14% at September 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 2.69% at September 30, 2020 compared to 2.54% at June 30, 2020. Net charge-offs of $3.77 million were recorded for the third quarter of 2020 compared with net recoveries of $0.31 million in the same quarter a year ago and $0.11 million of net recoveries in the prior quarter.

The provision for loan and lease losses was $9.30 million for the third quarter of 2020, an increase of $5.59 million compared with the same period in 2019 and a decrease of $1.07 million from the second quarter of 2020. The ratio of nonperforming assets to loans and leases was 1.33% as of September 30, 2020, compared to 1.20% on June 30, 2020 and 0.34% on September 30, 2019. Excluding PPP loans, the ratio of non-performing assets to loans and leases was 1.48% at September 30, 2020 and 1.33% at June 30, 2020.

Capital

As of September 30, 2020, the common equity-to-assets ratio was 12.04%, compared to 11.74% at June 30, 2020 and 12.15% a year ago. The tangible common equity-to-tangible assets ratio was 11.01% at September 30, 2020 compared to 10.73% at June 30, 2020 and 11.04% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 12.92% at September 30, 2020 compared to 12.76% at June 30, 2020 and 12.26% a year ago. All of the September 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.

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 79 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.

Category: Earnings

(charts attached)

(1) See “Reconciliation of Non-GAAP Financial Measures” for more information on this performance measure/ratio.

(2) Calculated as common shareholders’ equity divided by common shares outstanding at the end of the period.

(3) Calculated under banking regulatory guidelines.