1st Source Corporation Reports Fourth Consecutive Quarter of Record Results, Cash Dividend Increased

1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported a record high net income of $24.44 million for the third quarter of 2019, an improvement of 22.88% compared to $19.89 million reported in the third quarter a year ago. This brought the 2019 year-to-date net income to $70.02 million compared to $60.97 million in 2018, an increase of 14.85%. The year-to-date net income comparison was positively impacted by increased net interest income of $10.51 million primarily due to higher loan rates and higher average loan and lease balances. Non-recurring 2019 items included $1.41 million of negative valuation adjustments on repossessed assets, a $1.32 million gain on the sale of our former headquarters building, and a $0.43 million FDIC insurance premium credit.

Diluted net income per common share for the third quarter of 2019 was up 25.00% to a record high of $0.95, versus $0.76 in the third quarter of 2018. Diluted net income per common share for the first nine months of 2019 was $2.72 compared to $2.33 earned a year earlier, a 16.74% increase.

At its October 2019 meeting, the Board of Directors approved a cash dividend of $0.29 per common share, up 16% from the $0.25 per common share declared a year ago. The cash dividend is payable to shareholders of record on November 5, 2019 and will be paid on November 15, 2019.

Christopher J. Murphy III, Chairman and Chief Executive Officer, commented, “We are pleased to have achieved record earnings in the third quarter which marks four consecutive quarters of record net income for 1st Source Corporation! We have been able to accomplish this through steady, organic growth in average loans and leases and deposits and continued credit quality discipline which is validated by a 0.34% ratio of nonperforming assets to loans and leases. Our net interest margin while increasing early in the year is now challenged with Federal Reserve reductions in interest rates and continued competitive pressure for deposits.

“I am also very pleased to report we welcomed a new member to our Board of Directors for both the Bank and the Holding Company in early August. John Affleck-Graves, former Executive Vice President and Chief Financial Officer of the University of Notre Dame, was elected to a term ending April 2022 and will be subject to reelection at that time. John is a renowned finance Professor who has also managed people, processes and finances for a multi-market, multi-billion-dollar complex organization. He has also been a champion of regional economic development, having chaired the Regional Development Authority for northcentral Indiana. I have worked with John in community and regional development activities over many years and have often sought his economic and financial market advice when balancing the Bank’s assets and liabilities and managing our long-term pricing strategies. He has always been thoughtful, knowledgeable, insightful and often prescient. He will bring strong value to our Boards and to the future of 1st Source.

“The third quarter of the year also saw continued investment in our banking centers. In late July, we held an official groundbreaking event for a new standalone banking center in Middlebury, Ind. Our current banking center in this community is in a rented space and does not feature many of the amenities our clients have come to expect from us. This new building will offer drive-up teller service, a drive-up ATM and our signature side-by-side banking model. We also plan to enter the Auburn, Ind. market later this year, as we have signed a lease to occupy the first-floor space of a new building currently under construction in its downtown. Auburn is a thriving community in northeast Indiana, supported by a sizable auto industry presence. These projects are part of our overall initiative to continue our investment in the communities where we live, do business and raise families.

“As a Bank deeply rooted in our community, I’d be remiss to not mention the honorees of our twentieth Ernestine M. Raclin Community Leadership Award. This year, 11 individuals across the communities we serve were chosen for this award due to their commitment to volunteer leadership. These individuals, and the many other thousands of volunteers who serve good causes, are the backbone of our communities and weave a strong fabric that supports us all. It is important that we recognize and celebrate their contributions. Honorees were presented a globe of leadership award, a $1,000 personal cash award and a $1,000 award donated to the local charity of their choice.”

THIRD QUARTER 2019 FINANCIAL RESULTS

Loans

Average loans and leases of $5.09 billion increased $268.93 million, up 5.58% in the third quarter of 2019 from the year ago quarter and have increased $89.97 million, up 1.80% from the second quarter. Seasonal reductions in the auto and light truck portfolio were offset by growth in commercial real estate loans and solar loans near the end of the third quarter. Recently, we have also seen a slight decrease in the demand for loans and leases as clients have become more concerned about trade issues and the continued strength of a record long economic expansion. Year-to-date average loans and leases of $4.98 billion increased $256.45 million, up 5.42% from the first nine months of 2018.

Deposits

Average deposits of $5.36 billion grew $272.17 million for the quarter ended September 30, 2019, up 5.35% from the year ago quarter and have increased $98.48 million, up 1.87% compared to the second quarter. Average deposits for the first nine months of 2019 were $5.23 billion, an increase of $308.56 million, up 6.27% from the same period a year ago.

Net Interest Income and Net Interest Margin

Third quarter 2019 net interest income of $57.20 million increased $2.83 million, up 5.21% from the third quarter a year ago and increased $0.77 million, up 1.36% from the second quarter. For the first nine months of 2019, tax-equivalent net interest income was $169.10 million, an increase of $10.42 million, up 6.57% compared to the same period a year ago.

Third quarter 2019 net interest margin was 3.67%, a decrease of two basis points from the 3.69% for the same period in 2018 and decreased six basis points from the second quarter. Third quarter 2019 net interest margin on a fully tax-equivalent basis was 3.68%, a decrease of three basis points from the 3.71% for the same period in 2018 and was lower by six basis points compared to the previous quarter. The margin continued to see pressure from deposit competition and Federal Reserve interest rate decreases.

Net interest margin for the first nine months of 2019 was 3.72%, an increase of three basis points from the 3.69% for the same period in 2018. Net interest margin on a fully-taxable-equivalent basis for the first nine months of 2019 was 3.74%, an increase of three basis points from the 3.71% for the same period in 2018.

Noninterest Income

Third quarter 2019 noninterest income of $25.77 million increased $1.71 million, up 7.09% from the third quarter a year ago and increased $0.10 million, up 0.39% from the second quarter. For the first nine months of 2019, noninterest income was $75.55 million, an increase of $2.66 million, up 3.65% 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, improved mortgage banking income driven by gains on a higher volume of loan sales, 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 reduced trust and wealth advisory fees resulting from a lower value of assets under management due to stock market movements and lower equipment rental income due to a reduction in the size of the average equipment rental portfolio.

The increase in noninterest income from the second quarter of 2019 was primarily the result of higher mortgage banking income on improved loan production, increased claim proceeds on bank owned life insurance, and higher partnership investment gains. These positives were offset by lower equipment rental income due to a reduction in the size of the average equipment rental portfolio, reduced trust and wealth advisory fees as a result of seasonal tax fees in the second quarter, and decreased customer swap fees.

Noninterest Expense

Third quarter 2019 noninterest expense of $47.11 million decreased $0.24 million, down 0.50% from the third quarter a year ago and decreased $0.25 million, down 0.52% from the second quarter. Excluding depreciation on leased equipment, noninterest expenses were up 0.36% from the third quarter a year ago and down 0.11% from the second quarter. For the first nine months of 2019, noninterest expense was $139.66 million, an increase of $0.89 million, or 0.64% 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, fewer valuation adjustments on repossessed assets, reduced insurance expenses due to FDIC assessment credits, lower leased equipment depreciation resulting from a reduction in the average equipment rental portfolio, decreased incentive compensation from fewer vestings of share-based compensation arrangements, lower business development costs, and reduced professional fees from consulting services.

The decrease in noninterest expense from the second quarter was primarily the result of a reduction in the provision for unfunded loan commitments, lower insurance costs due to FDIC assessment credits, decreased group insurance costs on lower claims, reduced leased equipment depreciation, lower furniture and equipment expense due to reduced computer processing charges and lower professional fees offset by higher salaries due to increased staffing levels related to a summer internship program, increased business development and marketing expenses due to marketing promotions, and higher repossessed asset valuation adjustments.

Credit

The reserve for loan and lease losses as of September 30, 2019 was 2.14% of total loans and leases compared to 2.05% at June 30, 2019 and 2.04% at September 30, 2018. Net recoveries of $0.31 million were recorded for the third quarter of 2019 compared with net charge-offs of $10.86 million in the same quarter a year ago and down from the $1.19 million of net charge-offs in the second quarter.

The provision for loan and lease losses was $3.72 million for the third quarter of 2019, a decrease of $2.44 million compared with the same period in 2018 and a decrease of $0.53 million from the second quarter. The ratio of nonperforming assets to loans and leases was an improved 0.34% as of September 30, 2019, compared to 0.41% on June 30, 2019 and 1.00% on September 30, 2018.

Capital

As of September 30, 2019, the common equity-to-assets ratio was 12.15%, compared to 11.95% at June 30, 2019 and 11.92% a year ago. The tangible common equity-to-tangible assets ratio was 11.04% at September 30, 2019 compared to 10.82% at June 30, 2019 and 10.73% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 12.26% at September 30, 2019 compared to 11.83% at June 30, 2019 and 12.38% a year ago. During the first nine months of 2019, 325,787 shares were repurchased for treasury reducing common shareholders’ equity by $15.09 million.

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.

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(charts attached)

1st SOURCE CORPORATION
3rd QUARTER 2019 FINANCIAL HIGHLIGHTS
(Unaudited - Dollars in thousands, except per share data)
		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,				September 30,
		2019				2019				2018				2019				2018
AVERAGE BALANCES
Assets		$	6,620,880			$	6,487,744			$	6,224,187			$	6,467,547			$	6,111,302
Earning assets		6,190,264				6,067,871				5,839,588				6,052,686				5,724,114
Investments		1,024,250				1,001,142				964,281				1,004,463				943,372
Loans and leases		5,091,358				5,001,392				4,822,431				4,984,498				4,728,047
Deposits		5,363,391				5,264,912				5,091,221				5,230,335				4,921,780
Interest bearing liabilities		4,493,376				4,468,591				4,323,467				4,426,489				4,283,411
Common shareholders’ equity		809,279				789,009				751,248				791,438				738,025
Total equity		819,734				792,884				751,248				796,767				738,025
INCOME STATEMENT DATA
Net interest income		$	57,195			$	56,427			$	54,362			$	168,570			$	158,063
Net interest income - FTE(1)		57,362				56,604				54,559				169,096				158,675
Provision for loan and lease losses		3,717				4,247				6,157				12,882				14,760
Noninterest income		25,765				25,664				24,060				75,553				72,890
Noninterest expense		47,106				47,353				47,342				139,663				138,776
Net income		24,448				23,417				19,888				70,061				60,968
Net income available to common shareholders		24,438				23,385				19,888				70,019				60,968
PER SHARE DATA
Basic net income per common share		$	0.95			$	0.91			$	0.76			$	2.72			$	2.33
Diluted net income per common share		0.95				0.91				0.76				2.72				2.33
Common cash dividends declared		0.27				0.27				0.25				0.81				0.71
Book value per common share(2)		31.88				31.12				28.90				31.88				28.90
Tangible book value per common share(1)		28.59				27.83				25.66				28.59				25.66
Market value - High		48.31				48.66				59.33				50.15				59.33
Market value - Low		42.31				43.34				50.34				39.11				48.26
Basic weighted average common shares outstanding		25,520,035				25,615,718				25,965,694				25,630,771				25,958,125
Diluted weighted average common shares outstanding		25,520,035				25,615,718				25,965,694				25,630,771				25,958,125
KEY RATIOS
Return on average assets		1.46		%		1.45		%		1.27		%		1.45		%		1.33		%
Return on average common shareholders’ equity		11.98				11.89				10.50				11.83				11.04
Average common shareholders’ equity to average assets		12.22				12.16				12.07				12.24				12.08
End of period tangible common equity to tangible assets(1)		11.04				10.82				10.73				11.04				10.73
Risk-based capital - Common Equity Tier 1(3)		12.26				11.83				12.38				12.26				12.38
Risk-based capital - Tier 1(3)		13.33				12.94				13.41				13.33				13.41
Risk-based capital - Total(3)		14.59				14.20				14.66				14.59				14.66
Net interest margin		3.67				3.73				3.69				3.72				3.69
Net interest margin - FTE(1)		3.68				3.74				3.71				3.74				3.71
Efficiency ratio: expense to revenue		56.78				57.68				60.37				57.21				60.09
Efficiency ratio: expense to revenue - adjusted(1)		53.44				54.07				56.71				53.57				56.28
Net (recoveries) charge offs to average loans and leases		(0.02		)		0.10				0.89				0.12				0.32
Loan and lease loss reserve to loans and leases		2.14				2.05				2.04				2.14				2.04
Nonperforming assets to loans and leases		0.34				0.41				1.00				0.34				1.00
		September 30,				June 30,				March 31,				December 31,				September 30,
		2019				2019				2019				2018				2018
END OF PERIOD BALANCES
Assets		$	6,691,070			$	6,650,105			$	6,379,086			$	6,293,745			$	6,293,169
Loans and leases		5,099,546				5,109,337				4,926,187				4,835,464				4,825,553
Deposits		5,391,679				5,403,845				5,124,091				5,122,322				5,061,977
Reserve for loan and lease losses		108,941				104,911				101,852				100,469				98,300
Goodwill and intangible assets		83,978				83,985				83,992				83,998				84,097
Common shareholders’ equity		813,167				794,662				778,422				762,082				750,437
Total equity		833,042				804,686				781,101				763,590				750,437
ASSET QUALITY
Loans and leases past due 90 days or more		$	311			$	156			$	178			$	366			$	125
Nonaccrual loans and leases		10,188				12,212				13,622				27,859				36,028
Other real estate		629				543				417				299				432
Repossessions		6,610				8,799				10,411				6,666				13,041
Equipment owned under operating leases		—				—				64				126				48
Total nonperforming assets		$	17,738			$	21,710			$	24,692			$	35,316			$	49,674

(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.

1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited - Dollars in thousands)
		September 30,				June 30,				December 31,				September 30,
		2019				2019				2018				2018
ASSETS
Cash and due from banks		$	94,160			$	71,910			$	94,907			$	68,362
Federal funds sold and interest bearing deposits with other banks		33,325				24,578				4,172				45,514
Investment securities available-for-sale		1,032,185				1,021,786				990,129				972,172
Other investments		28,404				28,404				28,404				28,159
Mortgages held for sale		28,654				19,178				11,290				11,149
Loans and leases, net of unearned discount:
Commercial and agricultural		1,175,936				1,173,000				1,073,205				1,062,907
Auto and light truck		612,921				635,100				559,987				562,546
Medium and heavy duty truck		289,925				300,042				283,544				271,601
Aircraft		805,568				811,163				803,111				836,458
Construction equipment		685,696				686,633				645,239				654,605
Commercial real estate		858,402				835,919				809,886				781,093
Residential real estate and home equity		531,630				529,749				523,855				523,391
Consumer		139,468				137,731				136,637				132,952
Total loans and leases		5,099,546				5,109,337				4,835,464				4,825,553
Reserve for loan and lease losses		(108,941		)		(104,911		)		(100,469		)		(98,300		)
Net loans and leases		4,990,605				5,004,426				4,734,995				4,727,253
Equipment owned under operating leases, net		119,171				126,502				134,440				137,492
Net premises and equipment		51,680				51,570				52,139				53,479
Goodwill and intangible assets		83,978				83,985				83,998				84,097
Accrued income and other assets		228,908				217,766				159,271				165,492
Total assets		$	6,691,070			$	6,650,105			$	6,293,745			$	6,293,169
LIABILITIES
Deposits:
Noninterest-bearing demand		$	1,246,063			$	1,238,604			$	1,217,120			$	1,151,573
Interest-bearing deposits:
Interest-bearing demand		1,605,602				1,665,456				1,614,959				1,606,462
Savings		820,409				810,122				822,477				822,246
Time		1,719,605				1,689,663				1,467,766				1,481,696
Total interest-bearing deposits		4,145,616				4,165,241				3,905,202				3,910,404
Total deposits		5,391,679				5,403,845				5,122,322				5,061,977
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase		139,417				119,781				113,627				124,630
Other short-term borrowings		57,734				66,228				85,717				166,077
Total short-term borrowings		197,151				186,009				199,344				290,707
Long-term debt and mandatorily redeemable securities		71,520				71,542				71,123				70,919
Subordinated notes		58,764				58,764				58,764				58,764
Accrued expenses and other liabilities		138,914				125,259				78,602				60,365
Total liabilities		5,858,028				5,845,419				5,530,155				5,542,732
SHAREHOLDERS’ EQUITY
Preferred stock; no par value
Authorized 10,000,000 shares; none issued or outstanding		—				—				—				—
Common stock; no par value
Authorized 40,000,000 shares; issued 28,205,674 shares at September 30, 2019, June 30, 2019, December 31, 2018, and September 30, 2018, respectively		436,538				436,538				436,538				436,538
Retained earnings		448,715				431,091				398,980				383,943
Cost of common stock in treasury (2,696,918, 2,670,462, 2,421,946, and 2,239,928 shares at September 30, 2019, June 30, 2019, December 31, 2018, and September 30, 2018, respectively)		(76,716		)		(75,380		)		(62,760		)		(54,369		)
Accumulated other comprehensive income (loss)		4,630				2,413				(10,676		)		(15,675		)
Total shareholders’ equity		813,167				794,662				762,082				750,437
Noncontrolling interests		19,875				10,024				1,508				—
Total equity		833,042				804,686				763,590				750,437
Total liabilities and equity		$	6,691,070			$	6,650,105			$	6,293,745			$	6,293,169

1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Dollars in thousands, except per share amounts)
		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,				September 30,
		2019				2019				2018				2019				2018
Interest income:
Loans and leases		$	66,807			$	65,599			$	59,961			$	195,089			$	172,172
Investment securities, taxable		5,056				5,186				4,912				15,757				13,993
Investment securities, tax-exempt		316				353				432				1,054				1,438
Other		497				499				391				1,434				1,196
Total interest income		72,676				71,637				65,696				213,334				188,799
Interest expense:
Deposits		13,524				12,978				9,405				37,972				24,286
Short-term borrowings		293				540				518				1,764				2,120
Subordinated notes		914				928				918				2,770				2,709
Long-term debt and mandatorily redeemable securities		750				764				493				2,258				1,621
Total interest expense		15,481				15,210				11,334				44,764				30,736
Net interest income		57,195				56,427				54,362				168,570				158,063
Provision for loan and lease losses		3,717				4,247				6,157				12,882				14,760
Net interest income after provision for loan and lease losses		53,478				52,180				48,205				155,688				143,303
Noninterest income:
Trust and wealth advisory		4,982				5,583				5,109				15,423				16,097
Service charges on deposit accounts		2,892				2,785				2,567				8,175				7,676
Debit card		3,727				3,669				3,377				10,616				9,907
Mortgage banking		1,362				999				925				3,297				2,882
Insurance commissions		1,603				1,518				1,580				5,295				5,025
Equipment rental		7,578				7,809				7,977				23,369				23,836
Losses on investment securities available-for-sale		—				—				—				—				(345		)
Other		3,621				3,301				2,525				9,378				7,812
Total noninterest income		25,765				25,664				24,060				75,553				72,890
Noninterest expense:
Salaries and employee benefits		24,434				23,787				23,164				71,716				69,391
Net occupancy		2,635				2,481				2,523				7,888				7,504
Furniture and equipment		6,027				6,289				5,769				18,340				16,942
Depreciation – leased equipment		6,198				6,400				6,580				19,122				19,692
Professional fees		1,603				1,706				1,883				4,907				5,628
Supplies and communication		1,643				1,608				1,635				4,744				4,687
FDIC and other insurance		260				608				855				1,513				2,267
Business development and marketing		1,844				1,678				1,663				4,471				4,921
Loan and lease collection and repossession		697				230				1,563				2,288				3,079
Other		1,765				2,566				1,707				4,674				4,665
Total noninterest expense		47,106				47,353				47,342				139,663				138,776
Income before income taxes		32,137				30,491				24,923				91,578				77,417
Income tax expense		7,689				7,074				5,035				21,517				16,449
Net income		24,448				23,417				19,888				70,061				60,968
Net (income) loss attributable to noncontrolling interests		(10		)		(32		)		—				(42		)		—
Net income available to common shareholders		$	24,438			$	23,385			$	19,888			$	70,019			$	60,968
Per common share:
Basic net income per common share		$	0.95			$	0.91			$	0.76			$	2.72			$	2.33
Diluted net income per common share		$	0.95			$	0.91			$	0.76			$	2.72			$	2.33
Cash dividends		$	0.27			$	0.27			$	0.25			$	0.81			$	0.71
Basic weighted average common shares outstanding		25,520,035				25,615,718				25,965,694				25,630,771				25,958,125
Diluted weighted average common shares outstanding		25,520,035				25,615,718				25,965,694				25,630,771				25,958,125

1st SOURCE CORPORATION
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Unaudited - Dollars in thousands)
													Three Months Ended
		September 30, 2019											June 30, 2019											September 30, 2018
		Average Balance				Interest Income Expense				Yield/ Rate			Average Balance				Interest Income Expense				Yield/ Rate			Average Balance				Interest Income Expense				Yield/ Rate
ASSETS
Investment securities available-for-sale:
Taxable		$	959,104			$	5,056			2.09	%		$	929,264			$	5,186			2.24	%		$	879,882			$	4,912			2.21	%
Tax exempt(1)		65,146				388				2.36	%		71,878				437				2.44	%		84,399				533				2.51	%
Mortgages held for sale		19,888				190				3.79	%		12,014				127				4.24	%		9,016				93				4.09	%
Loans and leases, net of unearned discount(1)		5,091,358				66,712				5.20	%		5,001,392				65,565				5.26	%		4,822,431				59,964				4.93	%
Other investments		54,768				497				3.60	%		53,323				499				3.75	%		43,860				391				3.54	%
Total earning assets(1)		6,190,264				72,843				4.67	%		6,067,871				71,814				4.75	%		5,839,588				65,893				4.48	%
Cash and due from banks		66,046											67,448											64,622
Reserve for loan and lease losses		(106,559		)									(102,787		)									(102,790		)
Other assets		471,129											455,212											422,767
Total assets		$	6,620,880										$	6,487,744										$	6,224,187
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits		$	4,174,746			$	13,524			1.29	%		$	4,137,118			$	12,978			1.26	%		$	3,986,576			$	9,405			0.94	%
Short-term borrowings		188,562				293				0.62	%		201,401				540				1.08	%		207,225				518				0.99	%
Subordinated notes		58,764				914				6.17	%		58,764				928				6.33	%		58,764				918				6.20	%
Long-term debt and mandatorily redeemable securities		71,304				750				4.17	%		71,308				764				4.30	%		70,902				493				2.76	%
Total interest-bearing liabilities		4,493,376				15,481				1.37	%		4,468,591				15,210				1.37	%		4,323,467				11,334				1.04	%
Noninterest-bearing deposits		1,188,645											1,127,794											1,104,645
Other liabilities		119,125											98,475											44,827
Shareholders’ equity		809,279											789,009											751,248
Noncontrolling interests		10,455											3,875											—
Total liabilities and equity		$	6,620,880										$	6,487,744										$	6,224,187
Less: Fully tax-equivalent adjustments						(167		)									(177		)									(197		)
Net interest income/margin (GAAP-derived)(1)						$	57,195			3.67	%						$	56,427			3.73	%						$	54,362			3.69	%
Fully tax-equivalent adjustments						167											177											197
Net interest income/margin - FTE(1)						$	57,362			3.68	%						$	56,604			3.74	%						$	54,559			3.71	%

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

1st SOURCE CORPORATION
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Unaudited - Dollars in thousands)
		Nine Months Ended
		September 30, 2019											September 30, 2018
		Average Balance				Interest Income Expense				Yield/ Rate			Average Balance				Interest Income/ Expense				Yield/ Rate
ASSETS
Investment securities available-for-sale:
Taxable		$	932,779			$	15,757			2.26	%		$	850,454			$	13,993			2.20	%
Tax exempt(1)		71,684				1,297				2.42	%		92,918				1,777				2.56	%
Mortgages held for sale		13,616				418				4.10	%		7,911				265				4.48	%
Loans and leases, net of unearned discount(1)		4,984,498				194,954				5.23	%		4,728,047				172,180				4.87	%
Other investments		50,109				1,434				3.83	%		44,784				1,196				3.57	%
Total earning assets(1)		6,052,686				213,860				4.72	%		5,724,114				189,411				4.42	%
Cash and due from banks		65,801											63,983
Reserve for loan and lease losses		(103,699		)									(99,284		)
Other assets		452,759											422,489
Total assets		$	6,467,547										$	6,111,302
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits		4,083,140				37,972				1.24	%		3,881,040				24,286				0.84	%
Short-term borrowings		213,551				1,764				1.10	%		272,813				2,120				1.04	%
Subordinated notes		58,764				2,770				6.30	%		58,764				2,709				6.16	%
Long-term debt and mandatorily redeemable securities		71,034				2,258				4.25	%		70,794				1,621				3.06	%
Total interest-bearing liabilities		4,426,489				44,764				1.35	%		4,283,411				30,736				0.96	%
Noninterest-bearing deposits		1,147,195											1,040,740
Other liabilities		97,096											49,126
Shareholders’ equity		791,438											738,025
Noncontrolling interests		5,329											—
Total liabilities and equity		$	6,467,547										$	6,111,302
Less: Fully tax-equivalent adjustments						(526		)									(612		)
Net interest income/margin (GAAP-derived)(1)						$	168,570			3.72	%						$	158,063			3.69	%
Fully tax-equivalent adjustments						526											612
Net interest income/margin - FTE(1)						$	169,096			3.74	%						$	158,675			3.71	%

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

1st SOURCE CORPORATION
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Unaudited - Dollars in thousands, except per share data)
			Three Months Ended												Nine Months Ended
			September 30,				June 30,				September 30,				September 30,				September 30,
			2019				2019				2018				2019				2018
Calculation of Net Interest Margin
(A)	Interest income (GAAP)		$	72,676			$	71,637			$	65,696			$	213,334			$	188,799
	Fully tax-equivalent adjustments:
(B)	– Loans and leases		95				93				96				283				273
(C)	– Tax exempt investment securities		72				84				101				243				339
(D)	Interest income – FTE (A+B+C)		72,843				71,814				65,893				213,860				189,411
(E)	Interest expense (GAAP)		15,481				15,210				11,334				44,764				30,736
(F)	Net interest income (GAAP) (A-E)		57,195				56,427				54,362				168,570				158,063
(G)	Net interest income - FTE (D-E)		57,362				56,604				54,559				169,096				158,675
(H)	Annualization factor		3.967				4.011				3.967				1.337				1.337
(I)	Total earning assets		$	6,190,264			$	6,067,871			$	5,839,588			$	6,052,686			$	5,724,114
	Net interest margin (GAAP-derived) (F*H)/I		3.67		%		3.73		%		3.69		%		3.72		%		3.69		%
	Net interest margin – FTE (G*H)/I		3.68		%		3.74		%		3.71		%		3.74		%		3.71		%
Calculation of Efficiency Ratio
(F)	Net interest income (GAAP)		$	57,195			$	56,427			$	54,362			$	168,570			$	158,063
(G)	Net interest income – FTE		57,362				56,604				54,559				169,096				158,675
(J)	Plus: noninterest income (GAAP)		25,765				25,664				24,060				75,553				72,890
(K)	Less: gains/losses on investment securities and partnership investments		(374		)		(131		)		(155		)		(521		)		(263		)
(L)	Less: depreciation – leased equipment		(6,198		)		(6,400		)		(6,580		)		(19,122		)		(19,692		)
(M)	Total net revenue (GAAP) (F+J)		82,960				82,091				78,422				244,123				230,953
(N)	Total net revenue – adjusted (G+J–K–L)		76,555				75,737				71,884				225,006				211,610
(O)	Noninterest expense (GAAP)		47,106				47,353				47,342				139,663				138,776
(L)	Less:depreciation – leased equipment		(6,198		)		(6,400		)		(6,580		)		(19,122		)		(19,692		)
(Q)	Noninterest expense – adjusted (O–L)		40,908				40,953				40,762				120,541				119,084
	Efficiency ratio (GAAP-derived) (O/M)		56.78		%		57.68		%		60.37		%		57.21		%		60.09		%
	Efficiency ratio – adjusted (Q/N)		53.44		%		54.07		%		56.71		%		53.57		%		56.28		%

			End of Period
			September 30,				June 30,				September 30,
			2019				2019				2018
Calculation of Tangible Common Equity-to-Tangible Assets Ratio
(R)	Total common shareholders’ equity (GAAP)		$	813,167			$	794,662			$	750,437
(S)	Less: goodwill and intangible assets		(83,978		)		(83,985		)		(84,097		)
(T)	Total tangible common shareholders’ equity (R–S)		$	729,189			$	710,677			$	666,340
(U)	Total assets (GAAP)		6,691,070				6,650,105				6,293,169
(S)	Less: goodwill and intangible assets		(83,978		)		(83,985		)		(84,097		)
(V)	Total tangible assets (U–S)		$	6,607,092			$	6,566,120			$	6,209,072
	Common equity-to-assets ratio (GAAP-derived) (R/U)		12.15		%		11.95		%		11.92		%
	Tangible common equity-to-tangible assets ratio (T/V)		11.04		%		10.82		%		10.73		%
Calculation of Tangible Book Value per Common Share
(R)	Total common shareholders’ equity (GAAP)		$	813,167			$	794,662			$	750,437
(W)	Actual common shares outstanding		25,508,756				25,535,212				25,965,746
	Book value per common share (GAAP-derived) (R/W)*1000		$	31.88			$	31.12			$	28.90
	Tangible common book value per share (T/W)*1000		$	28.59			$	27.83			$	25.66

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