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)

1st SOURCE CORPORATION
3rd QUARTER 2020 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,
	2020			2020			2019				2020			2019
AVERAGE BALANCES
Assets	$	7,281,542		$	7,185,406		$	6,620,880			$	7,026,956		$	6,467,547
Earning assets	6,841,720			6,727,011			6,190,264				6,584,451			6,052,686
Investments	1,057,780			1,045,310			1,024,250				1,044,625			1,004,463
Loans and leases	5,669,615			5,565,160			5,091,358				5,445,213			4,984,498
Deposits	5,889,434			5,810,578			5,363,391				5,658,309			5,230,335
Interest bearing liabilities	4,553,503			4,580,419			4,493,376				4,516,627			4,426,489
Common shareholders’ equity	876,992			862,209			809,279				861,366			791,438
Total equity	913,926			891,606			819,734				891,129			796,767
INCOME STATEMENT DATA
Net interest income	$	54,868		$	54,001		$	57,195			$	163,713		$	168,570
Net interest income - FTE(1)	54,996			54,138			57,362				164,129			169,096
Provision for loan and lease losses	9,303			10,375			3,717				31,031			12,882
Noninterest income	28,041			25,241			25,765				77,904			75,553
Noninterest expense	47,043			44,825			47,106				138,403			139,663
Net income	20,054			18,526			24,448				54,998			70,061
Net income available to common shareholders	20,058			18,502			24,438				54,973			70,019
PER SHARE DATA
Basic net income per common share	$	0.78		$	0.72		$	0.95			$	2.14		$	2.72
Diluted net income per common share	0.78			0.72			0.95				2.14			2.72
Common cash dividends declared	0.28			0.28			0.27				0.85			0.81
Book value per common share(2)	34.35			33.85			31.88				34.35			31.88
Tangible book value per common share(1)	31.06			30.57			28.59				31.06			28.59
Market value - High	38.26			38.70			48.31				52.16			50.15
Market value - Low	28.72			26.72			42.31				26.07			39.11
Basic weighted average common shares outstanding	25,552,374			25,540,855			25,520,035				25,538,910			25,630,771
Diluted weighted average common shares outstanding	25,552,374			25,540,855			25,520,035				25,538,910			25,630,771
KEY RATIOS
Return on average assets	1.10		%	1.04		%	1.46		%		1.05		%	1.45		%
Return on average common shareholders’ equity	9.10			8.63			11.98				8.52			11.83
Average common shareholders’ equity to average assets	12.04			12.00			12.22				12.26			12.24
End of period tangible common equity to tangible assets(1)	11.01			10.73			11.04				11.01			11.04
Risk-based capital - Common Equity Tier 1(3)	12.92			12.76			12.26				12.92			12.26
Risk-based capital - Tier 1(3)	14.48			14.32			13.33				14.48			13.33
Risk-based capital - Total(3)	15.74			15.58			14.59				15.74			14.59
Net interest margin	3.19			3.23			3.67				3.32			3.72
Net interest margin - FTE(1)	3.20			3.24			3.68				3.33			3.74
Efficiency ratio: expense to revenue	56.74			56.57			56.78				57.28			57.21
Efficiency ratio: expense to revenue - adjusted(1)	54.18			53.63			53.44				54.53			53.57
Net charge offs (recoveries) to average loans and leases	0.26			(0.01)			(0.02)				0.13			0.12
Loan and lease loss reserve to loans and leases	2.43			2.31			2.14				2.43			2.14
Nonperforming assets to loans and leases	1.33			1.20			0.34				1.33			0.34
	September 30,			June 30,			March 31,				December 31,			September 30,
	2020			2020			2020				2019			2019
END OF PERIOD BALANCES
Assets	$	7,290,949		$	7,365,146		$	6,735,118			$	6,622,776		$	6,691,070
Loans and leases	5,627,036			5,692,322			5,129,514				5,085,527			5,099,546
Deposits	5,896,855			5,993,456			5,275,911				5,357,326			5,391,679
Reserve for loan and lease losses	136,817			131,283			120,798				111,254			108,941
Goodwill and intangible assets	83,953			83,959			83,964				83,971			83,978
Common shareholders’ equity	877,754			864,995			850,897				828,277			813,167
Total equity	915,015			901,653			877,302				848,636			833,042
ASSET QUALITY
Loans and leases past due 90 days or more	$	81		$	256		$	191			$	309		$	311
Nonaccrual loans and leases	70,595			62,800			26,301				9,789			10,188
Other real estate	303			303			362				522			629
Repossessions	4,639			6,132			9,020				8,623			6,610
Equipment owned under operating leases	136			57			—				—			—
Total nonperforming assets	$	75,754		$	69,548		$	35,874			$	19,243		$	17,738

(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,
	2020					2020					2019					2019
ASSETS
Cash and due from banks	$	62,575				$	67,591				$	67,215				$	94,160
Federal funds sold and interest bearing deposits with other banks	91,641					112,645					16,150					33,325
Investment securities available-for-sale	1,083,427					1,055,797					1,040,583					1,032,185
Other investments	27,674					30,619					28,414					28,404
Mortgages held for sale	20,990					36,508					20,277					28,654
Loans and leases, net of unearned discount:
Commercial and agricultural	1,681,519					1,710,712					1,132,791					1,175,936
Auto and light truck	527,582					563,606					588,807					612,921
Medium and heavy duty truck	271,248					284,432					294,824					289,925
Aircraft	806,162					782,160					784,040					805,568
Construction equipment	723,596					739,027					705,451					685,696
Commercial real estate	961,550					942,971					908,177					858,402
Residential real estate and home equity	519,881					531,972					532,003					531,630
Consumer	135,498					137,442					139,434					139,468
Total loans and leases	5,627,036					5,692,322					5,085,527					5,099,546
Reserve for loan and lease losses	(136,817		)			(131,283		)			(111,254		)			(108,941		)
Net loans and leases	5,490,219					5,561,039					4,974,273					4,990,605
Equipment owned under operating leases, net	79,703					86,183					111,684					119,171
Net premises and equipment	49,933					51,486					52,219					51,680
Goodwill and intangible assets	83,953					83,959					83,971					83,978
Accrued income and other assets	300,834					279,319					227,990					228,908
Total assets	$	7,290,949				$	7,365,146				$	6,622,776				$	6,691,070
LIABILITIES
Deposits:
Noninterest-bearing demand	$	1,720,768				$	1,684,102				$	1,216,834				$	1,246,063
Interest-bearing deposits:
Interest-bearing demand	1,885,771					1,866,415					1,677,200					1,605,602
Savings	992,320					942,891					814,794					820,409
Time	1,297,996					1,500,048					1,648,498					1,719,605
Total interest-bearing deposits	4,176,087					4,309,354					4,140,492					4,145,616
Total deposits	5,896,855					5,993,456					5,357,326					5,391,679
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase	158,834					169,483					120,459					139,417
Other short-term borrowings	6,740					7,536					25,434					57,734
Total short-term borrowings	165,574					177,019					145,893					197,151
Long-term debt and mandatorily redeemable securities	81,659					81,760					71,639					71,520
Subordinated notes	58,764					58,764					58,764					58,764
Accrued expenses and other liabilities	173,082					152,494					140,518					138,914
Total liabilities	6,375,934					6,463,493					5,774,140					5,858,028
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, 2020, June 30, 2020, December 31, 2019, and September 30, 2019, respectively	436,538					436,538					436,538					436,538
Retained earnings	497,419					484,491					463,269					448,715
Cost of common stock in treasury (2,652,030, 2,655,319, 2,696,200, and 2,696,918 shares at September 30, 2020, June 30, 2020, December 31, 2019, and September 30, 2019, respectively)	(75,861		)			(75,922		)			(76,702		)			(76,716		)
Accumulated other comprehensive income	19,658					19,888					5,172					4,630
Total shareholders’ equity	877,754					864,995					828,277					813,167
Noncontrolling interests	37,261					36,658					20,359					19,875
Total equity	915,015					901,653					848,636					833,042
Total liabilities and equity	$	7,290,949				$	7,365,146				$	6,622,776				$	6,691,070

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,
	2020				2020					2019					2020					2019
Interest income:
Loans and leases	$	58,318			$	58,815				$	66,807				$	178,659				$	195,089
Investment securities, taxable	4,103				4,487					5,056					14,140					15,757
Investment securities, tax-exempt	207				232					316					703					1,054
Other	289				316					497					951					1,434
Total interest income	62,917				63,850					72,676					194,453					213,334
Interest expense:
Deposits	6,532				8,265					13,524					25,648					37,972
Short-term borrowings	83				90					293					427					1,764
Subordinated notes	824				835					914					2,543					2,770
Long-term debt and mandatorily redeemable securities	610				659					750					2,122					2,258
Total interest expense	8,049				9,849					15,481					30,740					44,764
Net interest income	54,868				54,001					57,195					163,713					168,570
Provision for loan and lease losses	9,303				10,375					3,717					31,031					12,882
Net interest income after provision for loan and lease losses	45,565				43,626					53,478					132,682					155,688
Noninterest income:
Trust and wealth advisory	5,153				5,589					4,982					15,590					15,423
Service charges on deposit accounts	2,336				1,910					2,892					6,851					8,175
Debit card	4,019				3,601					3,727					10,993					10,616
Mortgage banking	6,474				3,315					1,362					12,125					3,297
Insurance commissions	1,825				1,695					1,603					5,401					5,295
Equipment rental	5,593				5,990					7,578					18,213					23,369
(Losses) gains on investment securities available-for-sale	—				(1		)			—					279					—
Other	2,641				3,142					3,621					8,452					9,378
Total noninterest income	28,041				25,241					25,765					77,904					75,553
Noninterest expense:
Salaries and employee benefits	25,609				23,999					24,434					74,009					71,716
Net occupancy	2,512				2,504					2,635					7,737					7,888
Furniture and equipment	6,247				6,258					6,027					18,912					18,340
Depreciation – leased equipment	4,694				5,142					6,198					15,263					19,122
Professional fees	2,041				1,258					1,603					4,741					4,907
Supplies and communication	1,305				1,390					1,643					4,329					4,744
FDIC and other insurance	868				599					260					1,755					1,513
Business development and marketing	923				1,121					1,844					3,403					4,471
Loan and lease collection and repossession	1,054				838					697					2,655					2,288
Other	1,790				1,716					1,765					5,599					4,674
Total noninterest expense	47,043				44,825					47,106					138,403					139,663
Income before income taxes	26,563				24,042					32,137					72,183					91,578
Income tax expense	6,509				5,516					7,689					17,185					21,517
Net income	20,054				18,526					24,448					54,998					70,061
Net loss (income) attributable to noncontrolling interests	4				(24		)			(10		)			(25		)			(42		)
Net income available to common shareholders	$	20,058			$	18,502				$	24,438				$	54,973				$	70,019
Per common share:
Basic net income per common share	$	0.78			$	0.72				$	0.95				$	2.14				$	2.72
Diluted net income per common share	$	0.78			$	0.72				$	0.95				$	2.14				$	2.72
Cash dividends	$	0.28			$	0.28				$	0.27				$	0.85				$	0.81
Basic weighted average common shares outstanding	25,552,374				25,540,855					25,520,035					25,538,910					25,630,771
Diluted weighted average common shares outstanding	25,552,374				25,540,855					25,520,035					25,538,910					25,630,771

1st SOURCE CORPORATION
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Unaudited - Dollars in thousands)
														Three Months Ended
	September 30, 2020													June 30, 2020													September 30, 2019
	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	$	1,012,703				$	4,103				1.61	%		$	995,776				$	4,487				1.81	%		$	959,104				$	5,056				2.09	%
Tax exempt(1)	45,077					257					2.26	%		49,534					286					2.32	%		65,146					388					2.36	%
Mortgages held for sale	26,327					186					2.81	%		27,016					198					2.95	%		19,888					190					3.79	%
Loans and leases, net of unearned discount(1)	5,669,615					58,210					4.08	%		5,565,160					58,700					4.24	%		5,091,358					66,712					5.20	%
Other investments	87,998					289					1.31	%		89,525					316					1.42	%		54,768					497					3.60	%
Total earning assets(1)	6,841,720					63,045					3.67	%		6,727,011					63,987					3.83	%		6,190,264					72,843					4.67	%
Cash and due from banks	72,474													73,523													66,046
Reserve for loan and lease losses	(134,824		)											(124,186		)											(106,559		)
Other assets	502,172													509,058													471,129
Total assets	$	7,281,542												$	7,185,406												$	6,620,880
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits	$	4,225,299				$	6,532				0.62	%		$	4,248,478				$	8,265				0.78	%		$	4,174,746				$	13,524				1.29	%
Short-term borrowings	187,912					83					0.18	%		191,411					90					0.19	%		188,562					293					0.62	%
Subordinated notes	58,764					824					5.58	%		58,764					835					5.71	%		58,764					914					6.17	%
Long-term debt and mandatorily redeemable securities	81,528					610					2.98	%		81,766					659					3.24	%		71,304					750					4.17	%
Total interest-bearing liabilities	4,553,503					8,049					0.70	%		4,580,419					9,849					0.86	%		4,493,376					15,481					1.37	%
Noninterest-bearing deposits	1,664,135													1,562,100													1,188,645
Other liabilities	149,978													151,281													119,125
Shareholders’ equity	876,992													862,209													809,279
Noncontrolling interests	36,934													29,397													10,455
Total liabilities and equity	$	7,281,542												$	7,185,406												$	6,620,880
Less: Fully tax-equivalent adjustments						(128		)											(137		)											(167		)
Net interest income/margin (GAAP-derived)(1)						$	54,868				3.19	%							$	54,001				3.23	%							$	57,195				3.67	%
Fully tax-equivalent adjustments						128													137													167
Net interest income/margin - FTE(1)						$	54,996				3.20	%							$	54,138				3.24	%							$	57,362				3.68	%
(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, 2020											September 30, 2019
	Average Balance				Interest Income/Expense				Yield/ Rate			Average Balance				Interest Income/Expense				Yield/ Rate
ASSETS
Investment securities available-for-sale:
Taxable	$	994,035			$	14,140			1.90	%		$	932,779			$	15,757			2.26	%
Tax exempt(1)	50,590				868				2.29	%		71,684				1,297				2.42	%
Mortgages held for sale	21,563				480				2.97	%		13,616				418				4.10	%
Loans and leases, net of unearned discount(1)	5,445,213				178,430				4.38	%		4,984,498				194,954				5.23	%
Other investments	73,050				951				1.74	%		50,109				1,434				3.83	%
Total earning assets(1)	6,584,451				194,869				3.95	%		6,052,686				213,860				4.72	%
Cash and due from banks	70,475											65,801
Reserve for loan and lease losses	(123,790)											(103,699)
Other assets	495,820											452,759
Total assets	$	7,026,956										$	6,467,547
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits	4,183,502				25,648				0.82	%		4,083,140				37,972				1.24	%
Short-term borrowings	193,934				427				0.29	%		213,551				1,764				1.10	%
Subordinated notes	58,764				2,543				5.78	%		58,764				2,770				6.30	%
Long-term debt and mandatorily redeemable securities	80,427				2,122				3.52	%		71,034				2,258				4.25	%
Total interest-bearing liabilities	4,516,627				30,740				0.91	%		4,426,489				44,764				1.35	%
Noninterest-bearing deposits	1,474,807											1,147,195
Other liabilities	144,393											97,096
Shareholders’ equity	861,366											791,438
Noncontrolling interests	29,763											5,329
Total liabilities and equity	$	7,026,956										$	6,467,547
Less: Fully tax-equivalent adjustments					(416)											(526)
Net interest income/margin (GAAP-derived)(1)					$	163,713			3.32	%						$	168,570			3.72	%
Fully tax-equivalent adjustments					416											526
Net interest income/margin - FTE(1)					$	164,129			3.33	%						$	169,096			3.74	%
(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,
		2020			2020			2019				2020			2019
Calculation of Net Interest Margin
(A)	Interest income (GAAP)	$	62,917		$	63,850		$	72,676			$	194,453		$	213,334
	Fully tax-equivalent adjustments:
(B)	– Loans and leases	78			83			95				251			283
(C)	– Tax exempt investment securities	50			54			72				165			243
(D)	Interest income – FTE (A+B+C)	63,045			63,987			72,843				194,869			213,860
(E)	Interest expense (GAAP)	8,049			9,849			15,481				30,740			44,764
(F)	Net interest income (GAAP) (A-E)	54,868			54,001			57,195				163,713			168,570
(G)	Net interest income - FTE (D-E)	54,996			54,138			57,362				164,129			169,096
(H)	Annualization factor	3.978			4.022			3.967				1.336			1.337
(I)	Total earning assets	$	6,841,720		$	6,727,011		$	6,190,264			$	6,584,451		$	6,052,686
	Net interest margin (GAAP-derived) (F*H)/I	3.19		%	3.23		%	3.67		%		3.32		%	3.72		%
	Net interest margin – FTE (G*H)/I	3.20		%	3.24		%	3.68		%		3.33		%	3.74		%
Calculation of Efficiency Ratio
(F)	Net interest income (GAAP)	$	54,868		$	54,001		$	57,195			$	163,713		$	168,570
(G)	Net interest income – FTE	54,996			54,138			57,362				164,129			169,096
(J)	Plus: noninterest income (GAAP)	28,041			25,241			25,765				77,904			75,553
(K)	Less: gains/losses on investment securities and partnership investments	(177)			(248)			(374)				(938)			(521)
(L)	Less: depreciation – leased equipment	(4,694)			(5,142)			(6,198)				(15,263)			(19,122)
(M)	Total net revenue (GAAP) (F+J)	82,909			79,242			82,960				241,617			244,123
(N)	Total net revenue – adjusted (G+J–K–L)	78,166			73,989			76,555				225,832			225,006
(O)	Noninterest expense (GAAP)	47,043			44,825			47,106				138,403			139,663
(L)	Less:depreciation – leased equipment	(4,694)			(5,142)			(6,198)				(15,263)			(19,122)
(P)	Noninterest expense – adjusted (O–L)	42,349			39,683			40,908				123,140			120,541
	Efficiency ratio (GAAP-derived) (O/M)	56.74		%	56.57		%	56.78		%		57.28		%	57.21		%
	Efficiency ratio – adjusted (P/N)	54.18		%	53.63		%	53.44		%		54.53		%	53.57		%
		End of Period
		September 30,			June 30,			September 30,
		2020			2020			2019
Calculation of Tangible Common Equity-to-Tangible Assets Ratio
(Q)	Total common shareholders’ equity (GAAP)	$	877,754		$	864,995		$	813,167
(R)	Less: goodwill and intangible assets	(83,953)			(83,959)			(83,978)
(S)	Total tangible common shareholders’ equity (Q–R)	$	793,801		$	781,036		$	729,189
(T)	Total assets (GAAP)	7,290,949			7,365,146			6,691,070
(R)	Less: goodwill and intangible assets	(83,953)			(83,959)			(83,978)
(U)	Total tangible assets (T–R)	$	7,206,996		$	7,281,187		$	6,607,092
	Common equity-to-assets ratio (GAAP-derived) (Q/T)	12.04		%	11.74		%	12.15		%
	Tangible common equity-to-tangible assets ratio (S/U)	11.01		%	10.73		%	11.04		%
Calculation of Tangible Book Value per Common Share
(Q)	Total common shareholders’ equity (GAAP)	$	877,754		$	864,995		$	813,167
(V)	Actual common shares outstanding	25,553,644			25,550,355			25,508,756
	Book value per common share (GAAP-derived) (Q/V)*1000	$	34.35		$	33.85		$	31.88
	Tangible common book value per share (S/V)*1000	$	31.06		$	30.57		$	28.59

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