Business Wire | Jul 23, 2020 04:06PM EDT

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

Jul. 23, 2020

SOUTH BEND, Ind.--(BUSINESS WIRE)--Jul. 23, 2020--1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported net income of $18.50 million for the second quarter of 2020, up 12.73% from the $16.41 million reported in the first quarter of 2020 and down 20.88% from the $23.39 million reported in the second quarter a year ago, bringing the 2020 year-to-date net income to $34.92 million compared to $45.58 million in 2019, a decrease of 23.40%. The year-to-date net income comparison was negatively impacted by an increased provision for loan and lease losses of $12.56 million primarily due to sizeable impairments in a few accounts, the negative economic impact on our portfolio from COVID-19 and higher special attention loan balances in the first half of 2020. Additionally, net interest income decreased $2.53 million due to lower loan 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. 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 $0.09 million and a trust recovery of $0.17 million offset by $0.55 million in mortgage servicing rights impairment charges which reduced net income.

Diluted net income per common share for the second quarter of 2020 was up 12.50% to $0.72 versus $0.64 for the first quarter of 2020 and was down 20.88% versus $0.91 in the second quarter of 2019. Diluted net income per common share for the first half of 2020 was $1.36 compared to $1.76 a year earlier, a 22.73% decrease.

At its July 2020 meeting, the Board of Directors approved a cash dividend of $0.28 per common share, up 3.70% from the $0.27 per common share declared a year ago and equal to that declared in the previous quarter. The cash dividend is payable to shareholders of record on August 4, 2020 and will be paid on August 14, 2020.

Christopher J. Murphy III, Chairman and Chief Executive Officer, commented, "The second quarter results reflect a continuation of the impact of COVID-19 which began at the end of the first quarter. We focused our efforts and are pleased to have been able to help our customers deal with the uncertainties caused by the coronavirus pandemic. We believe we remain well-positioned for the long-term, are well-capitalized and have appropriate reserves with a strong balance sheet. That said, the near-term level of uncertainty remains unprecedented both in severity and length of the economic downturn tied to the coronavirus. The gradual easing of shelter-in-place in our markets is promising however, rising infection rates across the country could have further negative impacts on our clients and the markets we serve. In this environment of uncertainty, it is hard to predict what can or will happen and the impact it will have on us. While these are tumultuous times, we will continue our longstanding practice of providing straight talk, sound advice, always keeping our clients' best interests in mind for the long-term.

"We have provided over 3,350 clients with Paycheck Protection Program (PPP) loans, totaling more than $590 million, helping them save over 59,000 jobs in Indiana and Michigan. From what we can glean from the Government's release of the PPP program data through quarter end, we are the leading SBA lender among banks headquartered in Indiana with less than $10 billion in assets, having provided the highest number of PPP loans to businesses within the state among this group. Through the end of the quarter, 77% of the 3,350 PPP loans disbursed were for less than $150,000. We truly are serving our small business clients.

"In addition, we have approved and processed more than $835 million of loan modifications across our loan portfolios as of June 30, 2020. The majority of these in dollar terms are for customers primarily in the transportation (including auto rental and bus) and the hotel industries. We continue to take a long-term view of dealing with COVID-19 and its impact on the markets we serve. We are pleased to have entered this period well-capitalized, with appropriate reserves and a strong balance sheet so we are able to properly help our clients.

"During the second quarter, our net interest margin experienced the full impact of the 150 basis point decrease in the target Federal Funds Rate in March 2020 by the Federal Reserve. This resulted in a compression of our net interest margin as our earning assets repriced faster than interest-bearing liabilities. We also saw an increase in nonaccrual loans and leases during the second quarter as clients began to feel the full impact of business closures and stay-at-home orders in markets we serve. The majority of our present nonaccrual loans are tied to four customer relationships in our auto and light truck and construction equipment portfolios. During the second quarter, we recorded a provision for loan and lease losses of $10.38 million as we continue to monitor the negative impacts of the coronavirus pandemic for the intermediate and longer term. Continuing a positive trend from the first quarter, our residential mortgage loan business remained on record pace with high production volumes and profitable results.

"In April, Keefe, Bruyette & Woods, Inc. (KBW) announced their annual Bank Honor Roll list, with 1st Source being named among those recognized. The Bank Honor Roll consists of banking institutions that have had 10 consecutive years of increased earnings per share. 1st Source is among the 15 banks in the nation included in the Bank Honor Roll this year, with roughly 375 banking institutions having been analyzed in consideration for the list. To be considered for this recognition, banks must be publicly traded institutions with more than $500 million in assets. Given the economic uncertainty resulting from the coronavirus pandemic, this was welcome confirmation that our history of strong, steady practices focusing on our clients' best interests for the long-term has been successful.

"During the second quarter, we announced that the 1st Source Bank Board of Directors had elected Mr. Jim Seitz, Vice Chairman of the Board through the next Annual Meeting and Ms. Andrea Short, Chief Financial Officer, to the additional position as President of 1st Source Bank. Jim has served as President for eight years and has been an officer here for 35 years. Throughout his career, he has committed himself to delivering outstanding client service and supporting his colleagues in the strongest manner possible. He leaves a wonderful legacy of servant leadership, and his guidance to our Board and Andrea in the coming year will be helpful in the transition.

"Andrea earned her promotion to President of 1st Source Bank by demonstrating a strong track record of initiating and leading change, driving results, and by strengthening operational risk management and compliance. She was elected Chief Financial Officer of 1st Source Bank in 2013 and will continue in this capacity as well as serving as President. I am deeply grateful for and congratulate my two long-term colleagues as they enter these exciting new chapters in their lives. 1st Source has benefited tremendously from their dedication and leadership, and we look forward to their continued impact on our organization.

"Coincident with these promotions, a number of other promotions and changes were made to assure strong leadership for 1st Source for the future. All of our Consumer and Small Business Branch sales and service efforts, deposit offerings, and consumer and mortgage lending have been brought under the leadership of Mr. Ron Zeltwanger. Our Regional Presidents will report to Ron and he will report to Andrea Short. Similarly, Mr. Larry Mayers will direct all of our efforts serving business clients including our very successful SBA lending unit, Retirement Planning services, and our business banking practice groups across all regions. He also picks up direct responsibility for our national Solar financing business and will continue as our Fort Wayne Regional President. The business and operating units serving St. Joseph County, Indiana and Southwestern Michigan have been combined into the Central Region and Ms. Shelli Alexander was promoted to Regional President leading this unit. Also, a new group was created under the leadership of Mr. Kevin Murphy bringing together Marketing, Information Technology, our Virtual Branch, and digital strategy efforts serving clients and improving internal operations. Lastly, our Wealth Advisory Services and Insurance Group will now report to Mr. John Griffith, EVP and Chief Administrative Officer, giving new focus to its growth and profitability. All of these changes continue our process of building strong leadership for the future." Mr. Murphy concluded.

SECOND QUARTER 2020 FINANCIAL RESULTS

Loans

Average loans and leases of $5.57 billion increased $563.77 million, up 11.27% in the second quarter of 2020 from the year ago quarter and have increased $466.76 million, up 9.16% from the first quarter. Year-to-date average loans and leases of $5.33 billion increased $401.60 million, up 8.15% from the first six months of 2019. Loan growth is primarily from PPP originations.

Deposits

Average deposits of $5.81 billion grew $545.67 million for the quarter ended June 30, 2020, up 10.36% from the year ago quarter and have increased $538.20 million, or 10.21% from the first quarter. Average deposits for the first six months of 2020 were $5.54 billion, an increase of $378.77 million, up 7.34% from the same period a year ago. Deposit growth is primarily from PPP loan fundings and government stimulus payments.

Net Interest Income and Net Interest Margin

Second quarter 2020 net interest income of $54.00 million decreased $2.43 million, or 4.30% from the second quarter a year ago and decreased $0.84 million, down 1.54% from the previous quarter. For the first six months of 2020, tax-equivalent net interest income was $109.13 million, a decrease of $2.60 million, or 2.33% compared to the same period a year ago.

Second quarter 2020 net interest margin was 3.23%, a decrease of 50 basis points from the 3.73% for the same period in 2019 and decreased 34 basis points from the previous quarter. Second quarter 2020 net interest margin on a fully tax-equivalent basis was 3.24%, a decrease of 50 basis points from the 3.74% for the same period in 2019 and was lower by 34 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 four basis points for the quarter.

Net interest margin for the first six months on 2020 was 3.39%, a decrease of 36 basis points from the 3.75% for the same period in 2019. Net interest margin on a fully-taxable-equivalent basis for the first half of 2020 was 3.40%, a decrease of 37 basis points from the 3.77% for the first half of 2019. PPP loans had a negative impact of five basis points on the year-to-date net interest margin.

Noninterest Income

Second quarter 2020 noninterest income of $25.24 million decreased $0.42 million, or 1.65% from the second quarter a year ago and increased $0.62 million, or 2.51% from the first quarter of 2020. For the first six months of 2020, noninterest income was $49.86 million, relatively flat from the same period a year ago.

Noninterest income during the three months ended June 30, 2020 was lower compared to a year ago mainly from 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 offset by improved mortgage banking income driven by gains on a higher volume of loan sales. Additionally, we recognized a $0.55 million impairment charge on our mortgage servicing rights during the second quarter of 2020 as prepayment speeds increased.

The increase in noninterest income from the first quarter of 2020 was primarily the result of improved mortgage banking income driven by gains on a higher volume of loan sales, seasonal trust and wealth advisory tax fees, and higher customer swap fees, and increased debit card income offset by lower equipment rental income due to a reduction in the size of the average equipment rental portfolio, decreased service charges on deposit accounts due to fewer overdraft and non-sufficient fund transactions, and a $0.55 million impairment charge on our mortgage servicing rights during the second quarter of 2020.

Noninterest Expense

Second quarter 2020 noninterest expense of $44.83 million decreased $2.53 million, or 5.34% from the second quarter a year ago and decreased $1.71 million, down 3.67% from the prior quarter. Excluding depreciation on leased equipment, noninterest expenses were down 3.10% from the second quarter a year ago and down 3.47% from the prior quarter. For the first six months of 2020, noninterest expense was $91.36 million, a decrease of $1.20 million, down 1.29% compared to the same period a year ago.

The decrease in noninterest expense during the second quarter of 2020 compared to a year ago was mainly due to lower leased equipment depreciation from a reduction in the average equipment rental portfolio, less professional consulting fees, decreased group insurance costs on fewer claims and lower business development expenses. These decreases were offset by higher salaries as a result of normal merit increases and a rise in general collection and repossession costs.

The decrease in noninterest expense from the prior quarter was primarily the result of reduced business development expenses, a decrease in the valuation provision for interest rate swaps with customers, and higher deferred salary expense on PPP loan originations. These decreases were offset by increased incentives, fewer gains on the sale of operating lease equipment and higher collection and repossession expenses.

Credit

The reserve for loan and lease losses as of June 30, 2020 was 2.31% of total loans and leases compared to 2.35% at March 31, 2020 and 2.05% at June 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 2.54% at June 30, 2020 compared to 2.35% at March 31, 2020. Net recoveries of $0.11 million were recorded for the second quarter of 2020 compared with net charge-offs of $1.19 million in the same quarter a year ago and $1.81 million of net charge-offs in the prior quarter.

The provision for loan and lease losses was $10.38 million for the second quarter of 2020, an increase of $6.13 million compared with the same period in 2019 and a decrease of $0.98 million from the first quarter of 2020. The ratio of nonperforming assets to loans and leases was 1.20% as of June 30, 2020, compared to 0.68% on March 31, 2020 and 0.41% on June 30, 2019. Excluding PPP loans, the ratio of non-performing assets to loans and leases was 1.33% at June 30, 2020 and 0.68% at March 31, 2020.

Capital

As of June 30, 2020, the common equity-to-assets ratio was 11.74%, compared to 12.63% at March 31, 2020 and 11.95% a year ago. The tangible common equity-to-tangible assets ratio was 10.73% at June 30, 2020 compared to 11.53% at March 31, 2020 and 10.82% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 12.76% at June 30, 2020 compared to 12.57% at March 31, 2020 and 11.83% a year ago. All of the June 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 80 banking centers, 15 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

2nd QUARTER2020 FINANCIALHIGHLIGHTS

(Unaudited -Dollars inthousands, except pershare data)

Three Months Ended Six Months Ended

June 30, March 31, June 30, June 30, June 30,

2020 2020 2019 2020 2019

AVERAGE BALANCES

Assets $ 7,185,406 $ 6,611,121 $ 6,487,744 $ 6,898,264 $ 6,389,610

Earning 6,727,011 6,181,794 6,067,871 6,454,403 5,982,757 assets

Investments 1,045,310 1,030,640 1,001,142 1,037,975 994,405

Loans and 5,565,160 5,098,397 5,001,392 5,331,779 4,930,183 leases

Deposits 5,810,578 5,272,376 5,264,912 5,541,477 5,162,704

Interestbearing 4,580,419 4,415,552 4,468,591 4,497,986 4,392,491 liabilities

Commonshareholders' 862,209 844,724 789,009 853,467 782,370 equity

Total equity 891,606 867,605 792,884 879,605 785,094

INCOMESTATEMENT DATA

Net interest $ 54,001 $ 54,844 $ 56,427 $ 108,845 $ 111,375 income

Net interestincome - FTE^ 54,138 54,995 56,604 109,133 111,734 (1)

Provision forloan and 10,375 11,353 4,247 21,728 9,165 lease losses

Noninterest 25,241 24,622 25,664 49,863 49,788 income

Noninterest 44,825 46,535 47,353 91,360 92,557 expense

Net income 18,526 16,418 23,417 34,944 45,613

Net incomeavailable to 18,502 16,413 23,385 34,915 45,581 commonshareholders

PER SHARE DATA

Basic netincome per $ 0.72 $ 0.64 $ 0.91 $ 1.36 $ 1.76 common share

Diluted netincome per 0.72 0.64 0.91 1.36 1.76 common share

Common cashdividends 0.28 0.29 0.27 0.57 0.54 declared

Book valueper common 33.85 33.32 31.12 33.85 31.12 share^(2)

Tangible bookvalue per 30.57 30.03 27.83 30.57 27.83 common share^(1)

Market value 38.70 52.16 48.66 52.16 50.15 - High

Market value 26.72 26.07 43.34 26.07 39.11 - Low

Basicweightedaverage 25,540,855 25,523,356 25,615,718 25,532,105 25,687,056 common sharesoutstanding

Dilutedweightedaverage 25,540,855 25,523,356 25,615,718 25,532,105 25,687,056 common sharesoutstanding

KEY RATIOS

Return onaverage 1.04 % 1.00 % 1.45 % 1.02 % 1.44 %assets

Return onaveragecommon 8.63 7.81 11.89 8.23 11.75 shareholders'equity

Averagecommonshareholders' 12.00 12.78 12.16 12.37 12.24 equity toaverageassets

End of periodtangiblecommon equity 10.73 11.53 10.82 10.73 10.82 to tangibleassets^(1)

Risk-basedcapital - 12.76 12.57 11.83 12.76 11.83 Common EquityTier 1^(3)

Risk-basedcapital - 14.32 13.97 12.94 14.32 12.94 Tier 1^(3)

Risk-basedcapital - 15.58 15.23 14.20 15.58 14.20 Total^(3)

Net interest 3.23 3.57 3.73 3.39 3.75 margin

Net interestmargin - FTE^ 3.24 3.58 3.74 3.40 3.77 (1)

Efficiencyratio: 56.57 58.56 57.68 57.56 57.43 expense torevenue

Efficiencyratio:expense to 53.63 55.79 54.07 54.71 53.64 revenue -adjusted^(1)

Net(recoveries)charge offs (0.01) 0.14 0.10 0.06 0.19 to averageloans andleases

Loan andlease lossreserve to 2.31 2.35 2.05 2.31 2.05 loans andleases

Nonperformingassets to 1.20 0.68 0.41 1.20 0.41 loans andleases



June 30, March 31, December 31, September 30, June 30,

2020 2020 2019 2019 2019

END OF PERIOD BALANCES

Assets $ 7,365,146 $ 6,735,118 $ 6,622,776 $ 6,691,070 $ 6,650,105

Loans and 5,692,322 5,129,514 5,085,527 5,099,546 5,109,337 leases

Deposits 5,993,456 5,275,911 5,357,326 5,391,679 5,403,845

Reserve forloan and 131,283 120,798 111,254 108,941 104,911 lease losses

Goodwill andintangible 83,959 83,964 83,971 83,978 83,985 assets

Commonshareholders' 864,995 850,897 828,277 813,167 794,662 equity

Total equity 901,653 877,302 848,636 833,042 804,686

ASSET QUALITY

Loans andleases past $ 256 $ 191 $ 309 $ 311 $ 156 due 90 daysor more

Nonaccrualloans and 62,800 26,301 9,789 10,188 12,212 leases

Other real 303 362 522 629 543 estate

Repossessions 6,132 9,020 8,623 6,610 8,799

Equipmentowned under 57 - - - - operatingleases

Totalnonperforming $ 69,548 $ 35,874 $ 19,243 $ 17,738 $ 21,710 assets

(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

CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION

(Unaudited -Dollars in thousands)

June 30, March 31, December 31, June 30,

2020 2020 2019 2019

ASSETS

Cash and due from $ 67,591 $ 72,756 $ 67,215 $ 71,910 banks

Federal funds soldand interest 112,645 49,543 16,150 24,578 bearing depositswith other banks

Investmentsecurities 1,055,797 1,057,169 1,040,583 1,021,786 available-for-sale

Other investments 30,619 28,414 28,414 28,404

Mortgages held for 36,508 13,449 20,277 19,178 sale

Loans and leases,net of unearned discount:

Commercial and 1,710,712 1,166,462 1,132,791 1,173,000 agricultural

Auto and light 563,606 577,757 588,807 635,100 truck

Medium and heavy 284,432 278,076 294,824 300,042 duty truck

Aircraft 782,160 773,132 784,040 811,163

Construction 739,027 718,307 705,451 686,633 equipment

Commercial real 942,971 930,757 908,177 835,919 estate

Residential realestate and home 531,972 545,606 532,003 529,749 equity

Consumer 137,442 139,417 139,434 137,731

Total loans and 5,692,322 5,129,514 5,085,527 5,109,337 leases

Reserve for loan (131,283) (120,798) (111,254) (104,911) and lease losses

Net loans and 5,561,039 5,008,716 4,974,273 5,004,426 leases

Equipment ownedunder operating 86,183 101,238 111,684 126,502 leases, net

Net premises and 51,486 52,431 52,219 51,570 equipment

Goodwill and 83,959 83,964 83,971 83,985 intangible assets

Accrued income and 279,319 267,438 227,990 217,766 other assets

Total assets $ 7,365,146 $ 6,735,118 $ 6,622,776 $ 6,650,105



LIABILITIES

Deposits:

Noninterest-bearing $ 1,684,102 $ 1,219,327 $ 1,216,834 $ 1,238,604 demand

Interest-bearing deposits:

Interest-bearing 1,866,415 1,591,419 1,677,200 1,665,456 demand

Savings 942,891 840,606 814,794 810,122

Time 1,500,048 1,624,559 1,648,498 1,689,663

Totalinterest-bearing 4,309,354 4,056,584 4,140,492 4,165,241 deposits

Total deposits 5,993,456 5,275,911 5,357,326 5,403,845

Short-term borrowings:

Federal fundspurchased andsecurities sold 169,483 135,942 120,459 119,781 under agreements torepurchase

Other short-term 7,536 146,903 25,434 66,228 borrowings

Total short-term 177,019 282,845 145,893 186,009 borrowings

Long-term debt andmandatorily 81,760 81,877 71,639 71,542 redeemablesecurities

Subordinated notes 58,764 58,764 58,764 58,764

Accrued expensesand other 152,494 158,419 140,518 125,259 liabilities

Total liabilities 6,463,493 5,857,816 5,774,140 5,845,419



SHAREHOLDERS' EQUITY

Preferred stock; nopar value

Authorized - - - - 10,000,000 shares;none issued oroutstanding

Common stock; nopar value

Authorized40,000,000 shares;issued 28,205,674 436,538 436,538 436,538 436,538 shares at June 30,2020, March 31,2020, December 31,2019, and June 30,2019, respectively

Retained earnings 484,491 472,911 463,269 431,091

Cost of commonstock in treasury(2,655,319,2,670,290,2,696,200, and2,670,462 shares atJune 30, 2020, (75,922) (76,203) (76,702) (75,380) March 31, 2020,December 31, 2019,and

June 30, 2019,respectively)

Accumulated othercomprehensive 19,888 17,651 5,172 2,413 income (loss)

Total shareholders' 864,995 850,897 828,277 794,662 equity

Noncontrolling 36,658 26,405 20,359 10,024 interests

Total equity 901,653 877,302 848,636 804,686

Total liabilities $ 7,365,146 $ 6,735,118 $ 6,622,776 $ 6,650,105 and equity

1st SOURCE CORPORATION

CONSOLIDATEDSTATEMENTS OF INCOME

(Unaudited - Dollars inthousands, except per share amounts)

Three Months Ended Six Months Ended

June 30, March 31, June 30, June 30, June 30,

2020 2020 2019 2020 2019

Interest income:

Loans and leases $ 58,815 $ 61,526 $ 65,599 $ 120,341 $ 128,282

Investmentsecurities, 4,487 5,550 5,186 10,037 10,701 taxable

Investmentsecurities, 232 264 353 496 738 tax-exempt

Other 316 346 499 662 937

Total interest 63,850 67,686 71,637 131,536 140,658 income

Interest expense:

Deposits 8,265 10,851 12,978 19,116 24,448

Short-term 90 254 540 344 1,471 borrowings

Subordinated notes 835 884 928 1,719 1,856

Long-term debt andmandatorily 659 853 764 1,512 1,508 redeemablesecurities

Total interest 9,849 12,842 15,210 22,691 29,283 expense

Net interest 54,001 54,844 56,427 108,845 111,375 income

Provision for loan 10,375 11,353 4,247 21,728 9,165 and lease losses

Net interestincome after 43,626 43,491 52,180 87,117 102,210 provision for loanand lease losses

Noninterest income:

Trust and wealth 5,589 4,848 5,583 10,437 10,441 advisory

Service charges on 1,910 2,605 2,785 4,515 5,283 deposit accounts

Debit card 3,601 3,373 3,669 6,974 6,889

Mortgage banking 3,315 2,336 999 5,651 1,935

Insurance 1,695 1,881 1,518 3,576 3,692 commissions

Equipment rental 5,990 6,630 7,809 12,620 15,791

(Losses) gains oninvestment (1) 280 - 279 - securitiesavailable-for-sale

Other 3,142 2,669 3,301 5,811 5,757

Total noninterest 25,241 24,622 25,664 49,863 49,788 income

Noninterest expense:

Salaries and 23,999 24,401 23,787 48,400 47,282 employee benefits

Net occupancy 2,504 2,721 2,481 5,225 5,253

Furniture and 6,258 6,407 6,289 12,665 12,313 equipment

Depreciation - 5,142 5,427 6,400 10,569 12,924 leased equipment

Professional fees 1,258 1,442 1,706 2,700 3,304

Supplies and 1,390 1,634 1,608 3,024 3,101 communication

FDIC and other 599 288 608 887 1,253 insurance

Businessdevelopment and 1,121 1,359 1,678 2,480 2,627 marketing

Loan and leasecollection and 838 763 230 1,601 1,591 repossession

Other 1,716 2,093 2,566 3,809 2,909

Total noninterest 44,825 46,535 47,353 91,360 92,557 expense

Income before 24,042 21,578 30,491 45,620 59,441 income taxes

Income tax expense 5,516 5,160 7,074 10,676 13,828

Net income 18,526 16,418 23,417 34,944 45,613

Net (income) lossattributable to (24) (5) (32) (29) (32) noncontrollinginterests

Net incomeavailable to $ 18,502 $ 16,413 $ 23,385 $ 34,915 $ 45,581 commonshareholders

Per common share:

Basic net income $ 0.72 $ 0.64 $ 0.91 $ 1.36 $ 1.76 per common share

Diluted net income $ 0.72 $ 0.64 $ 0.91 $ 1.36 $ 1.76 per common share

Cash dividends $ 0.28 $ 0.29 $ 0.27 $ 0.57 $ 0.54

Basic weightedaverage common 25,540,855 25,523,356 25,615,718 25,532,105 25,687,056 shares outstanding

Diluted weightedaverage common 25,540,855 25,523,356 25,615,718 25,532,105 25,687,056 shares outstanding

1st SOURCE CORPORATION

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY

INTEREST RATES AND INTEREST DIFFERENTIAL

(Unaudited -Dollars in thousands)

Three Months Ended

June 30, 2020 March 31, 2020 June 30, 2019

Average Interest Yield/ Average Interest Yield/ Average Interest Yield/ Balance Income/ Rate Balance Income/ Rate Balance Income/ Rate Expense Expense Expense

ASSETS

Investmentsecurities available-for-sale:

Taxable $ 995,776 $ 4,487 1.81 % $ 973,421 $ 5,550 2.29 % $ 929,264 $ 5,186 2.24 %

Tax exempt^(1) 49,534 286 2.32 % 57,219 325 2.28 % 71,878 437 2.44 %

Mortgages held for 27,016 198 2.95 % 11,294 96 3.42 % 12,014 127 4.24 %sale

Loans and leases,net of unearned 5,565,160 58,700 4.24 % 5,098,397 61,520 4.85 % 5,001,392 65,565 5.26 %discount^(1)

Other investments 89,525 316 1.42 % 41,463 346 3.36 % 53,323 499 3.75 %

Total earning 6,727,011 63,987 3.83 % 6,181,794 67,837 4.41 % 6,067,871 71,814 4.75 %assets^(1)

Cash and due from 73,523 65,407 67,448 banks

Reserve for loan (124,186) (112,239) (102,787) and lease losses

Other assets 509,058 476,159 455,212

Total assets $ 7,185,406 $ 6,611,121 $ 6,487,744



LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing $ 4,248,478 $ 8,265 0.78 % $ 4,076,270 $ 10,851 1.07 % $ 4,137,118 $ 12,978 1.26 %deposits

Short-term 191,411 90 0.19 % 202,545 254 0.50 % 201,401 540 1.08 %borrowings

Subordinated notes 58,764 835 5.71 % 58,764 884 6.05 % 58,764 928 6.33 %

Long-term debt andmandatorily 81,766 659 3.24 % 77,973 853 4.40 % 71,308 764 4.30 %redeemablesecurities

Totalinterest-bearing 4,580,419 9,849 0.86 % 4,415,552 12,842 1.17 % 4,468,591 15,210 1.37 %liabilities

Noninterest-bearing 1,562,100 1,196,106 1,127,794 deposits

Other liabilities 151,281 131,858 98,475

Shareholders' 862,209 844,724 789,009 equity

Noncontrolling 29,397 22,881 3,875 interests

Total liabilities $ 7,185,406 $ 6,611,121 $ 6,487,744 and equity

Less: Fullytax-equivalent (137) (151) (177) adjustments

Net interest income/margin $ 54,001 3.23 % $ 54,844 3.57 % $ 56,427 3.73 %(GAAP-derived)^(1)

Fullytax-equivalent 137 151 177 adjustments

Net interest income $ 54,138 3.24 % $ 54,995 3.58 % $ 56,604 3.74 %/margin - FTE^(1)

(1) See "Reconciliation of Non-GAAP Financial Measures" for more information onthis performance measure/ratio.



1st SOURCE CORPORATION

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY

INTEREST RATES AND INTEREST DIFFERENTIAL

(Unaudited -Dollars in thousands)

Six Months Ended

June 30, 2020 June 30, 2019

Average Interest Yield/ Average Interest Yield/ Balance Income/ Rate Balance Income/ Rate Expense Expense

ASSETS

Investmentsecurities available-for-sale:

Taxable $ 984,598 $ 10,037 2.05 % $ 919,398 $ 10,701 2.35 %

Tax exempt^(1) 53,377 611 2.30 % 75,007 909 2.44 %

Mortgages held for 19,155 294 3.09 % 10,429 228 4.41 %sale

Loans and leases,net of unearned 5,331,779 120,220 4.53 % 4,930,183 128,242 5.25 %discount^(1)

Other investments 65,494 662 2.03 % 47,740 937 3.96 %

Total earning 6,454,403 131,824 4.11 % 5,982,757 141,017 4.75 %assets^(1)

Cash and due from 69,465 65,677 banks

Reserve for loan (118,212) (102,245) and lease losses

Other assets 492,608 443,421

Total assets $ 6,898,264 $ 6,389,610



LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing 4,162,374 19,116 0.92 % 4,036,578 24,448 1.22 %deposits

Short-term 196,978 344 0.35 % 226,252 1,471 1.31 %borrowings

Subordinated notes 58,764 1,719 5.88 % 58,764 1,856 6.37 %

Long-term debt andmandatorily 79,870 1,512 3.81 % 70,897 1,508 4.29 %redeemablesecurities

Totalinterest-bearing 4,497,986 22,691 1.01 % 4,392,491 29,283 1.34 %liabilities

Noninterest-bearing 1,379,103 1,126,126 deposits

Other liabilities 141,570 85,899

Shareholders' 853,467 782,370 equity

Noncontrolling 26,138 2,724 interests

Total liabilities $ 6,898,264 $ 6,389,610 and equity

Less: Fullytax-equivalent (288) (359) adjustments

Net interest income/margin $ 108,845 3.39 % $ 111,375 3.75 %(GAAP-derived)^(1)

Fullytax-equivalent 288 359 adjustments

Net interest income $ 109,133 3.40 % $ 111,734 3.77 %/margin - FTE^(1)

(1) See "Reconciliation of Non-GAAP Financial Measures" for more information onthis performance measure/ratio.

1st SOURCE CORPORATION

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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



Three Months Ended Six Months Ended

June 30, March 31, June 30, June 30, June 30,

2020 2020 2019 2020 2019

Calculation of Net Interest Margin

(A) Interest income $ 63,850 $ 67,686 $ 71,637 $ 131,536 $ 140,658 (GAAP)

Fully tax-equivalent adjustments:

(B) - Loans and leases 83 90 93 173 188

- Tax exempt(C) investment 54 61 84 115 171 securities

(D) Interest income - 63,987 67,837 71,814 131,824 141,017 FTE (A+B+C)

(E) Interest expense 9,849 12,842 15,210 22,691 29,283 (GAAP)

Net interest(F) income (GAAP) 54,001 54,844 56,427 108,845 111,375 (A-E)

(G) Net interest 54,138 54,995 56,604 109,133 111,734 income - FTE (D-E)

(H) Annualization 4.022 4.022 4.011 2.011 2.017 factor

(I) Total earning $ 6,727,011 $ 6,181,794 $ 6,067,871 $ 6,454,403 $ 5,982,757 assets

Net interest margin 3.23 % 3.57 % 3.73 % 3.39 % 3.75 % (GAAP-derived) (F*H)/I

Net interest margin - FTE (G*H) 3.24 % 3.58 % 3.74 % 3.40 % 3.77 % /I



Calculation of Efficiency Ratio

(F) Net interest $ 54,001 $ 54,844 $ 56,427 $ 108,845 $ 111,375 income (GAAP)

(G) Net interest 54,138 54,995 56,604 109,133 111,734 income - FTE

(J) Plus: noninterest 25,241 24,622 25,664 49,863 49,788 income (GAAP)

Less: gains/losses on investment(K) securities and (248) (513) (131) (761) (148) partnership investments

(L) Less: depreciation (5,142) (5,427) (6,400) (10,569) (12,924) - leased equipment

(M) Total net revenue 79,242 79,466 82,091 158,708 161,163 (GAAP) (F+J)

Total net revenue(N) - adjusted 73,989 73,677 75,737 147,666 148,450 (G+J-K-L)

(O) Noninterest 44,825 46,535 47,353 91,360 92,557 expense (GAAP)

(L) Less:depreciation (5,142) (5,427) (6,400) (10,569) (12,924) - leased equipment

Noninterest(P) expense - adjusted 39,683 41,108 40,953 80,791 79,633 (O-L)

Efficiency ratio (GAAP-derived) (O/ 56.57 % 58.56 % 57.68 % 57.56 % 57.43 % M)

Efficiency ratio - 53.63 % 55.79 % 54.07 % 54.71 % 53.64 % adjusted (P/N)



End of Period

June 30, March 31, June 30,

2020 2020 2019

Calculation of Tangible Common Equity-to-Tangible Assets Ratio

Total common(Q) shareholders' $ 864,995 $ 850,897 $ 794,662 equity (GAAP)

(R) Less: goodwill and (83,959) (83,964) (83,985) intangible assets

Total tangible(S) common $ 781,036 $ 766,933 $ 710,677 shareholders' equity (Q-R)

(T) Total assets 7,365,146 6,735,118 6,650,105 (GAAP)

(R) Less: goodwill and (83,959) (83,964) (83,985) intangible assets

(U) Total tangible $ 7,281,187 $ 6,651,154 $ 6,566,120 assets (T-R)

Common equity-to-assets ratio 11.74 % 12.63 % 11.95 % (GAAP-derived) (Q/ T)

Tangible common equity-to-tangible 10.73 % 11.53 % 10.82 % assets ratio (S/U)



Calculation ofTangible Book Value per Common Share

Total common(Q) shareholders' $ 864,995 $ 850,897 $ 794,662 equity (GAAP)

(V) Actual common 25,550,355 25,535,384 25,535,212 shares outstanding

Book value per common share $ 33.85 $ 33.32 $ 31.12 (GAAP-derived) (Q/ V)*1000

Tangible common book value per $ 30.57 $ 30.03 $ 27.83 share (S/V)*1000

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