2 0 1 4 A N N U A L R E P O R T
Your partners from the first – Jarom T. Abel • Dustin K. Adams • Peggy S. Adams • Terri L. Adams • Jennifer C. Addis • Natasha A. Akers • Kari Albert • Lorie A. Albright • Tonia M. Albright • Amanda S. Alburitel • Jamie
T. Alexander • Shelli A. Alexander • Rachel L. Alford Lipsey • Brenda A. Allison • Amanda M. Alvarado • Marie G. Alvarez • Jill S. Alward • Jeannie M. Amador • Kirsten D. Amussen • Solomon L. Anderson • Melani D. Andres • Mark L. Andrews • Mary
E. Andrews • Gabrielle K. Anglin • Tara A. Antonucci • Carolotta M. Anweiler • Jennifer R. Armstrong • Angela M. Arndt • Michael T. Arnett • Brenda D. Arrivillaga • Abeer Aslam • Helen M. Atkinson • Alexandria N. Austin • Pamela J. Austin • Robert G.
Ax • Sherri M. Bachman • Jeffrey S. Bachmann • Erik C. Back • Christy M. Bader • Stephanie A. Baeske • Jack G. Bahbah • Lisa A. Balazsi Williams • Ida M. Balazsi • Christine L. Baldwin • John V. Ball Jr. • David K. Ball • Tamala L. Baney • Jamie M.
Bankert • Amy M. Barbour • Alberta M. Barker • Linsey Barkowski • Shanon G. Barnhart • Sheri L. Bartoli • Deborah A. Barton • Robert E. Bartos • Debra A. Bass • Terry W. Batchelor • Brett A. Bauer • Laurence R. Bauer • Micheal L. Bauer • Michelle
N. Bauman • Douglas S. Baumgardner • Edmund C. Baumgartner • Emily E. Bay • Aretas O. Bayley • Michael D. Beaton • Gina L. Beckner • Stephanie L. Becvar • John D. Bedient • Madeline I. Beggs • Angela L. Beilman • Angela E. Beison • Terri R.
Belcher • Ryan S. Bell • Theresa J. Bell • Mark W. Bemenderfer • Todd M. Bemenderfer • Angelica K. Benitez • Kim A. Bennett • Mary A. Benson • Sue E. Berger • David W. Bergevin • Janette Bergstedt • Angela M. Beserra • Curtis L. Bethel Jr. • Emily
J. Beutter • Carolyn H. Biggs • Barry A. Bilger • Justin R. Binder • Dolores J. Bingham • Patricia A. Birk • Joshua M. Birky • Jana L. Bishop • Tracy A. Bishop • Kristin R. Bivens • Gary C. Blacketor • Sandra K. Blasko • Charlotte C. Blint • Virginia E. Blythe
• Amy L. Bobson • Kathryn S. Bohan • Kathy L. Boles • Jeffery A. Bomstad • Sarah A. Bond • John R. Borkowski • Sheila A. Borr • Cheryl L. Borsch • Pamela B. Borton • Barbara M. Botka • Eleanor E. Bottom • Nancy A. Bourlier • Susan M. Bovard •
Virginia L. Bowen • Sue A. Bowers • Christopher D. Bowman • Thomas L. Bowman • Melinda S. Bowmar • Tracy M. Bradford • Shawn M. Bradshaw • Sean M. Brady • Roxanne M. Bralick • Heather K. Brames • Jacob R. Brentlinger • Amber L. Briggs
• Patricia J. Brioli • Ruth A. Brittain • Brittany N. Brockie • Gregory C. Brown • Jasmine K. Brown • Rachelle L. Brown • Sheri L. Brown • Thomas J. Brown • William C. Brown • Richard L. Brubaker • Kalyn M. Bruce • Emily A. Bruck • Melissa D. Brunner
• Dawn L. Brutout • Douglas A. Bryant • Bradley K. Bucher • Shelley L. Buck • Jeffrey A. Buckley • Ashley S. Budish • Jeffrey L. Buhr • Kamela M. Bunch • Lisa M. Burch • Diane L. Burgess • Karen S. Burgess • Ellen M. Burke • Amy J. Burnau • Janessa
F. Burns • Amy L. Burridge • William B. Burton • Adam R. Busenbark • Steve M. Bush • Nancy L. Buss • Leonard D. Buszkiewicz • Tamara L. Butler • Bryan E. Byers • Rose E. Cabanaw • Bradley E. Campbell • Carneeya S. Campbell • Brenda Capps •
Kenneth J. Carbiener • Kathy M. Carlson • Joseph M. Carlton • Shawn C. Carlton • Melissa B. Carper • Douglas R. Carroll • Edwin S. Carter • Crystal M. Cartwright • Tara A. Casper • Courtney R. Cassler • Jennifer A. Castaneda • Rachel R. Casto •
Stephanie M. Cato • Christine I. Caudill • Judy A. Caudill • Ruben Cavazos • Scott R. Cawthon • Pamela S. Cecchi • Susan K. Ceglarek • Jesus A. Cervera • Mai Y. Chabon • Brittainy B. Chaffee • Melissa M. Chase • Tirang Chaudhary • Leticia Chavez •
Nikita Chawla • Chosani S. Chitaya • Bonnie L. Chlebowski • Mary E. Chmiel • Patricia A. Chodzinski • Lisa A. Christensen • Becky D. Christner • Scott J. Christner • Jonathan W. Cisna • Kimberly L. Clanton • Amy J. Clark • Pamela L. Clowers • Jean A.
Coby • Samantha L. Coday • Austin M. Coffel • Mindie L. Colanese • Sharon M. Colburn • Shelly M. Colip • Shelley A. Connors • Victoria L. Conrad • Daniel P. Conroy • Christa L. Cook • Nancy B. Cooks • Jeffrey A. Cooley • Jason W. Cooper • Jayne E.
Cooper • Lisa D. Corban • Kimberly A. Cornelis • Julianna Corr • Georgia Correa • Nancy M. Coughlin • Jolinda S. Cox • Rhonda L. Cox • Christopher L. Craft • Scott A. Cramer • Pamela S. Creech • Myrtle M. Crespo • David J. Crim • Jane A. Crim •
Larry W. Cripe • Glen H. Crookston • Carrissa L. Cross • Deborah A. Cross • Gail J. Crussemeyer • Julie Cruz • Nancy C. Culp • Ryan T. Culp • Richard J. Curran • Donna J. Curry • Beth A. Curtis • Lori A. Cuson • Susan L. Cybulski • Eugene R. Damalas
• Tara K. Daniel • Catherine V. Davis • Kimberley K. Davis • Kaley M. Day • Terri L. Day • Kimberly D. De Cook • Holley M. De La Cruz • Jeannette L. De Neve • JoElla L. De Pra • Debbie L. Dean • Stephen M. Deck • Faith M. Dejong • Gerardo Del Real
Mota • Maribel Delbrey • Amy J. Delee • Marissa A. Delgado • Nancy M. Deneen • Rachel A. Denlinger • Cheryl L. Dennis • Roger E. DePoy • Steven Deranek • Casey J. DeSmith • Christina M. Dettman • Kymberlee M. Diaz • Terry L. Dickerson • Kelton
R. Dickey • Lisa M. Dieringer • Steven M. Dieringer • Rebecca K. Dietrich • Liberty F. DiGiacomo • Charles C. Ditto • Cynthia K. Dixon • Glenda L. Dixon • Kelsey A. Dixon • Marci L. Dixon • Bethany L. Dobson • Diana Dockemeyer • Deborah L. Doelling
• Erika L. Doke • Diane H. Dolezal • J D. Dollar • Linda S. Dombrowski • Nancy Dominguez • Diana L. Domsic • Alyssa N. Dotson • Cimmon N. Dougherty • Mark D. Dougherty • Tina H. Dougherty • Eric D. Drogosch • Emily J. Dubree • Ann M. Duncan
• Bradley R. Dunlap • Lisa Dutoi • Donna J. Duttlinger • Amy B. Dutton • Angela B. Dvorak • Telesia A. Ealey • Emily Eash • Jon K. Edwards • Tracy Edwards • Andrea M. Ehresman • Danielle B. Eigenmann • Jana L. Eldridge • John W. Elliott • Brandy J.
Ellis • Jennifer R. Engdahl • Adair I. Engel • Kelly R. Engle • Sarah M. Engler • Danielle E. Erickson • Constance J. Estep • Cristina Y. Estrada Kedik • Amber R. Evans • Amy E. Evans • Lu Ann M. Evans • Michelle A. Evans • Kimberly A. Evard • Shanda L.
Ezell • Jeanette C. Fage • Jamie J. Fahlsing • Laura K. Falcone • Benjamin A. Fanning • Deborah A. Farkas • Leah M. Farmwald • Bonita G. Farnsworth • Peter D. Farrar • Darla D. Faucett • Michelle R. Fekete • Mickey M. Fell • Ryan J. Fenstermaker •
Margaret E. Ferrara • Eduardo Ferreira • Carolyn D. Fields • Terry W. Fike • Angela S. Fisher • Caryn M. Fisher • Kenneth L. Fisher • Sandra K. Fisher • Bonnie L. Fitch • Julie A. Flanigan • Renee N. Fleming • Sarah L. Folk • Laura L. Fonce • Denise L.
Ford • Connie L. Fordyce • Tracy A. Foreman • Rachel E. Foster • John E. Fowler • Grace Fox • S Andrew Fox • William Fox • Artavia L. Franklin • Shannon E. Franko • Debra K. Franks • Todd J. Franks • Cynthia J. Frederick • Ryan A. Freeman • Patricia
A. Freyer • Terry M. Freyer • Jillian M. Frick • Joe P. Frucci • Christine J. Frydrych • Leslie A. Gallup • Fernando A. Garcia • Gregory A. Gardner • Pamela L. Garrett • Tonya R. Gaskill • Monica G. Gates • Jacqueline S. Gearhart • Scott F. Geik • Brenda
A. Geller • Chad M. Gentry • Grier B. Gentry • Wendy L. George • Sara E. Gephart • Thomas P. Gerencser • Mallory R. Getty • Lauren M. Gibbons • Marcus D. Giden • Paul W. Gifford Jr. • Adam C. Gill • Timothy M. Gilleand • Martha L. Gilmer • Dana K.
Giszewski • Lynell L. Goehring • Rachel S. Goings • Rena M. Gomez • Stephanie J. Gonzales • Adrienne P. Gonzalez • Cynthia M. Good • Mary R. Goodhew • Tamara L. Goodwin • Traci E. Gordon • Jennifer L. Gore • Jay S. Gosselin • Christine M. Gosztola
• Mark D. Gould • Melissa A. Grassa • Brian D. Green • Linda M. Green • Pamela B. Green • Amanda J. Grenert • Jennifer L. Greve • Amy R. Grey • James L. Griest • John B. Griffith • Barbara K. Guerin • Michelle R. Gulas • Amy S. Gullotta • Jeffrey D.
Gunn • Samuel Gutierrez Rangel • Rosario M. Gutierrez • Jane E. Guzman • Amy S. Hagan • Jaimie C. Hageman • Nora M. Hall • Steve R. Hall • Robert G. Hamilton Jr. • Adam C. Hamilton • Lori L. Hammonds • Laurie B. Harbison • Gabrielle L. Hardy
• Melissa D. Harmon • Carri L. Harrington • Angela J. Harris • Jim Harris • Kathryn L. Harris • Sarah B. Harting • Tracy D. Harvey • Teresa C. Harwood • Erin M. Hathaway • Elizabeth A. Hawkins • Wayne E. Hawn • Mary E. Hayden • Derek R. Hayes •
Jeannette M. Hayes • Juli K. Hayes • Marcia L. Hayes • Patricia L. Hayes • Renee M. Hayes • Kelly M. Heatherly • Amy L. Hechlinski • Andrew P. Heck • Frances J. Hegyi • James T. Heim • Eric H. Heintzelman • Mary H. Hektor • Keith D. Henderson •
Brandy R. Henrich • Adam L. Henson • Ronda A. Herbert • Meredith S. Herman • Mariangelica Hernandez Garcia • Julianna D. Herring • Cecilia M. Hess • Rebecca E. Hess • Cristabel H. Hewitt • Brian P. Hibbs • Karissa N. Hickey • Kendra L. Hicks •
Lisa K. Hilbert • Michael P. Hinds • Tara D. Hitt • Dennis L. Hively • Bonnie L. Hobbs • Carol A. Hochstetler • Judith A. Hodgson • Rachelle E. Hodgson • Sarah P. Hodum • Aaron M. Hoeppner • Kathy L. Hoffa • Lee M. Hoffman • Carol L. Hoke • Raquel
A. Holdgrafer • Phillip S. Hollett • Debra A. Holloman • Christine E. Holmes • John D. Holmes • Marcia L. Holmes • Gregory M. Holst • Larry V. Holston • Melody A. Hooley • Devin P. Hoover • John J. Horan Jr. • Holly R. Horan • Judith L. Horner • Hazel
C. Horvath • Michael E. Horvath • Joanna J. Houin • Janice L. Howdeshell • David P. Hudak • Janet G. Hughes • Meagen E. Hunsaker • Joseph B. Hunting • Melani J. Huntsman • Anthony T. Hurley • Linda G. Hurst • Robert W. Hyde • Terri L. Hynek •
Megan A. Ingram • Ashlyn M. Irk • Branko Isailovic • Timothy E. Isenberg • Patricia A. Jackowiak • Eileen Jackson • John A. James • Katrina L. James • Robert L. Jamieson • Catherine E. Janowiak • John M. Jarvis • Lori Jean • Karin J. Jenczalik • Gary
T. Jenswold • Debra K. Jernas • Angela L. Jeter • Laura J. Jeter • Douglas P. Johnson • Kimberly D. Johnson • Sarah J. Johnston • Alison S. Jones • Gregory A. Jones • Jeannine F. Jones • Loveda R. Jones • Nancy G. Jones • Tanisha M. Jones • Tracy
L. Jones • Lyle V. Juillerat • Carmen M. Jun • Lorra A. Junk • Sarah A. Jurgenson • Sherryl A. Kalk • Tracy J. Karafa-Chrzan • Karen A. Karason • Mackenzie A. Karst • Kristy L. Kaufman • Garrett T. Kautz • Matthew P. Kavanaugh • Marissa E. Kay •
Noreen A. Kazi • Norena E. Kazmierczak • Sean B. Kearns • Robert J. Kedzior • Richard T. Keel • Sabrina Keel • Victoria Keldsen • Peggy A. Kelley • Samantha J. Kemp • Shannon R. Kesvormas • Kevin M. Kettle • Rebekah L. Kincaid • Jay W. King •
Karen J. King • Kristian P. Kintz • Chree L. Kizer • Lisa M. Kleckner • Jennifer L. Klein • Trisha L. Klein • Lori A. Klimek • Kathy I. Kline • JoAnne M. Klowetter • Kirsten A. Klupp • Jean M. Knaak • Mark A. Knight • Melissa M. Knoll • Shantel R. Knuth •
Kevin A. Kobb • Carey A. Koch • Sarah L. Kolodziej • Carrie L. Kosac • Charlene A. Koszyk • Jacquelyn M. Kovach • Robin L. Koziczynski • Amishia R. Kreft • Julia R. Kretlow • Susan K. Kreuter • Regina A. Kring • Amanda J. Kroll • Jacqueline A.
Kronewitter • Daina M. Krueger • Elizabeth A. Kruk • Patricia R. Kruszka • Marlene A. Kulesia • Stephanie L. Kuruzar • Joseph T. Kuzmitz • Jessica L. Kwiatkowski • James D. Laffey • Patricia L. Lahey • Lauren Lahndorf • Debrielle C. Lane • Mark A.
Lane • Raeanna L. Lane • Catherine C. Langford • Sarah M. Laskowski • Candise N. Lassus • Judith C. Lauer • Karah N. Leach • Sonya L. Lee • Connie K. Lemler • Nicole M. Lemler • Virginia M. Lentz • Tracy M. Leopold • Julie A. Leszczynski • Julie L.
Lewandowski • Carol L. Lewis • Kimberlee J. Lewis • Richard L. Lewis • Alana J. Lezotte • Donna L. Lichtenbarger • Choong H. Liew • John D. Linabury • Jennifer M. Lincoln • Greg A. Linder • Heather M. Lindsley • Jeffrey F. Lindstadt • Judith H. Link •
Constance J. Lipscomb • Kevin A. Little • Sherry L. Little • Tammy L. Litzkow • Jessica L. Long • Rhonda L. Longley • Irene Lopez • Oscar Lopez • Clara F. Lorentzen • Susan M. Losievski • Theresa F. Lough • Crystal L. Love • Judy K. Love • Ashley E.
Lower • Bonnie L. Luczyk • Samantha J. Luke • Juliane K. Lusk • Carmen K. Lynes • Aurora Machado • Bela P. Machan • Jacobi F. Mack • Vicki L. Maddox • Gerald W. Madsen • James D. Magera • Julie A. Maggio • Amelia M. Mailander • Laurie A. Main
• Joseph S. Malinowski • Nichole M. Mammolenti • Mark A. Manering • Andrew J. Manes • John J. Mankey • Cynthia L. Mann • Kelsey J. Manson • Angela L. Marciniak • Sandra S. Marks • Emily E. Marovich • Sonya S. Marshall • David C. Martin • Sherry
I. Martinkowski • Gerald O. Mast • Heather N. Mast • Amy L. Matchett • Robert J. Mater • Charles L. Matheny Jr. • Courtney L. Matheny • Ingrid E. Mathias Leuthold • Keely M. Maurer • Amy K. Mauro • Cindy A. May • Susan E. May • Lawrence J. Mayers
• Paige M. Mayers • Magdalena Z. Mazurek • Marcia L. Mc Carthy • Thomas M. Mc Carthy • Melissa A. Mc Caughey • Joseph S. Mc Clintock • Deborah K. Mc Cormick • John A. Mc Creary • Leigh A. Mc Crorey • Patrick B. Mc Cullough • Kelsie L. Mc
Daniel • Ricky D. Mc Gee • Luping W. Mc Ginness • Bailey M. Mc Grew • Kaydi M. Mc Mahan • Christina K. Meiss • Lori A. Memsic • Elsy G. Mendoza Matute • Gopinath Menon • Rene L. Mesaros • Jordan K. Messmann • Jason P. Metcalfe • Debra K.
Meyer • Richard J. Michalski • Catherine E. Michaluk • Christine L. Miley • Amanda L. Miller • Amanda L. Miller • Cynthia L. Miller • Denise R. Miller • Jeffrey C. Miller • Jerry A. Miller • Jessica M. Miller • Kayla A. Miller • Michele A. Miller • Neil H. Miller
• Shayna M. Miller • Susan E. Miller • Tammy L. Miller • Trina S. Miller • Tyler Miller • Stacie L. Mills • Raychel M. Minasian • Robyn R. Minix • Jyoti Minocha • Sairah Mirza • Lisa A. Misch • Charity H. Mitchell • Brent A. Mithoefer • Kimberli A. Mock •
Christine A. Modlin • Erica L. Molden • Rita D. Molengraft • Jorge Montenegro Martinez • Leila S. Moon • Gloria M. Moore • Steven R. Moore • George L. Morris • Jann E. Morris • Ronald F. Morrison • Andrea L. Morton • Debra S. Moser • Lori D. Moulton
• Christopher J. Murphy III • Kevin C. Murphy • Cecil W. Murray • Dawn K. Murray • Denise S. Myers • Diane L. Nally • Anderson D. Nascimento • Divya S. Nattanmai • Ayla J. Naugle • Tamara S. Nees • Stephen J. Neeser • Sara K. Nelson • Sharon L.
Nelson • Linda M. Nelund • Patricia E. Nemeth • Jamie A. Nicholos • Holly K. Nichols • Mary A. Niedbalski • Rebecca A. Niedbalski • Michael L. Niezgodski • Cynthia R. Nimtz • Timothy L. Noble • Romulo Nobrega • Cheryl A. Noell • Joe B. Noffsinger
• Vanessa P. Noriega • Patrick D. Novitzki • Kenneth R. Nowacki • Suzanne T. Nowicki • Thomas E. Nowicki • Jennifer A. Nunemaker • Pedro D. Nunes • Angela M. Nurnberg • Jacqueline J. O Blenis • Amy M. O Brien • Joseph P. O Connor • Joseph R.
O Dell • Anthony R. Obringer • Michael D. Oei • Jason M. Olejnik • Eric L. Olsen • Sarah E. Olsen • Janet L. Outman • Jessica E. Overmyer • Melinda M. Overmyer • Jonathon C. Painter • Karen S. Pal • Bethany M. Panting • Jamie L. Parker • Caren C.
Parko • Elizabeth C. Parr • Robert E. Patrick • Brandon D. Pawloski • Karlie L. Pazdur • Leslie L. Pazdur • Eric C. Peat • Jeffrey L. Peat • Jeremy A. Peat • Monty C. Peden • Lindsey J. Peek • Lacey G. Perkins • Steven J. Perlewitz • Lisa A. Pesaresi •
Jacqueline M. Peters • Jessica E. Phelps • Bryan F. Phillips • Andrew D. Piasecki • Ricky A. Piechocki • Cynthia K. Pierce • Douglas C. Pierce • Thomas D. Pietrzak • Vickie L. Pinckert • Rene S. Pipp • Shane A. Pippenger • Jackie L. Pisarek • Christine
J. Pittman • Brittney D. Plummer • Deborah A. Pogotis • Krista L. Porman • Jay F. Potts • Christopher A. Poulsen • Allyson E. Powers • Patricia L. Powers • Nicholas L. Prentkowski • Jennifer E. Prestine • Angela R. Price • Frances M. Price • Linda C.
Price • Monique Price • Rebecca J. Pritchard • Lee M. Pritchett • Holly A. Proctor • Mary J. Prosser • Penney S. Pruett • Rebecca E. Puente • Saira K. Puga Resendiz • Diane G. Pugh • Billye L. Purdy • Kevin V. Putz • Weijia Qu • Allen R. Qualey • Julie
K. Quinn • Jennifer S. Ramirez • Patricia D. Randall • Marion D. Rankin • Caitlin M. Rappelli • Joyce M. Rayl • Donna M. Reed-Hamilton • Danielle B. Reist • Linda J. Relos • Karrie Remmo • Susan R. Rettig • Courtney E. Rhoades • Jennifer L. Rice •
Timothy D. Rice • Dawn A. Richards • Jordan Richardson • Kimberly A. Richardson • Michelle L. Richardson • Cheri R. Richmond • Susan J. Richmond • Beth A. Ricksgers • Jacqueline Rico • Diana J. Riddle • Jonah D. Ridenour • Stephen H. Rider •
Amber N. Riggs • Daniel F. Riley • Holly M. Risner • Gina M. Ritter • Rebecca L. Ritter • Becky S. Rizor • Julie D. Roberts • Sinead R. Robinson • Guadalupe Robles • Obdulia M. Rodriguez • Richard S. Rogers • Joseph T. Rogina • William P. Rohwer •
Wayne R. Roller • Robert E. Romano • Christin R. Romine • Anna L. Roose • Leland L. Rose • Leslee L. Rose • Delfa G. Rosenberg • Caressa J. Rospierski • Christopher M. Ross • Jonathan B. Rountree • Robert B. Rountree • Tabitha M. Rowe • Richard
Rozenboom • Susan M. Rudecki • Janet L. Rumpf • Debra D. Rykovich • Lori A. Ryman • Brittany N. Salisbury • Emily J. Sammons • Jaime A. Sanchez Alba • Ellen J. Santa • Maribel Santamaria • Ericka R. Santiesteban • Patricia
M. Sarkisian • David M. Satek • Lagena M. Saviano • Patrick T. Sawyer • Lauren S. Scalf • Cheryl A. Scarberry • Andrea A. Schaefer • Joyce E. Schalliol • Kayla R. Schenkel • Ann M. Schepman • Veronica S. Schimmel • Lindsey M. Schlemmer • Adam
C. Schmeltz • Brandon M. Schmidt • Stephanie A. Schmucker • Kyle E. Schneider • Crystal E. Schnick • Kathy J. Schoff • Jennifer E. Schrader • Sarah E. Schrader • Nancy J. Schroder • Mark C. Schult • Beth A. Schultz • Kelly A. Schulz • Teresa K.
Schwelnus • Lanny L. Scoby • Candice M. Scott • Denise L. Scott • Julie M. Scott • Theresa M. Scott • Carol M. Sechrist • Daniel P. Seely • Terry L. Seely • James R. Seitz • Kate E. Seramur • Lane C. Sexton • Linda Shafer Wilson • Sandra K. Sharkey
• Thomas E. Shaw • Karen L. Shearer • Kristina M. Sheedy • Aaron J. Sheets • Megan R. Sheets • Sarah S. Sheets • Erin N. Shell • Scott L. Shelly • Erica L. Shelton • Shayla K. Shembarger • Rebecca L. Sherman • Shane R. Shidaker • Pamela J. Shirtz
• Caitlin M. Shobert • Andrea G. Short • Romy M. Shortz • Diana L. Shultz-Gundrum • Laura Shumate • Charles L. Shute • Candy L. Sickels • Lorelei D. Siddall • Thomas J. Siddons • Kristine M. Sieczko • Stephanie L. Siglawski • Ana L. Silguero Casados
• David L. Silvers Jr. • Tamara L. Simon • Janet M. Siri • Patricia A. Skaggs • Christopher J. Skoczylas • Janice Skok • Suzanne R. Slavinskas • Charles C. Slomski • Joann L. Small • David E. Smedley • Andrea D. Smiddy-Schlagel • Amber M. Smith •
Brittany R. Smith • Chelsea R. Smith • Debra L. Smith • Kimberly J. Smith • Linda A. Smith • Malorie M. Smith • Laura E. Sniadecki • Graham R. Snyder • Jennifer R. Snyder • Lisa A. Snyder • Rachel L. Solmos • Kathleen D. Solomon • Andrea K. Soule
• Gregory R. Spalding • Kanetha K. Speck • Patrick M. Spence • Brian S. Spitaels • James A. Spitters • Luke P. Squires • Pamela K. Stalbaum • Cassie L. Stamper • Victoria L. Stanley • Pamela L. Staples • Pamela Stearns • Amber M. Stephenson •
Michelle R. Stesiak • Garry A. Stoll • James A. Story Jr. • Nancy A. Stoutenour • William C. Strafford • Caderia L. Strickland • Keith R. Strong • Gregory J. Stroupe • Laura J. Strzelecki • Samantha R. Studt • Pamela S. Stump • Brittany L. Stutzman •
Sherrie J. Suddarth • Michelle R. Sumerix • Dawn M. Sumption • Trina Swank • Marilyn A. Swartz • Patricia M. Swihart • Jerry D. Szmanda • Michael Szymanski • Kim M. Tagliaferri • Marlene A. Taiclet • Erin N. Talkington • Sarah E. Talley • Mark E. Taylor
• Dianna S. Teadt • Cory M. Teagno • Darran Teamor • Lawrence M. Tepe • Nicole L. Teske • Julie L. Thode • Helesha Thomas • Margaret A. Thomas • Mary E. Thomas • Brandon S. Thompson • Katherine L. Thompson • Kurt B. Thompson • Randall E.
Thornton • Jennifer N. Thorson • Lori S. Tierce • Jessa F. Tilford • Melissa S. Tobias • Matthew R. Todt • Kamie A. Tomasek • Sharon L. Tompkins • Michele J. Torzewski • Amanda J. Totzke • Cindy B. Trenerry • Danielle C. Trumbull • Kandis M. Tubb •
Sharon L. Tucker • Dawn M. Tungate • Steven A. Turcotte • Aasim Turk • Sonia Turk • Kathryn A. Turner • Clifford D. Tuttle • Jaime L. Unate-Martin • Lindsay M. Utnik • Tammy L. Valdez • Jeannie Valencourt • Deborah J. Van De Walle • Steven M. Van
Den Driessche • Erin E. Van Dieren • Lynda F. Vandervinne • Elizabeth A. Vann • Maria I. Varela • Itania V. Vargas • Cynthia A. Vasta • Gloria Vaughan McKown • Laura E. Vaughn • Tessah T. Venderlic • Tanya E. Vermande • Georganne L. Vervaet •
Rebecca J. Vervaet • Mercedes L. Vest • Jacqueline S. Vida • Kayla K. Vincent • Kathleen H. Volheim • Margaret M. Voorheis • David A. Voors • Nancy M. Wagenblast • Amy R. Wagoner • Jill C. Wagoner • Mark E. Waldron • Kristina J. Walker • Shea L.
Wallace • Krista M. Walsh • Kelly A. Walters-Franklin • Emily J. Walton • Amy S. Wankhade • Ashley J. Ward • Jamie D. Warren • Amber M. Watson • Erik G. Watson • Marchelle A. Watt • Douglas W. Way • Pamela J. Weaver • Kimberley A. Webb •
Pamela K. Weesner • Cecile A. Weir • Valerie C. Weis • Shannon M. Welborn • James E. Welch • Amy Welkie • Cari R. Wells • Deborah A. Wentland • Mary K. Wenzel • David A. Wertz • Debra J. Wesolek-Mynsberge • Steven J. Wessell • Catherine F.
West • Christianna L. Weston • Cheryl K. Wetters • Joshua A. Wheeler • Claudia R. White • David W. White • Julie A. Whitehead • Jennifer L. Whitmer • Teri L. Whittington • Jan E. Wilhelm • Crystal T. Williams • Jeffrey A. Williams • Jennie V. Williams •
Marshall G. Williams • Michelle A. Williams • Brad A. Willsey • Jody L. Wilson • Melody A. Wilson • Stacey J. Wing • Julli B. Wirt • Tracy L. Wise • Anne E. Wiseman • Philip A. Wiseman • Philip A. Witges • Phillip A. Witt • Andrea S. Wittendorf • Deborah
S. Wogoman • Linda S. Wojciechowski • Matthew V. Wold • Gina M. Wolff • Kelly L. Woloszyn • Rebecca L. Womer • Janine E. Wood • Stephen S. Wood • Christopher T. Woody • Matthew T. Workman • Cherie L. Wright • Kelley J. Wright • Dinghong
Wu • Kelly J. Wunder • Kevin J. Yaeger • Latoya S. Yarber • Rayfield Yarber • Larisa L. Yates • Casey A. Yerger • Kayla M. Yoder • Amy J. York • Dawn C. Young-Pavasco • Terresa L. Younkin • Krystina S. Yuen • Taylor M. Zahrt • Matthew J. Zakrowski
• Gail Y. Zalud • Luis Zapata • Marcus I. Zarembka • Elizabeth M. Zarzecki • Ronald W. Zeltwanger • Guangwen G. Zhang • Seth M. Zimmerman • Ashleigh M. Zimpelman • Barbara J. Ziolkowski • Sara A. Zolman • Mark R. Zurat
2014 Annual Report
CONTENTS
Corporate Description...........................................................................................................................
2014 in Brief .............................................................................................................................................
Financial Highlights .................................................................................................................................
2014 Annual Shareholders’ Letter ...............................................................................................
Recognition .................................................................................................................................................
Services ........................................................................................................................................................
2014 Banking Center Locations .....................................................................................................
i
i
ii
iii
ix
ix
x
Shareholders’ Information ..................................................................................................................
xi
Financial Report ....................................................................................................................................... 1
Officers and Directors .......................................................................................
Inside Back Cover
Corporate Description
1st Source Corporation is the largest locally controlled
financial institution headquartered in the northern
Indiana-southwestern Michigan area. While delivering
a comprehensive range of consumer and commercial
banking services, 1st Source has distinguished itself
with highly personalized services. 1st Source also
provides specialized financing nationally for new and
used private and cargo aircraft, automobiles and light
trucks for leasing and rental agencies, medium and
heavy duty trucks, and construction equipment.
At year-end,
the Corporation had 80 banking
centers in 17 counties in Indiana and Michigan,
Insurance offices, 9 Trust and
8 1st Source
Wealth Management locations, and 22 locations
nationwide for the 1st Source Specialty Finance
Group. With a history dating back
to 1863,
1st Source is proud of its tradition of providing superior
service to clients while playing a leadership role in the
continued development of the communities it serves.
2014 IN BRIEF:
2014 net income of $58.07 million was up 5.66% from
the $54.96 million earned in 2013. Diluted net income
per common share for 2014 was $2.39, up 7.17% from
the $2.23 for 2013.
Return on average total assets was 1.21% compared
to 1.19% a year ago. Return on average common
shareholders’ equity was 9.65% for 2014, compared to
9.55% for 2013. The average common shareholders’
equity-to-average assets ratio for 2014 was 12.52%
compared to 12.49% last year.
At year-end, total assets were $4.83 billion, up 2.27%
from a year earlier. Loans and leases were $3.69 billion,
up 3.92%, deposits were $3.80 billion, up 4.08% from
2013 and common shareholders’ equity was $614.47
million, an increase of 4.97% from a year earlier.
The reserve for loan and lease losses at year-end was
2.31% of total loans and leases, compared to 2.35% the
prior year. The ratio of nonperforming assets to net loans
and leases was 1.13% for 2014, compared to 1.29%
for 2013.
Net Income (in millions)
55.0
58.1
48.2
49.6
41.2
10
11
12
13
14
Diluted Net Income Per Common Share
2.23
2.39
1.96
2.02
1.21
$60
50
40
30
20
10
0
$2.50
2.00
1.50
1.00
0.50
0
10
11
12
13
14
Return on Average Common Shareholders’ Equity
(as a percent)
12%
8
4
0
1.40%
1.20
1.00
0.80
0.60
0.40
0.20
0
9.51
9.10
9.55
9.65
6.10
10
11
12
13
14
Return on Average Assets
(as a percent)
1.09
1.11
1.19
1.21
0.91
10
11
12
13
14
i
Financial Highlights
Earnings and Dividends
(Dollars in thousands, except per share amounts)
2014
2013
2012
2011
2010
Interest and other income
Interest and other expense
Net income
Net income available to common shareholders
Common cash dividends
Per common share
Diluted net income
Cash dividends
Book value
Return on average common shareholders’ equity
Return on average assets
Statement of Condition
Average Balances: (Dollars in thousands)
Assets
Earning assets
Investments
Loans and leases
$ 256,441
$ 256,797
$ 263,277
$ 268,395
$ 287,317
171,998
172,854
187,597
194,606
226,841
58,069
58,069
17,643
54,958
54,958
17,054
49,633
49,633
16,522
48,195
48,195
15,921
41,244
29,655
15,076
$
2.39
$
2.23
$
2.02
$
1.96
$
1.21
0.71
25.75
9.65%
1.21%
0.68
24.07
9.55%
1.19%
0.66
23.04
9.10%
1.11%
0.64
21.64
9.51%
1.09%
0.61
20.12
6.10%
0.91%
$ 4,806,805
$ 4,607,949
$ 4,472,879
$ 4,402,554
$ 4,543,702
4,513,631
4,325,907
4,174,443
4,090,297
4,207,485
822,021
840,798
882,392
899,896
914,253
3,639,985
3,433,938
3,209,490
3,078,581
3,109,508
Reserve for loan and lease losses
86,982
85,203
83,430
86,617
89,656
Deposits
Interest bearing liabilities
Shareholders’ equity
3,777,743
3,700,509
3,574,211
3,555,454
3,605,195
3,395,591
3,286,558
3,239,530
3,286,246
3,402,199
601,892
575,662
545,631
506,939
590,464
ii
2014 Annual Shareholders’ Letter
This is the 35th time I’ve written
a shareholders’ letter to you.
By this time, it should be a
whole lot easier. This is especially
return on assets of 1.21%, compared
to 4.00% compared to 4.19% in the
to the prior year of $54.96 million
prior year. We also worked hard to
and 1.19%, respectively. This was a
continue to change the mix of deposits
good return and moderate growth,
on our balance sheet and were able
true after finishing another good
just as in the prior year.
year with record earnings as we did
in 2014. But in writing this letter,
I am reporting what is past, what
has already happened. What I really
want to be focused on, as all of us
at 1st Source do, is the year now
developing. More than ever, there
needs to be laser-like focus on the
things that make us successful day
in and day out and on protecting
those things against the many threats
that can derail great performance.
Perhaps it is in writing about the past
that we recommit ourselves to the
future and, in thinking about the year
just past and the nuances of its ebbs
and flows, we become even more
sensitive to what we need to do this
year and beyond. Clearly, actions
we took in 2014 resulted in good
performance but just as importantly,
actions we took years before set
the stage for that performance. So
it also is true that actions we took in
2014 will have a lasting impact and
should contribute to a more positive
performance in 2015 and beyond.
So, let’s start with the numbers, and
then talk about people, facilities and
systems. It was a good year with
net income of $58.07 million and a
INCOME GROWTH
The components that made up the
growth in 2014 were net interest
income of $160.33 million, up
from $156.82 million in 2013; the
provision for loan and lease losses of
$3.73 million, compared to $0.77
million the prior year; noninterest
income of $77.89 million, compared
to $77.21 million the prior year; and
noninterest expense of $150.04
million, essentially flat from 2013’s
$149.31 million.
In addition, tax
to reduce our total cost of interest
bearing funds by 15 basis points. Our
pricing disciplines led to yield erosion
in net interest margin (fully taxable
equivalent net interest income over
earning assets) of only eight basis
points. As the year progressed, this
became more difficult and our cost
of funds is reaching its natural bottom
with the Federal Reserve continuing
to hold interest rates as low as it has
for as long as it has.
CREDIT QUALITY
Our credit quality, as measured by
expense
for 2014 was $26.37
the ratio of net charge-offs, credit
million, compared to 2013’s expense
losses, and collection expenses
of $28.99 million.
NET INTEREST INCOME
Even with growing our average
net loans and leases and average
mortgages held for sale to $3.65
billion up from $3.44 billion in 2013,
net
interest
income was under
pressure all year from very aggressive
loan pricing in our regional geographic
market and in our national specialty
finance markets. By making sure we
added value to our client relationships,
we were able to maintain loan pricing
and therefore the yield on earning
assets dropped only 19 basis points
to average net loans and leases,
repossessions, and other real estate
owned,
improved
to 0.09%
in
2014, compared to 0.13% in 2013.
Nonperforming assets to net loans
and leases dropped to 1.13% as of
December 31, 2014, from 1.29%
a year earlier. Total nonperforming
assets dropped almost 10%. Our
net charge-offs for 2014 totaled
$2.17 million or 0.06% of average
net loans and leases compared to
a very strong 2013 performance
of $0.58 million and 0.02%,
respectively. We were pleased with
the overall results for the year but
iii
saw a slight increase in our over 30
day delinquencies at the end of the
year from 0.52% in 2013 to 0.60%
in 2014. Our performance this year
continued a string of positive years in
the management of credit quality.
NONINTEREST INCOME
Growing noninterest
income has
been challenging. Many categories
of income are adversely affected by
regulatory influences on deposit fees,
nonsufficient
funds and overdraft
fees, and debit card fees. Market
forces on fixed income management
Notre Dame Banking Center team; Ashley Lower, Brittany Brockie, Rachel Casto and Cathy Janowiak
and other investment management
at the grand opening.
fees, partly offset by strong equity
management returns, also created a
fee income challenge. Deposit fees
were down for the year by 5.37%
while debit card income grew 7.91%
to $9.59 million from $8.88 million
in 2013. With lower overall volumes
in home purchases and refinancings,
mortgage banking income was down
to $5.38 million from $5.94 million in
the prior year. Insurance commissions
and net equipment rental income
were flat, while trust fees were up
6.49% to $18.51 million for 2014.
NONINTEREST EXPENSE
By tightly managing expenses, we
and repossession expenses, reduced
reworking our brand positioning.
professional fees, lower supplies and
Lastly, in addition to staffing the
communication expenses and less
new or refurbished banking centers,
FDIC and other
insurance costs.
our human resource costs in some
These results are especially gratifying
areas increased for the year with
because 2014 costs included adding
strong new hires
in
Information
a new full-service banking center and
Technology,
Information Security,
six ATMs on the University of Notre
and IT Technical Services.
Dame campus (we were selected to
be the primary provider of banking
services on the campus), refurbishing
six banking centers and adding two
new ones in the Fort Wayne market
to enhance our presence and support
future growth there, refurbishing our
Portage, Indiana, facility in 2013 and
As a result of our good performance,
we contributed $1.5 million to the
1st Source Foundation which
supports charitable organizations
across the markets we serve. This
had the effect of increasing our
noninterest expenses but was offset
by a gain on the sale of securities of
approximately $1 million taken on
one of the securities contributed to
the Foundation.
were able to hold them relatively
being fully operational in 2014, and
flat to slightly down in key categories
the full year expense of operating a
for 2014 compared to 2013. Total
new facility in Purdue University’s
noninterest expense was down 0.49%
hometown of Lafayette, Indiana. We
with the major positive impact coming
also incurred the costs of launching
from lower loan and lease collection
our new mobile deposit product and
iv
Chris Murphy, Chairman of the Board and Chief Executive Officer; Andrea Short, Chief Financial Officer; and Jim Seitz, President, in the 1st Source Boardroom.
THE PEOPLE
New Hires, Promotions,
and Development
We started the year by hiring new
us shore up safeguards to mitigate
Group; and in private banking in Central
increasing cybersecurity risks. Late in
with new leadership in our Personal
the year, we also strengthened talent
Asset Management Group focused on
in the management of our technology
sales management and client service
strength into the leadership of our
service areas.
across our regional market.
Information Technology and Systems
area. The Chief Information Officer
(CIO) is charged with ensuring that
1st Source has
the appropriate
systems to meet our clients’ needs
efficiently and effectively, simply
and completely, and securely. Our
new CIO brings experience in large
banking
organizations,
complex
financial service providers, the Federal
Reserve and other businesses. This
was followed by the creation of a Chief
Information Security Officer position
and the hiring of talent with public
company, private industry, banking,
and government experience to help
Our growth is dependent on having
We have worked hard on growing
the right people properly trained and
the capabilities of our colleagues and
motivated in the right markets. New
of increasing their personal capacity
people were added for our new banking
and
responsibilities. This
is an
center at Notre Dame and our new
important part of our organization
facilities in Fort Wayne and Lafayette
and career development and forms
which are now fully staffed. Additional
the foundation of our long-term
client service banking officers were
succession planning. Starting at the
added
in our consumer banking
top of the organization, Jim Seitz has
businesses in Goshen, Elkhart, and
become President of the Bank and
Valparaiso; in business and agricultural
the Corporation, with responsibilities
banking in Fort Wayne, Kalamazoo,
for sales and marketing for the
Warsaw, Valparaiso and Central (the
consumer, business, and specialty
South Bend region); in the construction
finance portions of our business.
machinery
and
specialty
vehicle
Most deposit and loan products
divisions of our Specialty Finance
and services are also concentrated
v
TRAINING
We continue to develop our Lean/
Continuous Improvement initiatives
as a way to improve management
disciplines,
teach
people
how
to identify and collect data, give
people the tools and language to
more fully analyze issues, and to
improve processes and better solve
problems quickly.
In 2014, over
30 Lean teams addressed issues
across the Bank. Just over 40%
of our Value Stream Mapping and
Kaizen teams addressed processing
issues, close to 45% waste removal,
11% regulatory changes, and nearly
4% revenue enhancement. Internal
public posting of the results of our 5S
audits for the Senior Management
Team and the individual groups and
divisions throughout the Bank has
led to better and more disciplined
practicing of the tenets of Lean just
as the posting of Kaizen and Key
Performance Indicator dashboards
in the boardroom, break rooms,
banking centers, and departments
has led to holding the gains of our
various initiatives. We have also used
online training extensively to ensure
better understanding of compliance
requirements and to enhance product
and
service
knowledge.
Lastly,
members of our management team
have been sent to university, industry,
and vendor training to help round out
their skills to better serve our clients
and manage the complexities of
today’s business and help us achieve
our long-term goals.
Controller. Andrea was promoted to
CFO just over two years ago.
Also in 2014, our Chief Credit Officer,
Jeff Buhr, was promoted to Executive
Vice President
in recognition of
his continued strong oversight of
the Bank’s credit quality and his
effective management of credit,
loan administration, collections and
workout.
Ron Zeltwanger was promoted to
the head of an expanded Central
Region encompassing St. Joseph
County in Indiana and Cass and
Berrien Counties in Michigan. He also
recently took on responsibility for our
electronic banking initiatives. With
some earlier experience in banking
and coming from the presidency
of one of our local businesses, Ron
began his career with us as a banking
center manager in our Community
Banking Division, eventually becoming
President of the Division. He then was
recruited to be the day-to-day leader
of our then new Lean/Continuous
Improvement initiative, reporting to
the senior officer responsible for
bank-wide implementation of Lean.
Across the Bank, people have been
recruited and promoted
to new
responsibilities or asked to serve on
special project teams in an effort
to broaden their experience, have
them learn from others, work as part
of a team and address challenging
performance issues. These efforts
can ensure a strong team throughout
the Bank by further developing the
skills, experiences and capabilities of
our colleagues.
vi
under his leadership. He has the
appropriate education and has grown
up in 1st Source with experience
running
our
banking
centers;
consumer, micro, and small business
sales management and lending; and
electronic banking and marketing.
Jim embraces and embodies our
core values.
Similarly, Andrea Short, our Chief
Financial Officer, was promoted
to Executive Vice President of the
Corporation with all loan and deposit
operations in addition to accounting,
finance, and facilities management
consolidated under her leadership. A
CPA with 30 years of public accounting
and banking experience, Andrea
started with us as Tax Director and
took charge of accounting and financial
controls when she was promoted to
PERFORMANCE
We are pleased that we have again
been
recognized
for outstanding
client service, small business lending,
and strong
financial performance.
Performance in the client service
category is critical and it is for this we
are most proud. We were recognized
as Michiana’s “Best Bank for Business”
and the “Best Bank for Customer
Service” by
the readers of
the
Northwest Indiana Business Quarterly
Magazine, voted the “Top Bank” in
the Post Tribune’s Neighbors’ Choice
Awards, and voted the “Best Bank of
Marshall County” by the readers of the
Plymouth Pilot. We were among the
top customer service providers among
banks
in
the Midwest according
to APECS scores, developed by a
nationally recognized firm, The MSR
Group. 1st Source had the highest
net customer advocacy score in the
Midwest. We were once again the
Luke Squires, Jan Wilhelm, Larry Mayers, Deb Moser and Jim Seitz at the ground breaking of the
Illinois Road Banking Center in Fort Wayne.
FACILITIES AND SYSTEMS
2014 was a year of significant
investment in facilities and systems.
The most
important expenditure
was building new banking centers,
refurbishing others, and upgrading
our communication systems. An $8
million investment was completed
in our Fort Wayne market by adding
six others and
relocating our
insurance offices so we can better
serve our clientele. We rolled out
a new mobile banking product and
were very pleased with the rate of
adoption and use by our clients. We
also upgraded our ATMs, improving
their performance and making
transactions easier and clearer for
two new banking centers, upgrading
our clients.
Ribbon cutting ceremony at the
renovated Fort Wayne Downtown
Banking Center. Simultaneous ribbon
cuttings were held at the six renovated
banking centers.
vii
for the long term. And lastly, we
know the importance of continuing
a culture built on solid values of
personal and corporate
integrity,
teamwork, outstanding client service,
superior quality in everything we
do, and being in leadership of the
communities we serve.
The world
is more volatile. Our
domestic economy is showing signs
of improvement while international
markets
are
under
pressure,
regulation is increasing, cybersecurity
threats are more numerous and
sophisticated, product development in
alternative financial delivery systems
is accelerating, competitive incursions
are more frequent, and change is
accelerating. We know that there
will be challenges but we are more
convinced than ever that balance in
all we do is critical to our continued
long-term success. We must keep
changing to meet these challenges.
We believe we can continue to
succeed by staying
focused on
exceptional client service, rigorous
cost control and achieving pristine
credit quality. A strong balance sheet,
strong capital and reserves, continued
investment in systems and people,
and a commitment to excellence will
ensure our long-term success.
Thank you for your
continuing support.
Christopher J. Murphy III
Chairman and Chief Executive Officer
1st Source Corporation
Angela Beison, 1st Source Client Service Representative, assists a client side-by-side at the
Maple Lane Banking Center.
leading provider of SBA loans in all
small
list of “Dividend Achievers”
of the geographic markets we serve.
according to Mergent Financial which
We were the #1 provider of SBA 504
tracks this information.
loans in our primary market and the
#2 provider in the state of Indiana.
The SBA recognized 1st Source with
the Community Lender Award for
both the state of Indiana and its Great
Lakes Region, which includes Indiana,
Ohio and Michigan.
The results of exceptional customer
service, rigorous cost control, and
managing for pristine credit quality
often
lead to strong, noteworthy
financial performance. In 2014, we
were listed among KBW’s Bank Honor
Roll of Superior Performers and were
number eight of 93 banks identified
by Bank Director Magazine on their
Bank Performance Scorecard based
on profitability, capital strength, and
credit quality. Lastly, we have achieved
27 years of consecutive dividend
growth, which puts us among a very
CONCLUSION
We are thankful for a wonderful
group of colleagues who try their
best every day and who love being
in service to others. We are thankful
for a Board of Directors that is
knowledgeable and engaged. We are
thankful for those who have come
before us over the preceding 151
years and passed this company and
legacy on to us with a responsibility
to enhance it and carry it forward.
We are thankful for the support of
our shareholders and mindful of our
responsibility to continue to build this
company for the long term, staying
true to our mission to help our clients
achieve security, build wealth and
realize their dreams and to do so by
giving straight talk and sound advice,
keeping their best interests in mind
viii
STRARR IGHT TATT LAA KLL
and
SOUOO ND
UU
ADAA VIDD CE
Prestigious Recognition
SINCE 1863
Strong. Stable. Local. Personal. We’re a top-rated community bank recognized for
outstanding performance and exceptional service to clients.
Staying true to our values has helped us succeed. Integrity; outstanding client service; teamwork;
superior quality; and community leadership are at the heart of everything we do. We adhere to solid, basic lending principles,
allowing us to maintain a strong fi nancial standing.
BauerFinancial
5 Star “Superior” Rating
Highest rating possible. Based on
capital ratio, profi tability/loss trend,
credit quality and CRA ratings
Seifried&&BrewBrew
Seifried
Top 15th Percentile
of Community Banks
Small Business Administration
Great Lakes Community
Lender of the Year
for 2014
BankDirector
Nifty Fifty
Ranked #43 on the 2014 list of
best users of capital based on
profitability and capital strength
Small Business Administration
2014 Indiana SBA
Community Lender Award
BankDirector
Bank Performance Scorecard
Northwest Indiana
Business Quarterly Magazine
Ranked #8 of 93 banks on list, based
on profi tability, capital strength and
credit quality.
Recognized as
‘Best Bank for Business, and
Customer Service’ in Michiana
KBW, Inc
2012, 2013 & 2014
Bank Honor Roll
of Superior Performers
Comprehensive Services
PERSONAL
Checking
Savings
Certificates of Deposit
IRAs
Health Savings Accounts
Loans
Personal
Automobile
Home Equity
Mortgage
Boat, RV, Motorcycle
Asset Management
Trust and Estate
Administration
Trust Administration
IRA/401(k) Management
Special Needs Trust
Estate Settlement
Bill Payment Services
Charitable Trust and
Foundation Administration
Wealth Management Services
Investment Management
Estate Planning
Charitable Strategies
Retirement Planning
Education Planning
Tax Planning
Insurance Solutions
Private Banking
Relationship Management
Premier Convenience in
Day-to-Day Banking
Deposit/Cash Management
Specialization
Mortgage Loans
Lines of Credit
(secured and unsecured)
Checking
INSUR ANCE
BUSIN E SS
Loans & Leasing
Cash Management
Merchant Card Services
Business 401(k) Plans
Retirement Plan Services
SPECIALT Y
EQU IPM EN T
FINANCE
Aircraft & Helicopter
Auto & Light Truck
Medium & Heavy Duty
Trucks
Construction Equipment
Shuttle Bus
Step Vans
Funeral Coaches
Personal
Homeowners
Rental
Flood
Umbrella Liability Coverage
Life & Health
Disability Income
Automobile
Snowmobile
Recreational Vehicle
Boat
Business
Commercial Auto
Commercial Property
Crime
Employment Practices
Key Man Life
Environmental Liability
General Liability
Umbrella/Excess Liability
Workers’ Compensation
Crop Insurance
ix
2014 Banking Center Locations
Specialty Finance Group Locations
2
4
Kalamazoo
Wisconsin
Milwaukee
Michigan
Chicago
Illinois
South Bend
Detroit
Cleveland
Ohio
Fort Wayne
Indiana
Indianapolis
Louisville
Kentucky
St. Joseph
Stevensville
Dowagiac
51
60
Kalamazoo
Cass
St. Joseph
69
Berrien
31
Niles
94
131
12
Granger
12
Michigan City
Portage
Chesterton
80/90
New Carlisle
South Bend
17
2
LaPorte
Mishawaka
Elkhart
Osceola
Dunlap
Goshen
80/90
Middlebury
5
La Grange
9
20
6
4
Valparaiso
Westville
LaPorte
North Liberty
St. Joseph
Walkerton
LaPaz
30
Bremen
Elkhart
Nappanee
6
15
Kouts
Porter
LaCrosse
Knox
23
Plymouth
Hebron
Starke
Marshall
33
Noble
33
69
8
Argos
Warsaw
5
30
9
3
Pulaski
35
Fulton
31
Winamac
Rochester
421
White
Cass
Kosciusko
Miami
Wabash
Columbia
City
Whitley
Fort Wayne
9
24
Huntington
469
Huntington
24
9
5
Wells
1
224
69
Bluffton
Steuben
DeKalb
Allen
New
Haven
Lafayette
Tippecanoe
N
.
C
a
m
p
b
e
l
l
S
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.
County Road 400 North
80/90
Cleveland Rd.
23
933
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R
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E. Evans Ave.
S
t
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Valparaiso
E. Lincolnway
130
Indiana Ave.
Valparaiso
University
P
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A
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Notre
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.
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49
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331
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31
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Dupont Rd.
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State Blvd.
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Shareholders’ Information
2014 Stock Performance & Dividends
1st Source Corporation common stock is traded on the Over-The-Counter Market and is listed on the NASDAQ Global
Select Market under the symbol “SRCE.” 1st Source is also listed on the National Market System tables in many daily papers
under the symbol “1stSrc.”
High and low common stock prices, cash dividends paid for 2014 and book value were:
Quarter Ended
High
Low
Cash Dividends
Paid
March 31
June 30
September 30
December 31
$ 32.60
$ 27.56
$0 .17
33.21
31.92
35.22
28.76
27.80
28.00
0.18
0.18
0.18
Book value per common share at December 31, 2014: $25.75
Annual Meeting of Shareholders
The Annual Meeting of Shareholders has been called for 10:00 a.m. EDT, April 23, 2015, at 1st Source Center, 100 North
Michigan Street, South Bend, Indiana.
Entrance to the annual meeting is limited to shareholders only. If your shares are held in “street name” (that is, through a
broker), you must bring a recent copy of a brokerage statement reflecting your stock ownership as of February 18, 2015,
the record date.
Common Stock Listing
The NASDAQ Global Select Market
Market Symbol: “SRCE”
CUSIP #336901 10 3
1stsource.com
For the latest shareholder information, log on to www.1stsource.com.
Click on the “About Us” link and then “Investor Relations.”
If you would like to help us reduce printing costs by receiving reports electronically,
please e-mail us at shareholder(cid:2)1stsource.com.
Transfer Agent, Registrar and Dividend Disbursing Agent
American Stock Transfer and Trust Company
6201 15th Avenue
Brooklyn, NY 11219
Independent Auditors
Ernst & Young LLP
155 North Wacker Drive
Chicago, IL 60606
Shareholder Inquiries
1st Source Corporation
Andrea G. Short, Chief Financial Officer
Post Office Box 1602
South Bend, IN 46634
(574) 235-2000
xi
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-6233
1ST SOURCE CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Indiana
35-1068133
100 North Michigan Street, South Bend, Indiana
(Address of principal executive offices)
46601
(Zip Code)
Registrant’s telephone number, including area code: (574) 235-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock — without par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2014 was $571,817,483
The number of shares outstanding of each of the registrant’s classes of stock as of February 13, 2015: Common Stock, without par value — 23,880,154
shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2015 Proxy Statement for the 2015 annual meeting of shareholders to be held April 23, 2015, are incorporated by reference into Part
III.
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TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
Certifications
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10
14
14
14
15
15
16
16
34
35
35
37
38
39
39
40
41
76
76
76
77
77
77
77
77
78
80
82
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Part I
Item 1. Business.
1ST SOURCE CORPORATION
1st Source Corporation, an Indiana corporation incorporated in 1971, is a bank holding company headquartered in South Bend,
Indiana, that provides, through its subsidiaries (collectively referred to as “1st Source,” “we,” and “our”), a broad array of financial
products and services. 1st Source Bank (“Bank”), its banking subsidiary, offers commercial and consumer banking services, trust
and investment management services, and insurance to individual and business clients through most of our 80 banking center
locations in 17 counties in Indiana and Michigan. 1st Source Bank’s Specialty Finance Group, with 22 locations nationwide, offers
specialized financing services for new and used private and cargo aircraft, automobiles and light trucks for leasing and rental
agencies, medium and heavy duty trucks and construction equipment. While our lending portfolio is concentrated in certain
equipment types, we serve a diverse client base. We are not dependent upon any single industry or client. At December 31, 2014,
we had consolidated total assets of $4.83 billion, loans and leases of $3.69 billion, deposits of $3.80 billion, and total shareholders’
equity of $614.47 million.
Our principal executive office is located at 100 North Michigan Street, South Bend, Indiana 46601 and our telephone number is
(574) 235-2000. Access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports is available, free of charge, at www.1stsource.com soon after the material is electronically filed with
or furnished to the Securities and Exchange Commission (SEC).
1ST SOURCE BANK
1st Source Bank is a wholly owned subsidiary of 1st Source Corporation that offers a broad range of consumer and commercial
banking services through its lending operations, retail branches, and fee based businesses.
Commercial, Agricultural, and Real Estate Loans — 1st Source Bank provides commercial, small business, agricultural, and
real estate loans to primarily privately owned business clients mainly located within our regional market area. Loans are made for
a wide variety of general corporate purposes, including financing for industrial and commercial properties, financing for equipment,
inventories and accounts receivable, and acquisition financing. Other services include commercial leasing, cash management
services and retirement planning services.
Consumer Services — 1st Source Bank provides a full range of consumer banking products and services through our banking
centers and at 1stsource.com. In a number of our markets 1st Source also offers insurance products through 1st Source Insurance
offices. The traditional banking services include checking and savings accounts, certificates of deposits and Individual Retirement
Accounts. 1st Source offers a full line of on-line and mobile banking products which includes bill payment. As an added convenience,
a strategically located Automated Teller Machine network serves our customers and supports the debit and credit card programs
of the bank. Consumers also have the ability to obtain consumer loans, real estate loans and lines of credit in any of our banking
centers or on-line. Finally, 1st Source offers a variety of financial planning, financial literacy and other consultative services to
our customers.
Trust Services — 1st Source Bank provides a wide range of trust, investment, agency, and custodial services for individual,
corporate, and not-for-profit clients. These services include the administration of estates and personal trusts, as well as the
management of investment accounts for individuals, employee benefit plans, and charitable foundations.
Specialty Finance Group Services — 1st Source Bank, through its Specialty Finance Group, provides a broad range of
comprehensive equipment loan and lease finance products addressing the financing needs of a broad array of companies. This
group can be broken down into four areas: auto and light trucks; medium and heavy duty trucks; new and used aircraft; and
construction equipment.
The auto and light truck division consists of financings to automobile rental and leasing companies, light truck rental and
leasing companies, and special purpose vehicles. The auto and light truck finance receivables generally range from
$100,000 to $20 million with fixed or variable interest rates and terms of one to five years.
The medium and heavy duty truck division provides financing for highway tractors and trailers and delivery trucks to
the commercial trucking industry. Medium and heavy duty truck finance receivables generally range from $500,000 to
$15 million with fixed or variable interest rates and terms of three to seven years.
Aircraft financing consists of financings for new and used general aviation aircraft (including helicopters) for private
and corporate aircraft users, aircraft distributors and dealers, air charter operators, air cargo carriers, and other aircraft
operators. We have for many years selectively entered the international aircraft markets, primarily Brazil and Mexico,
on a limited basis where desirable aircraft financing opportunities exist for private and corporate aircraft users. Aircraft
finance receivables generally range from $500,000 to $15 million with fixed or variable interest rates and terms of one
to ten years.
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Construction equipment financing includes financing of equipment (i.e., asphalt and concrete plants, bulldozers,
excavators, cranes, loaders, and trash and recycling equipment, etc.) to the construction industry. Construction equipment
finance receivables generally range from $50,000 to $20 million with fixed or variable interest rates and terms of one to
five years.
We also generate equipment rental income through the leasing of construction equipment, medium and heavy duty trucks,
automobiles, and other equipment to clients through operating leases.
SPECIALTY FINANCE GROUP SUBSIDIARIES
The Specialty Finance Group also consists of separate wholly owned subsidiaries of 1st Source Bank which include: Michigan
Transportation Finance Corporation; 1st Source Specialty Finance, Inc.; SFG Aircraft, Inc.; 1st Source Intermediate Holding,
LLC; SFG Commercial Aircraft Leasing, Inc.; and SFG Equipment Leasing Corporation I.
1ST SOURCE INSURANCE, INC.
1st Source Insurance, Inc. is a wholly owned subsidiary of 1st Source Bank that provides insurance products and services to
individuals and businesses covering corporate and personal property, casualty insurance, and individual and group health and life
insurance. 1st Source Insurance, Inc. has eight offices.
1ST SOURCE CORPORATION INVESTMENT ADVISORS, INC.
1st Source Corporation Investment Advisors, Inc. (Investment Advisors) is a wholly owned subsidiary of 1st Source Bank that
provides investment advisory services for trust and investment clients of 1st Source Bank and to Wasatch Advisors, Inc., the
investment advisor of the Wasatch Mutual Fund family. Investment Advisors is registered as an investment advisor with the
Securities and Exchange Commission under the Investment Advisors Act of 1940. Investment Advisors serves strictly in an advisory
capacity and, as such, does not hold any client securities.
OTHER CONSOLIDATED SUBSIDIARIES
We have other subsidiaries that are not significant to the consolidated entity.
1ST SOURCE MASTER TRUST
Our unconsolidated subsidiary includes 1st Source Master Trust. This subsidiary was created for the purpose of issuing $57.00
million of trust preferred securities and lending the proceeds to 1st Source. We guarantee, on a limited basis, payments of
distributions on the trust preferred securities and payments on redemption of the trust preferred securities.
COMPETITION
The activities in which we and the Bank engage in are highly competitive. Our businesses and the geographic markets we serve
require us to compete with other banks, some of which are affiliated with large bank holding companies headquartered outside of
our principal market. We generally compete on the basis of client service and responsiveness to client needs, available loan and
deposit products, the rates of interest charged on loans and leases, the rates of interest paid for funds, other credit and service
charges, the quality of services rendered, the convenience of banking facilities, and in the case of loans and leases to large commercial
borrowers, relative lending limits.
In addition to competing with other banks within our primary service areas, the Bank also competes with other financial service
companies, such as credit unions, industrial loan associations, securities firms, insurance companies, small loan companies, finance
companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit organizations, and other
enterprises.
Additional competition for depositors’ funds comes from United States Government securities, private issuers of debt obligations,
and suppliers of other investment alternatives for depositors. Many of our non-bank competitors are not subject to the same
extensive Federal and State regulations that govern bank holding companies and banks. Such non-bank competitors may, as a
result, have certain advantages over us in providing some services.
We compete against these financial institutions by being convenient to do business with, and by taking the time to listen and
understand our clients’ needs. We deliver personalized, one-on-one banking through knowledgeable local members of the
community always keeping the clients’ best interest in mind while offering a full array of products and highly personalized services.
We rely on our history and our reputation in northern Indiana dating back to 1863.
EMPLOYEES
At December 31, 2014, we had approximately 1,100 employees on a full-time equivalent basis. We provide a wide range of
employee benefits and consider employee relations to be good.
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REGULATION AND SUPERVISION
General — 1st Source and the Bank are extensively regulated under Federal and State law. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may have a material effect on our business and our prospective
business. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. We are unable
to predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, economic controls,
or new Federal or State legislation may have in the future.
We are a registered bank holding company under the Bank Holding Company Act of 1956 (BHCA) and, as such, we are subject
to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (Federal Reserve). We are
required to file annual reports with the Federal Reserve and to provide the Federal Reserve such additional information as it may
require.
1st Source Bank, as an Indiana state bank and member of the Federal Reserve System, is supervised by the Indiana Department
of Financial Institutions (DFI) and the Federal Reserve. As such, 1st Source Bank is regularly examined by and subject to regulations
promulgated by the DFI and the Federal Reserve. Because the Federal Deposit Insurance Corporation (FDIC) provides deposit
insurance to 1st Source Bank, we are also subject to supervision and regulation by the FDIC (even though the FDIC is not our
primary Federal regulator).
Bank Holding Company Act — Under the BHCA, as amended, our activities are limited to business so closely related to banking,
managing, or controlling banks as to be a proper incident thereto. We are also subject to capital requirements applied on a
consolidated basis in a form substantially similar to those required of the Bank. The BHCA also requires a bank holding company
to obtain approval from the Federal Reserve before (i) acquiring, or holding more than 5% voting interest in any bank or bank
holding company, (ii) acquiring all or substantially all of the assets of another bank or bank holding company, or (iii) merging or
consolidating with another bank holding company.
The BHCA also restricts non-bank activities to those which, by statute or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or of managing or controlling banks. As discussed below, the
Gramm-Leach-Bliley Act (GLBA), which was enacted in 1999, established a new type of bank holding company known as a
“financial holding company” that has powers that are not otherwise available to bank holding companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991 — The Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) was adopted to supervise and regulate a wide variety of banking issues. In general, FDICIA
provided for the recapitalization of the former Bank Insurance Fund, deposit insurance reform, including the implementation of
risk-based deposit insurance premiums, the establishment of five capital levels for financial institutions (“well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”) that would
impose more scrutiny and restrictions on less capitalized institutions, along with a number of other supervisory and regulatory
issues. At December 31, 2014, the Bank was categorized as “well capitalized,” meaning that our total risk-based capital ratio
exceeded 10.00%, our Tier 1 risk-based capital ratio exceeded 6.00%, our leverage ratio exceeded 5.00%, and we are not subject
to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure.
FDIC Deposit Insurance Assessments —The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),
which was signed into law on July 21, 2010, changes how the FDIC will calculate future deposit insurance premiums payable by
insured depository institutions. The Dodd-Frank Act directs the FDIC to amend its assessment regulations so that future assessments
will generally be based upon a depository institution’s average total consolidated assets minus the average tangible equity of the
insured depository institution during the assessment period, whereas assessments were previously based on the amount of an
institution’s insured deposits. The minimum deposit insurance fund rate will increase from 1.15% to 1.35% by September 30,
2020, and the cost of the increase will be borne by depository institutions with assets of $10 billion or more.
The Dodd-Frank Act also provides the FDIC with discretion to determine whether to pay rebates to insured depository institutions
when its deposit insurance reserves exceed certain thresholds. Previously, the FDIC was required to give rebates to depository
institutions equal to the excess once the reserve ratio exceeded 1.50%, and was required to rebate 50% of the excess over 1.35%
but not more than 1.5% of insured deposits. The FDIC adopted a final rule on February 7, 2011, that implements these provisions
of the Dodd-Frank Act.
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Emergency Economic Stabilization Act of 2008 — The Emergency Economic Stabilization Act of 2008 (EESA) among other
things, temporarily increased the standard maximum deposit insurance amount from $100,000 to $250,000. This temporary increase
in the scope of deposit insurance coverage was originally set to expire on December 31, 2013, but the Dodd-Frank Act made this
temporary increase permanent. Under the Troubled Asset Relief Program established by EESA, the U.S. Treasury Department
(Treasury) announced a Capital Purchase Program (CPP). CPP was designed to encourage U.S. financial institutions to build
capital to increase the flow of financing to U.S. businesses and consumers and support the U.S. economy. Under the program,
Treasury could purchase up to $250 billion of senior preferred shares on standardized terms as described in the program’s term
sheet. The program was available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan
holding companies engaged only in financial activities that timely submitted applications to Treasury. EESA provided for Treasury
to determine an applicant’s eligibility to participate in the CPP after consulting with the appropriate federal banking agency.
Treasury approved 1st Source’s application to participate in the CPP and on January 23, 2009, 1st Source issued to Treasury
pursuant to the CPP preferred stock valued at $111.00 million and a warrant to acquire 837,947 shares of its common stock. The
warrant was exercisable at any time during the ten-year period following issuance at an exercise price of $19.87 per share. On
December 29, 2010, 1st Source redeemed all of the preferred stock issued to the Treasury under CPP for $111.68 million, which
included accrued and unpaid dividends payable to Treasury on the preferred stock. On March 8, 2011, 1st Source repurchased the
common stock warrant for $3.75 million.
Securities and Exchange Commission (SEC) and The NASDAQ Stock Market (NASDAQ) — We are under the jurisdiction
of the SEC and certain state securities commissions for matters relating to the offering and sale of our securities and our investment
advisory services. We are subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, as administered by the SEC. We are listed on the NASDAQ Global Select Market
under the trading symbol “SRCE,” and we are subject to the rules of NASDAQ for listed companies.
Interstate Branching — Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate
Act) to allow bank holding companies to expand, by acquiring existing banks, into all states, even those which had theretofore
restricted entry. The legislation also authorized a bank to open de novo branches in other states, but only to the extent that the law
of the bank’s home state, as well as the law of the state where the branch was to be located, permitted an out-of-state bank to open
a de novo branch. The Interstate Act also authorized, subject to future action by individual states, a bank holding company to
convert its subsidiary banks located in different states under a single charter.
The Dodd-Frank Act amended the Interstate Act by expanding the authority of a state or national bank to open offices in other
states. A state or national bank may now open a de novo branch in another state if the law of the state where the branch is to be
located would permit a state bank chartered by that state to open the branch. This amendment repealed the restriction under the
Interstate Act that permitted an out-of-state bank to open a de novo branch in another state only if the bank’s home state and the
state where the branch was to be located had each enacted reciprocal de novo interstate branching laws.
Gramm-Leach-Bliley Act of 1999 — The GLBA is intended to modernize the banking industry by removing barriers to affiliation
among banks, insurance companies, the securities industry, and other financial service providers. It provides financial organizations
with the flexibility of structuring such affiliations through a holding company structure or through a financial subsidiary of a bank,
subject to certain limitations. The GLBA establishes a new type of bank holding company, known as a financial holding company,
which may engage in an expanded list of activities that are “financial in nature,” which include securities and insurance brokerage,
securities underwriting, insurance underwriting, and merchant banking. The GLBA also sets forth a system of functional regulation
that makes the Federal Reserve the “umbrella supervisor” for holding companies, while providing for the supervision of the holding
company’s subsidiaries by other Federal and state agencies. A bank holding company may not become a financial holding company
if any of its subsidiary financial institutions are not well-capitalized or well-managed. Further, each bank subsidiary of the holding
company must have received at least a satisfactory Community Reinvestment Act (CRA) rating. The GLBA also expands the types
of financial activities a national bank may conduct through a financial subsidiary, addresses state regulation of insurance, generally
prohibits unitary thrift holding companies organized after May 4, 1999, from participating in new activities that are not financial
in nature, provides privacy protection for nonpublic customer information of financial institutions, modernizes the Federal Home
Loan Bank system, and makes miscellaneous regulatory improvements. The Federal Reserve and the Secretary of the Treasury
must coordinate their supervision regarding approval of new financial activities to be conducted through a financial holding
company or through a financial subsidiary of a bank. While the provisions of the GLBA regarding activities that may be conducted
through a financial subsidiary directly apply only to national banks, those provisions indirectly apply to state-chartered banks. In
addition, the Bank is subject to other provisions of the GLBA, including those relating to CRA and privacy, regardless of whether
we elect to become a financial holding company or to conduct activities through a financial subsidiary. We do not currently intend
to file notice with the Board to become a financial holding company or to engage in expanded financial activities through a financial
subsidiary.
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Financial Privacy — In accordance with the GLBA, Federal banking regulators adopted rules that limit the ability of banks and
other financial institutions to disclose non-public information about customers to nonaffiliated third parties. These limitations
require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain
personal information to a nonaffiliated third party. The privacy provisions of the GLBA affect how consumer information is
transmitted through diversified financial companies and conveyed to outside vendors. We are also subject to various state laws
that generally require us to notify any customer whose personal financial information may have been released to an unauthorized
person as the result of a breach of our data security policies and procedures.
USA Patriot Act of 2001 — The USA Patriot Act of 2001 (USA Patriot Act) was signed into law following the terrorist attacks
of September 11, 2001. The USA Patriot Act is comprehensive anti-terrorism legislation that, among other things, substantially
broadened the scope of anti-money laundering laws and regulations by imposing significant new compliance and due diligence
obligations on financial institutions.
The regulations adopted by the Treasury under the USA Patriot Act require financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering, and terrorist financing. Additionally, the regulations
require that we, upon request from the appropriate Federal regulatory agency, provide records related to anti-money laundering,
perform due diligence of private banking and correspondent accounts, establish standards for verifying customer identity, and
perform other related duties.
Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational
consequences for the institution.
Regulations Governing Capital Adequacy — The Federal bank regulatory agencies use capital adequacy guidelines in their
examination and regulation of bank holding companies and banks. If capital falls below the minimum levels established by these
guidelines, a bank holding company or bank will be required to submit an acceptable plan for achieving compliance with the
capital guidelines and will be subject to denial of applications and appropriate supervisory enforcement actions. The various
regulatory capital requirements that we are subject to are disclosed in Part II, Item 8, Financial Statements and Supplementary
Data — Note 20 of the Notes to Consolidated Financial Statements.
Community Reinvestment Act — The Community Reinvestment Act of 1977 requires that, in connection with examinations of
financial institutions within their jurisdiction, the Federal banking regulators must evaluate the record of the financial institutions
in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the
safe and sound operation of those banks. Federal banking regulators are required to consider a financial institution’s performance
in these areas as they review applications filed by the institution to engage in mergers or acquisitions or to open a branch or facility.
Regulations Governing Extensions of Credit — 1st Source Bank is subject to certain restrictions imposed by the Federal Reserve
Act on extensions of credit to 1st Source or our subsidiaries, or investments in our securities and on the use of our securities as
collateral for loans to any borrowers. These regulations and restrictions may limit our ability to obtain funds from the Bank for
our cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. Further, the BHCA,
certain regulations of the Federal Reserve, state laws and many other Federal laws govern the extensions of credit and generally
prohibit a bank from extending credit, engaging in a lease or sale of property, or furnishing services to a customer on the condition
that the customer obtain additional services from the bank’s holding company or from one of its subsidiaries.
1st Source Bank is also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive
officers, directors, principal shareholders, or any related interest of such persons. Extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral, and subject to credit underwriting procedures that are at least
as stringent as those prevailing at the time for comparable transactions with non affiliates, and (ii) must not involve more than the
normal risk of repayment or present other unfavorable features. The Bank is also subject to certain lending limits and restrictions
on overdrafts to such persons.
Reserve Requirements — The Federal Reserve requires all depository institutions to maintain reserves against their transaction
account deposits. For 2015, the Bank must maintain reserves of 3.00% against net transaction accounts greater than $14.50 million
and up to $103.60 million (subject to adjustment by the Federal Reserve) and reserves of 10.00% must be maintained against that
portion of net transaction accounts in excess of $103.60 million. These amounts are indexed to inflation and adjusted annually by
the Federal Reserve.
Dividends — The ability of the Bank to pay dividends is limited by state and Federal laws and regulations that require 1st Source
Bank to obtain the prior approval of the DFI and the Federal Reserve Bank of Chicago before paying a dividend that, together
with other dividends it has paid during a calendar year, would exceed the sum of its net income for the year to date combined with
its retained net income for the previous two years. The amount of dividends the Bank may pay may also be limited by certain
covenant agreements and by the principles of prudent bank management. See Part II, Item 5, Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for further discussion of dividend limitations.
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Monetary Policy and Economic Control — The commercial banking business in which we engage is affected not only by general
economic conditions, but also by the monetary policies of the Federal Reserve. Changes in the discount rate on member bank
borrowing, availability of borrowing at the “discount window,” open market operations, the imposition of changes in reserve
requirements against member banks’ deposits and assets of foreign branches, and the imposition of, and changes in, reserve
requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to
the Federal Reserve. These monetary policies are used in varying combinations to influence overall growth and distributions of
bank loans, investments, and deposits, and such use may affect interest rates charged on loans and leases or paid on deposits. The
monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected
to do so in the future. The monetary policies of the Federal Reserve are influenced by various factors, including economic growth,
inflation, unemployment, short-term and long-term changes in the international trade balance, and in the fiscal policies of the U.S.
Government. Future monetary policies and the effect of such policies on our future business and earnings, and the effect on the
future business and earnings of the Bank cannot be predicted.
Sarbanes-Oxley Act of 2002 — The Sarbanes-Oxley Act of 2002 (SOA) includes provisions intended to enhance corporate
responsibility and protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities
laws, and which increase penalties for accounting and auditing improprieties at public traded companies. The SOA generally
applies to all companies that file or are required to file periodic reports with the SEC under the Exchange Act.
Among other things, the SOA creates the Public Company Accounting Oversight Board as an independent body subject to SEC
supervision with responsibility for setting auditing, quality control, and ethical standards for auditors of public companies. The
SOA also requires public companies to make faster and more-extensive financial disclosures, requires the chief executive officer
and the chief financial officer of public companies to provide signed certifications as to the accuracy and completeness of financial
information filed with the SEC, and provides enhanced criminal and civil penalties for violations of the Federal securities laws.
The SOA also addresses functions and responsibilities of audit committees of public companies. The statute, by mandating certain
stock exchange listing rules, makes the audit committee directly responsible for the appointment, compensation, and oversight of
the work of the company’s outside auditor, and requires the auditor to report directly to the audit committee. The SOA authorizes
each audit committee to engage independent counsel and other advisors, and requires a public company to provide the appropriate
funding, as determined by its audit committee, to pay the company’s auditors and any advisors that its audit committee retains.
The SOA also requires public companies to prepare an internal control report and assessment by management, along with an
attestation to this report prepared by the company’s independent registered public accounting firm, in their annual reports to
stockholders.
Secure and Fair Enforcement for Mortgage Licensing Act — The Secure and Fair Enforcement for Mortgage Licensing Act
of 2008 (S.A.F.E. Act) establishes a nationwide licensing and registration system for mortgage loan originators. The S.A.F.E. Act
requires an employee of a bank, savings association or credit union and certain of their subsidiaries that are regulated by a federal
banking agency (agency-regulated institutions) who acts as a residential mortgage loan originator to register with the Nationwide
Mortgage Licensing System and Registry (NMLS), obtain a unique identifier, and maintain this registration.
The federal banking agencies adopted a final rule in 2010 to implement these provisions. The final rule requires, among other
things, that a loan originator submit to the NMLS certain information concerning his or her personal history and experience,
undergo an FBI criminal background check, and authorize the NMLS to obtain information related to any administrative, civil,
or criminal findings by any governmental agency regarding the loan originator.
Consumer Financial Protection Laws — 1st Source Bank is subject to a number of federal and state consumer financial protection
laws and regulations that extensively govern its transactions with consumers. These laws include the Equal Credit Opportunity
Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the
Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures
Act, the Fair Debt Collection Practices Act, and the Service Members Civil Relief Act. 1st Source Bank must also comply with
applicable state usury laws and other laws prohibiting unfair and deceptive acts and practices. These laws, among other things,
require disclosures of the cost of credit and the terms of deposit accounts, prohibit discrimination in credit transactions, regulate
the use of credit report information, restrict the Bank’s ability to raise interest rates and subject the Bank to substantial regulatory
oversight. Violations of these laws may expose us to liability from potential lawsuits brought by affected customers. Federal bank
regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce these consumer
financial protection laws, in which case we may be subject to regulatory sanctions, civil money penalties, and customer rescission
rights. Failure to comply with these laws may also cause the Federal Reserve or DFI to deny approval of any applications we may
file to engage in merger and acquisition transactions with other financial institutions.
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Dodd-Frank Wall Street Reform and Consumer Protection Act — The Dodd-Frank Act, which was signed into law in 2010,
significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes
provisions affecting large and small financial institutions alike, including several provisions that will profoundly affect how
community banks, thrifts, and small bank and thrift holding companies will be regulated in the future. Among other things, these
provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules
regarding interstate branching, allow financial institutions to pay interest on business checking accounts, and impose new capital
requirements on bank and thrift holding companies. The Dodd-Frank Act also includes several corporate governance provisions
that apply to all public companies, not just financial institutions. These include provisions mandating certain disclosures regarding
executive compensation and provisions addressing proxy access by shareholders.
The Dodd-Frank Act also establishes the Consumer Financial Protection Bureau (CFPB) as an independent entity within the
Federal Reserve. In July 2011, the CFPB assumed primary responsibility for administering substantially all of the consumer
compliance regulations, including Regulation Z issued under the Truth in Lending Act and Regulation X issued under the Real
Estate Settlement Procedures Act, formerly administered by other federal agencies. The CFPB also has the authority to promulgate
consumer protection regulations that will apply to all entities, including banks, that offer consumer financial services or products.
Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among
other things, originator compensation, minimum repayment standards, and pre-payment penalties.
The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, including some that may
affect our business in substantial and unpredictable ways. We have incurred higher operating costs in complying with the Dodd-
Frank Act, and we expect that these higher costs will continue for the foreseeable future. Our management continues to monitor
the ongoing implementation of the Dodd-Frank Act and as new regulations are issued, will assess their effect on our business,
financial condition, and results of operations.
The Volcker Rule — The Dodd-Frank act prohibits banks and their affiliates from engaging in proprietary trading and from
investing and sponsoring hedge funds and private equity funds. The statutory provision implementing these restrictions is commonly
called the “Volcker Rule.” To implement the Volcker Rule, federal regulators issued final rules in December 2013 that were to
become effective April 2014. The Federal Reserve subsequently issued an order extending the period that institutions have to
conform their activities to the requirements of the Volcker Rule to July 21, 2015. These final rules exempt 1st Source Bank, as a
bank with less than $10 billion in total consolidated assets that does not engage in any covered activities other than trading in
certain government, agency, state or municipal obligations, from any significant compliance obligations under the Volcker Rule.
We are continuing to evaluate the effects of the Volcker Rules on our business, but we do not currently anticipate that the Volcker
rule will have a material effect on our business, financial condition and results of operations.
Capital Standards — In July 2013, the Federal Reserve and other federal banking agencies approved final rules implementing
the Basel Committee on Banking Supervision’s capital guidelines for all U.S. banks and for bank holding companies with greater
than $500 million in assets. Under these final rules, minimum requirements will increase for both the quantity and quality of capital
held by 1st Source and the Bank. The rules include a new common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital
ratio of 6.0%, a total capital ratio of 8.0%, and a minimum leverage ratio of 4.0%. The final rules also require a common equity
Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital
standards in the rule. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent
limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of
discretionary bonuses to senior executive management. The capital buffer requirement will be phased in over three years beginning
in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the
Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis.
The final rules also increase the required capital for certain categories of assets, including higher-risk construction real estate loans
and certain exposures related to securitizations. The final rules do not, however, adopt the changes in the proposed rule to the risk
weights assigned to certain mortgage loan assets. The final rules instead adopt the risk weights for residential mortgages under
the existing general risk-based capital rules, which assign a risk weight of either 50% (for most first-lien exposures) or 100% for
other residential mortgage exposures. Similarly, the final rules do not adopt the proposed rule’s elimination of Tier 1 treatment of
trust preferred securities for banking organizations with less than $15 billion in assets as of December 31, 2010. Instead, the final
rules permit these banking organizations to retain non-qualifying Tier 1 capital trust preferred securities issued prior to May 19,
2010, subject generally to a limit of 25% of Tier 1 capital.
These new minimum capital ratios will become effective for us on January 1, 2015, and will be fully phased-in on January 1, 2019.
Management believes that, as of December 31, 2014, 1st Source and 1st Source Bank would meet all capital adequacy requirements
under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
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Pending Legislation — Because of concerns relating to competitiveness and the safety and soundness of the banking industry,
Congress often considers a number of wide-ranging proposals for altering the structure, regulation, and competitive relationships
of the nation’s financial institutions. We cannot predict whether or in what form any proposals will be adopted or the extent to
which our business may be affected.
An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that we believe
affect us are described below. See “Forward-Looking Statements” under Item 7 of this report for a discussion of other important
factors that can affect our business.
Item 1A. Risk Factors.
Credit Risks
We are subject to credit risks relating to our loan and lease portfolios — We have certain lending policies and procedures in
place that are designed to optimize loan and lease income within an acceptable level of risk. Our management reviews and approves
these policies and procedures on a regular basis. A reporting system supplements the review process by providing our management
with frequent reports related to loan and lease production, loan quality, concentrations of credit, loan and lease delinquencies, and
nonperforming and potential problem loans and leases. Diversification in the loan and lease portfolios is a means of managing
risk associated with fluctuations and economic conditions.
We maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results
of these reviews are presented to our management. The loan and lease review process complements and reinforces the risk
identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.
Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans.
Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation
and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market
or the economy. We seek to minimize these risks through our underwriting standards. We obtain financial information and perform
credit risk analysis on our customers. Credit criteria may include, but are not limited to, assessments of income, cash flows,
collateral, and net worth; asset ownership; bank and trade credit references; credit bureau reports; and operational history.
Commercial real estate or equipment loans are underwritten after evaluating and understanding the borrower’s ability to operate
profitably and generate positive cash flows. Our management examines current and projected cash flows of the borrower to
determine the ability of the borrower to repay their obligations as agreed. Underwriting standards are designed to promote
relationship banking rather than transactional banking. Most commercial and industrial loans are secured by the assets being
financed or other business assets; however, some loans may be made on an unsecured basis. Our credit policy sets different
maximum exposure limits both by business sector and our current and historical relationship and previous experience with each
customer.
We offer both fixed-rate and adjustable-rate consumer mortgage loans secured by properties, substantially all of which are located
in our primary market area. Adjustable-rate mortgage loans help reduce our exposure to changes in interest rates; however, during
periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase as a result of repricing and the
increased payments required from the borrower. Additionally, some residential mortgages are sold into the secondary market and
serviced by our principal banking subsidiary, 1st Source Bank.
Consumer loans are primarily all other non-real estate loans to individuals in our regional market area. Consumer loans can entail
risk, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets. In these cases, any repossessed
collateral may not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer
loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected
by job loss, divorce, illness, or personal bankruptcy.
The 1st Source Specialty Finance Group loan and lease portfolio consists of commercial loans and leases secured by construction
and transportation equipment, including aircraft, autos, trucks, and vans. Finance receivables for this Group generally provide for
monthly payments and may include prepayment penalty provisions.
Our construction and transportation related businesses could be adversely affected by slowdowns in the economy. Clients who
rely on the use of assets financed through the Specialty Finance Group to produce income could be negatively affected, and we
could experience substantial loan and lease losses. By the nature of the businesses these clients operate in, we could be adversely
affected by rapid increases and decreases of fuel costs. Since some of the relationships in these industries are large, a slowdown
could have a significant adverse impact on our performance.
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Our construction and transportation related businesses could be adversely impacted by the negative effects caused by high fuel
costs, terrorist and other potential attacks, and other destabilizing events. These factors could contribute to the deterioration of the
quality of our loan and lease portfolio, as they could have a negative impact on the travel and transportation sensitive businesses
for which our specialty finance businesses provide financing.
In addition, our leasing and equipment financing activity is subject to the risk of cyclical downturns, industry concentration and
clumping, and other adverse economic developments affecting these industries and markets. This area of lending, with
transportation in particular, is dependent upon general economic conditions and the strength of the travel, construction, and
transportation industries.
Our reserve for loan and lease losses may prove to be insufficient to absorb probable losses in our loan and lease portfolio
— In the financial services industry, there is always a risk that certain borrowers may not repay borrowings. The determination
of the appropriate level of the reserve for loan and lease losses inherently involves a high degree of subjectivity and requires us
to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Our reserve for
loan and lease losses may not be sufficient to cover the loan and lease losses that we may actually incur. If we experience defaults
by borrowers in any of our businesses, our earnings could be negatively affected. Changes in local economic conditions could
adversely affect credit quality, particularly in our local business loan and lease portfolio. Changes in national or international
economic conditions could also adversely affect the quality of our loan and lease portfolio and negate, to some extent, the benefits
of national or international diversification through our Specialty Finance Group’s portfolio. In addition, bank regulatory agencies
periodically review our reserve for loan and lease losses and may require an increase in the provision for loan and lease losses or
the recognition of further loan or lease charge-offs based upon their judgments, which may be different from ours.
The soundness of other financial institutions could adversely affect us — Financial services institutions are interrelated as a
result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties,
and we routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers
and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a
default by our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be
realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due us. Any such
losses could have a material adverse effect on our financial condition and results of operations.
Market Risks
Fluctuations or continued stagnation in interest rates could reduce our profitability and affect the value of our assets —
Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which
is the difference between interest earned on loans and leases and investments, and interest paid on deposits and borrowings. We
expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the
relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more
sensitive to changes in market interest rates than our interest-bearing liabilities, or vice-versa. In addition, the individual market
interest rates underlying our loan and lease and deposit products may not change to the same degree over a given time period. In
any event, if market interest rates should move contrary to our position, earnings may be negatively affected. In addition, loan
and lease volume and quality and deposit volume and mix can be affected by market interest rates as can the businesses of our
clients. Changes in levels of market interest rates could have a material adverse effect on our net interest spread, asset quality,
origination volume, and overall profitability.
Market interest rates are beyond our control, and they fluctuate in response to general economic conditions and the policies of
various governmental and regulatory agencies, in particular, the Federal Reserve Board. Changes in monetary policy, including
changes in interest rates, may negatively affect our ability to originate loans and leases, the value of our assets and our ability to
realize gains from the sale of our assets, all of which ultimately could affect our earnings.
Adverse changes in economic conditions could impair our financial condition and results of operations — We are impacted
by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term
interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity
capital markets, broad trends in industry and finance, unemployment, and the strength of the U.S. economy and the local economies
in which we operate, all of which are beyond our control. A deterioration in economic conditions could result in an increase in
loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and
services.
Changes in economic conditions may negatively impact the fees generated by our wealth management and trust business
— Wealth management and trust fees are largely based on the size of client relationships and the market value of assets held under
management. Changes in general economic conditions and in the financial and securities markets may negatively impact the value
of our clients’ wealth management accounts and the market value of assets held under management. Market declines, reductions
in the value of our clients’ accounts, and the loss of wealth management clients may negatively impact the fees generated by our
wealth management and trust business and could have an adverse effect on our business, financial condition and results of operations.
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Liquidity Risks
We could experience an unexpected inability to obtain needed liquidity — Liquidity measures the ability to meet current and
future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to
accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities and is essential to a financial
institution’s business. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet
structure, its ability to liquidate assets, and its access to alternative sources of funds. We seek to ensure our funding needs are met
by maintaining a level of liquidity through asset and liability management. If we become unable to obtain funds when needed, it
could have a material adverse effect on our business, financial condition, and results of operations. Additionally, under Indiana
law governing the collateralization of public fund deposits, the Indiana Board for Depositories determines which financial
institutions are required to pledge collateral based on the strength of their financial ratings. We have been informed that no collateral
is required for our public fund deposits. However, the Board of Depositories could alter this requirement in the future and adversely
impact our liquidity.
We rely on dividends from our subsidiaries — Our parent company, 1st Source Corporation, receives substantially all of its
revenue from dividends from our subsidiaries. These dividends are the principal source of funds to pay dividends on our common
stock and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that
our subsidiaries may pay to our parent company. In the event our subsidiaries are unable to pay dividends to our parent company,
we may not be able to service debt, pay obligations or pay dividends on our common stock. The inability to receive dividends
from our subsidiaries could have a material adverse effect on our business, financial condition and results of operations.
Operational Risks
We are dependent upon the services of our management team — Our future success and profitability is substantially dependent
upon our management and the banking abilities of our senior executives. We believe that our future results will also depend in
part upon our ability to attract and retain highly skilled and qualified management. We are especially dependent on a limited
number of key management personnel, many of whom do not have employment agreements with us. The loss of the chief executive
officer and other senior management and key personnel could have a material adverse impact on our operations because other
officers may not have the experience and expertise to readily replace these individuals. Many of these senior officers have primary
contact with our clients and are important in maintaining personalized relationships with our client base. The unexpected loss of
services of one or more of these key employees could have a material adverse effect on our operations and possibly result in
reduced revenues if we were unable to find suitable replacements promptly. Competition for senior personnel is intense, and we
may not be successful in attracting and retaining such personnel. Changes in key personnel and their responsibilities may be
disruptive to our businesses and could have a material adverse effect on our businesses, financial condition, and results of operations.
Technology security breaches — Information security risks have increased due to the sophistication and activities of organized
crime, hackers, terrorists and other external parties and the use of online, telephone, and mobile banking channels by clients. Any
compromise of our security could deter our clients from using our banking services. We rely on security systems to provide the
protection and authentication necessary to effect secure transmission of data against damage by theft, fire, power loss,
telecommunications failure or similar catastrophic event, as well as from security breaches, denial of service attacks, viruses,
worms, and other disruptive problems caused by hackers. Computer break-ins, phishing and other disruptions of customer or
vendor systems could also jeopardize the security of information stored in and transmitted through our computer systems and
network infrastructure. We maintain a cyber insurance policy that is designed to cover a majority of loss resulting from cyber
security breaches. These precautions may not protect our systems from compromises or breaches of our security measures that
could result in damage to our reputation and business.
We depend on the services of a variety of third party vendors to meet data processing and communication needs and we have
contracted with third parties to run their proprietary software on our behalf. While we perform reviews of security controls instituted
by the vendor in accordance with industry standards and institute our own internal security controls, we rely on continued
maintenance of the controls by the outside party to safeguard our customer data.
Additionally, we issue debit cards which are susceptible to compromise at the point of sale via the physical terminal through which
transactions are processed and by other means of hacking. The security and integrity of these transactions are dependent upon the
retailers’ vigilance and willingness to invest in technology and upgrades. Issuing debit cards to our clients exposes us to potential
losses which, in the event of a data breach at one or more major retailers may adversely affect our business, financial condition,
and results of operations.
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We continually encounter technological change — The financial services industry is constantly undergoing rapid technological
change with frequent introductions of new technology-driven products and services. The effective use of technology increases
efficiency and enables financial institutions to better service clients and reduce costs. Our future success depends, in part, upon
our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands,
as well as create additional efficiencies within our operations. Many of our large competitors have substantially greater resources
to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services
quickly or be successful in marketing these products and services to our clients. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial
condition and results of operations.
Our accounting estimates and risk management processes rely on analytical and forecasting models — The processes we
use to estimate our probable loan losses and to measure the fair value of financial instruments, as well as the processes used to
estimate the effects of changing interest rates and other market measures on our financial condition and results of operations,
depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly
in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be
inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk
and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates
or other market measures. If the models we use for determining our probable loan losses are inadequate, the reserve for loan and
lease losses may not be sufficient to support future charge-offs. If the models we use to measure the fair value of financial instruments
is inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could
realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have
a material adverse effect on our business, financial condition and results of operations.
We have opened new banking centers — We are selectively expanding our banking center network within our market footprint.
Executing this expansion requires a significant investment in both financial and personnel resources. Lower than expected loan
and deposit growth can decrease anticipated revenues and net income generated by those banking centers, which could have a
material adverse effect on our business, financial condition and results of operations.
Legal/Compliance Risks
We are subject to extensive government regulation and supervision — Our operations are subject to extensive federal and
state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance
funds and the banking system as a whole, not security holders. These regulations affect our lending practices, capital structure,
investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review
banking laws, regulations and policies for possible change. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulation or policies, could affect us in substantial and unpredictable
ways. Such changes could subject us to additional costs and limit the types of financial services and products we may offer. Failure
to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation
damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have
policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
Changes in accounting standards could impact reported earnings — Current accounting and tax rules, standards, policies and
interpretations influence the methods by which financial institutions conduct business, implement strategic initiatives and tax
compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies and interpretations
are constantly evolving and may change significantly over time. Events that may not have a direct impact on us, such as bankruptcy
of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting
Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board and various taxing
authorities, responding by adopting and/or proposing substantive revision to laws, regulations, rules, standards, policies and
interpretations. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and
may occur in the future. A change in accounting standards may adversely affect our reported financial condition and results of
operations.
Substantial ownership concentration — Our directors, executive officers and 1st Source Bank, as trustee, collectively hold a
significant ownership concentration of our common shares. Due to this significant level of ownership among our affiliates, our
directors, executive officers, and 1st Source Bank, as trustee, may be able to influence the outcome of director elections or impact
significant transactions, such as mergers or acquisitions, or any other matter that might otherwise be favored by other stockholders.
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Reputational Risks
Competition from other financial services providers could adversely impact our results of operations — The banking and
financial services business is highly competitive. We face competition in making loans and leases, attracting deposits and providing
insurance, investment, trust, and other financial services. Increased competition in the banking and financial services businesses
may reduce our market share, impair our growth or cause the prices we charge for our services to decline. Our results of operations
may be adversely impacted in future periods depending upon the level and nature of competition we encounter in our various
market areas.
Managing reputational risk is important to attracting and maintaining customers, investors, and employees — Threats to
our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices,
employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or
fraudulent activities of our customers. We have policies and procedures in place that seek to protect our reputation and promote
ethical conduct. Nonetheless, negative publicity may arise regarding our business, employees, or customers, with or without merit,
and could result in the loss of customers, investors, and employees; costly litigation; a decline in revenues; and increased government
regulation.
None
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Our headquarters building is located in downtown South Bend, Indiana. The building is part of a larger complex, including a 300-
room hotel and a 500-car parking garage. In December 2010, we entered into a new 10.5 year lease on our headquarters building
which became effective January 1, 2011. As of December 31, 2014, 1st Source leases approximately 69% of the office space in
this complex.
At December 31, 2014, we also owned property and/or buildings on which 58 of 1st Source Bank’s 80 banking centers were
located, including the facilities in Allen, Elkhart, Fulton, Huntington, Kosciusko, LaPorte, Marshall, Porter, Pulaski, St. Joseph,
Starke, Tippecanoe, Wells, and Whitley Counties in the State of Indiana and Berrien, Cass, and Kalamazoo Counties in the State
of Michigan, as well as an operations center and our former headquarters building, which is utilized for additional business
operations. The Bank leases additional property and/or buildings to and from third parties under lease agreements negotiated at
arms-length.
We refurbished six banking centers and opened three new ones in our Fort Wayne, Indiana region during the last two years. This
work marked the completion of an $8 million investment in that market.
Item 3. Legal Proceedings.
As previously reported, 1st Source Bank, as the trustee (the “Trustee”) of the Morris Family Trusts for Ernestine M. Raclin,
Chairman Emeritus of the Company, and other beneficiaries, requested approval of the Probate Court of St. Joseph County Indiana
to divide the Morris Family Trusts into four separate family trust lines. The Trustee also sought other relief regarding the trusts
including approving its accounts. The action was taken in light of possible changes in tax laws and for financial and estate planning
purposes, including the possible divesture of some 1st Source Corporation common stock owned by the Trusts. Shares at issue in
the probate action held by the Morris Family Trusts represent approximately 21% of the outstanding common stock of the Company.
1st Source Bank has served as Trustee continuously since 1985.
The four family trust lines correspond to the four children of Mrs. Raclin. (Mrs. Raclin’s daughter, Carmen is the wife of Christopher
J. Murphy III, the Chairman of the Board and Chief Executive Officer of the Company.) In a response filed on September 28,
2012, two of the siblings and their respective children filed a joint answer to the Trustee’s petition and a counter-petition setting
forth their objection to the Trustee’s proposed division of the Morris Family Trusts into four family trust lines. They also sought
affirmative relief, alleging that the Trustee has breached its duties by, among other things, acquiring an inappropriate and
unreasonably high concentration in common stock of the Company in 1971 and, for decades thereafter, failing to prudently,
impartially and timely diversify the assets of the Morris Family Trusts uninfluenced by the impact on the Company or its executives.
The relief sought includes removal of the Trustee, unspecified damages and payment by 1st Source Bank of all fees, costs and
expenses incurred by the Trustee for, among other things, all matters related to the preparation and prosecution of the probate
action. Mrs. Raclin, the two remaining siblings and their children, respectively, filed their joint answer to the petition indicating
their previous and ongoing support for the Trustee’s acquisition of and continuing investment in the common stock of the Company.
The Company believes there is no basis for the relief requested in the objection and counter-petition. The Trustee is defending the
matter vigorously. The Board of Directors of the Company has formed a special committee of independent directors that actively
monitors the progress of the matter.
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1st Source and our subsidiaries are involved in various other legal proceedings incidental to the conduct of our businesses. Our
management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated
financial position or results of operations.
None
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the NASDAQ Global Select Market under the symbol “SRCE.” The following table sets forth for
each quarter the high and low sales prices for our common stock, as reported by NASDAQ, and the cash dividends paid per share
for each quarter.
Common Stock Prices (quarter ended)
High
Low
Paid
High
Low
Paid
2014 Sales Price
Cash Dividends
2013 Sales Price
Cash Dividends
March 31
June 30
September 30
December 31
$
32.60
$
27.56
$
33.21
31.92
35.22
28.76
27.80
28.00
0.17
0.18
0.18
0.18
$
24.79
$
21.88
$
25.25
28.82
32.92
22.65
23.87
25.64
0.17
0.17
0.17
0.17
As of February 13, 2015, there were 879 holders of record of 1st Source common stock.
Comparison of Five Year Cumulative Total Return*
Among 1st Source, Morningstar Market Weighted NASDAQ Index** and Peer Group Index***
* Assumes $100 invested on December 31, 2009, in 1st Source Corporation common stock, NASDAQ market index, and peer
group index.
** The Morningstar Weighted NASDAQ Index Return is calculated using all companies which trade as NASD Capital Markets,
NASD Global Markets or NASD Global Select. It includes both domestic and foreign companies. The index is weighted by the
then current shares outstanding and assumes dividends reinvested. The return is calculated on a monthly basis.
*** The peer group is a market-capitalization-weighted stock index of 48 banking companies in Illinois, Indiana, Michigan, Ohio,
and Wisconsin.
NOTE: Total return assumes reinvestment of dividends.
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The following table shows our share repurchase activity during the three months ended December 31, 2014.
Period
October 01 - 31, 2014
November 01 - 30, 2014
December 01 - 31, 2014
Total Number of
Shares Purchased
Average Price
Paid Per Share
— $
—
—
—
—
—
Total Number of
Shares Purchased as
Part of Publicly Announced
Plans or Programs*
Maximum Number (or Approximate
Dollar Value) of Shares that
may yet be Purchased Under
the Plans or Programs
—
—
—
1,981,452
1,981,452
1,981,452
*1st Source maintains a stock repurchase plan that was authorized by the Board of Directors on July 24, 2014. This authorization
superseded any prior repurchase authorizations. Under the terms of the plan, 1st Source may repurchase up to 2,000,000 shares
of its common stock from time to time to mitigate the potential dilutive effects of stock-based incentive plans and other potential
uses of common stock for corporate purposes. Since the inception of the plan, 1st Source has repurchased a total of 18,548 shares.
Federal laws and regulations contain restrictions on the ability of 1st Source and the Bank to pay dividends. For information
regarding restrictions on dividends, see Part I, Item 1, Business - Regulation and Supervision - Dividends and Part II, Item 8,
Financial Statements and Supplementary Data - Note 20 of the Notes to Consolidated Financial Statements.
Item 6. Selected Financial Data.
The following table shows selected financial data and should be read in conjunction with our Consolidated Financial Statements
and the accompanying notes presented elsewhere herein.
(Dollars in thousands, except per share amounts)
2014
2013
2012
2011
2010
$
178,554
$
179,585
$
182,085
$
187,523
$
200,626
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Net income available to common shareholders
Assets at year-end
Long-term debt and mandatorily redeemable securities at
year-end
$
$
Shareholders’ equity at year-end
Basic net income per common share
Diluted net income per common share
Cash dividends per common share
Dividend payout ratio
Return on average assets
Return on average common shareholders’ equity
Average common shareholders' equity to average assets
18,225
160,329
3,733
156,596
77,887
150,040
84,443
26,374
58,069
58,069
4,829,958
56,232
614,473
2.39
2.39
0.71
29.71%
1.21%
9.65%
12.52%
$
$
22,768
156,817
772
156,045
77,212
149,314
83,943
28,985
54,958
54,958
4,722,826
58,335
585,378
2.23
2.23
0.68
30.49%
1.19%
9.55%
12.49%
$
$
30,309
151,776
5,752
146,024
81,192
151,536
75,680
26,047
49,633
49,633
4,550,693
71,021
558,655
2.02
2.02
0.66
32.67%
1.11%
9.10%
12.20%
$
$
39,123
148,400
3,129
145,271
80,872
152,354
73,789
25,594
48,195
48,195
4,374,071
37,156
523,918
1.96
1.96
0.64
32.65%
1.09%
9.51%
11.51%
$
$
53,129
147,497
19,207
128,290
86,691
154,505
60,476
19,232
41,244
29,655
4,445,281
24,816
486,383
1.21
1.21
0.61
50.41%
0.91%
6.10%
10.69%
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The purpose of this analysis is to provide the reader with information relevant to understanding and assessing our results of
operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this
analysis the reader is encouraged to review the consolidated financial statements and statistical data presented in this document.
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FORWARD-LOOKING STATEMENTS
This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-
looking statements. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals,
expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks,
uncertainties and other factors, which may be beyond our control, and which may cause actual results, performance or achievements
to be materially different from future results, performance or achievements expressed or implied by such forward-looking
statements.
All statements other than statements of historical fact are statements that could be forward-looking statements. Words such as
“believe,” “contemplate,” “seek,” “estimate,” “plan,” “project,” “anticipate,” “possible,” “assume,” “expect,” “intend,” “targeted,”
“continue,” “remain,” “will,” “should,” “indicate,” “would,” “may” and other similar expressions are intended to identify forward-
looking statements but are not the exclusive means of identifying such statements. Forward-looking statements provide current
expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing
management’s views as of any subsequent date.
All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by
this cautionary notice. We have no obligation and do not undertake to update, revise, or correct any of the forward-looking statements
after the date of this report, or after the respective dates on which such statements otherwise are made. We have expressed our
expectations, beliefs, and projections in good faith and we believe they have a reasonable basis. However, we make no assurances
that our expectations, beliefs, or projections will be achieved or accomplished. The results or outcomes indicated by our forward-
looking statements may not be realized due to a variety of factors, including, without limitation, the following:
• Local, regional, national, and international economic conditions and the impact they may have on us and our clients and
our assessment of that impact.
• Changes in the level of nonperforming assets and charge-offs.
• Changes in estimates of future cash reserve requirements based upon the periodic review thereof under relevant regulatory
and accounting requirements.
• The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the
Federal Reserve Board.
•
Inflation, interest rate, securities market, and monetary fluctuations.
• Political instability.
• Acts of war or terrorism.
• Substantial changes in the cost of fuel.
• The timely development and acceptance of new products and services and perceived overall value of these products and
services by others.
• Changes in consumer spending, borrowings, and savings habits.
• Changes in the financial performance and/or condition of our borrowers.
• Technological changes.
• Acquisitions and integration of acquired businesses.
• The ability to increase market share and control expenses.
• Changes in the competitive environment among bank holding companies.
• The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, and
insurance) with which we and our subsidiaries must comply.
• The effect of changes in accounting policies and practices and auditing requirements, as may be adopted by the regulatory
agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and
other accounting standard setters.
• Changes in our organization, compensation, and benefit plans.
• The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or
other governmental inquires and the results of regulatory examinations or reviews.
• Greater than expected costs or difficulties related to the integration of new products and lines of business.
• Our success at managing the risks described in Item 1A. Risk Factors.
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APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) and
follow general practices within the industries in which we operate. Application of these principles requires management to make
estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates or
judgments reflect management’s view of the most appropriate manner in which to record and report our overall financial
performance. Because these estimates or judgments are based on current circumstances, they may change over time or prove to
be inaccurate based on actual experience. As such, changes in these estimates, judgments, and/or assumptions may have a significant
impact on our financial statements. All accounting policies are important, and all policies described in Part II, Item 8, Financial
Statements and Supplementary Data, Note 1 (Note 1), should be reviewed for a greater understanding of how our financial
performance is recorded and reported.
We have identified the following three policies as being critical because they require management to make particularly difficult,
subjective, and/or complex estimates or judgments about matters that are inherently uncertain and because of the likelihood that
materially different amounts would be reported under different conditions or using different assumptions. These policies relate to
the determination of the reserve for loan and lease losses, fair value measurements, and the valuation of mortgage servicing rights.
Management believes it has used the best information available to make the estimations or judgments necessary to value the related
assets and liabilities. Actual performance that differs from estimates or judgments and future changes in the key variables could
change future valuations and impact net income. Management has reviewed the application of these policies with the Audit
Committee of the Board of Directors. Following is a discussion of the areas we view as our most critical accounting policies.
Reserve for Loan and Lease Losses — The reserve for loan and lease losses represents management’s estimate of probable losses
inherent in the loan and lease portfolio and the establishment of a reserve that is sufficient to absorb those losses. In determining
an appropriate reserve, management makes numerous judgments, assumptions, and estimates based on continuous review of the
loan and lease portfolio, estimates of client performance, collateral values, and disposition, as well as historical loss rates and
expected cash flows. In assessing these factors, management benefits from a lengthy organizational history and experience with
credit decisions and related outcomes. Nonetheless, if management’s underlying assumptions prove to be inaccurate, the reserve
for loan and lease losses would have to be adjusted. Our accounting policy related to the reserve is disclosed in Note 1 under the
heading “Reserve for Loan and Lease Losses.”
Fair Value Measurements — We use fair value measurements to record certain financial instruments and to determine fair value
disclosures. Available-for-sale securities, trading account securities, mortgage loans held for sale, and interest rate swap agreements
are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record
at fair value other financial assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve write-
downs of, or specific reserves against, individual assets. GAAP establishes a three-level hierarchy for disclosure of assets and
liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to
the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market-driven or
market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the
availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market
prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices
and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market
conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets
or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market
data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value
measurement. Fair value is discussed further in Note 1 under the heading “Fair Value Measurements” and in Note 21, “Fair Value
Measurements.”
Mortgage Servicing Rights Valuation — We recognize as assets the rights to service mortgage loans for others, known as
mortgage servicing rights (MSRs), whether the servicing rights are acquired through purchases or through originated loans. MSRs
do not trade in an active open market with readily observable market prices. Although sales of MSRs do occur, the precise terms
and conditions may not be readily available. As such, the value of MSRs is established and valued using discounted cash flow
modeling techniques which require management to make estimates regarding future net servicing cash flows, taking into
consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors.
The estimated rates of mortgage loan prepayments are the most significant factors driving the value of MSRs. Increases in mortgage
loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining
the fair value of the MSRs, mortgage interest rates (which are used to determine prepayment rates), and discount rates are held
constant over the estimated life of the portfolio. Estimated mortgage loan prepayment rates are derived from a third-party model
and adjusted to reflect our actual prepayment experience. MSRs are carried at the lower of amortized cost or fair value. The values
of these assets are sensitive to changes in the assumptions used and readily available market pricing does not exist. The valuation
of MSRs is discussed further in Note 21, “Fair Value Measurements.”
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EARNINGS SUMMARY
Net income in 2014 was $58.07 million, up from $54.96 million in 2013 and up from $49.63 million in 2012. Diluted net income
per common share was $2.39 in 2014, $2.23 in 2013, and $2.02 in 2012. Return on average total assets was 1.21% in 2014 compared
to 1.19% in 2013, and 1.11% in 2012. Return on average common shareholders’ equity was 9.65% in 2014 versus 9.55% in 2013,
and 9.10% in 2012.
Net income in 2014, as compared to 2013, was positively impacted by a $3.51 million or 2.24% increase in net interest income
and a $2.61 million or 9.01% decrease in income tax expense, which was offset by a $2.96 million or 383.55% increase in provision
for loan and lease losses. Net income in 2013 was positively impacted by a $5.04 million or 3.32% increase in net interest income
and $4.98 million or 86.58% decrease in provision for loan and lease losses over 2012, which was offset by a $3.98 million or
4.90% decrease in noninterest income and a $2.94 million or 11.28% increase in income tax expense.
Dividends paid on common stock in 2014 amounted to $0.71 per share, compared to $0.68 per share in 2013, and $0.66 per share
in 2012. The level of earnings reinvested and dividend payouts are determined by the Board of Directors based on management’s
assessment of future growth opportunities and the level of capital necessary to support them.
Net Interest Income — Our primary source of earnings is net interest income, the difference between income on earning assets
and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities while deposits and
borrowings represent the major portion of interest-bearing liabilities. For purposes of the following discussion, comparison of net
interest income is done on a tax equivalent basis, which provides a common basis for comparing yields on earning assets exempt
from federal income taxes to those which are fully taxable.
Net interest margin (the ratio of net interest income to average earning assets) is significantly affected by movements in interest
rates and changes in the mix of earning assets and the liabilities that fund those assets. Net interest margin on a fully taxable
equivalent basis was 3.59% in 2014, compared to 3.67% in 2013 and 3.69% in 2012. The decreased margins in 2014 and 2013
reflect lower yields on earning assets offset by a decline in funding costs. Net interest income was $160.33 million for 2014,
compared to $156.82 million for 2013 and $151.78 million for 2012. Tax-equivalent net interest income totaled $162.17 million
for 2014, up $3.53 million from the $158.64 million reported in 2013. Tax-equivalent net interest income for 2013 was up $4.80
million from the $153.84 million reported for 2012.
During 2014, average earning assets increased $187.72 million while average interest-bearing liabilities increased $109.03 million
over the comparable period in 2013. The yield on average earning assets decreased 19 basis points to 4.00% for 2014 from 4.19%
for 2013 due to the reduction in loan and investment yields in the current interest rate environment. Total cost of average interest-
bearing liabilities decreased 15 basis points to 0.54% during 2014 from 0.69% in 2013 as liabilities were impacted by rate re-
pricing on maturing certificates of deposit and the continued change in deposit mix. The result was a decrease of 8 basis points to
net interest spread, or the difference between interest income on earning assets and expense on interest-bearing liabilities.
The largest contributor to the decrease in the yield on average earning assets in 2014 was the 27 basis point decrease in the loan
and lease portfolio yield. Average net loans and leases increased $206.05 million or 6.00% in 2014 from 2013 while the yield
decreased to 4.42%.
During 2014, the tax-equivalent yield on securities available for sale decreased 9 basis points to 2.18% while the average balance
decreased $18.78 million. Average mortgages held for sale increased $3.57 million during 2014 and the yield increased 19 basis
points. Average other investments, which include federal funds sold, time deposits with other banks, Federal Reserve Bank excess
balances, Federal Reserve Bank and Federal Home Loan Bank (FHLB) stock and commercial paper decreased $3.12 million
during 2014 while the yield increased 35 basis points. The increase in yield was primarily a result of lower outstanding balances
at higher rates.
Average interest-bearing deposits increased $5.51 million during 2014 while the effective rate paid on those deposits decreased
17 basis points. Average noninterest-bearing demand deposits increased $71.72 million during 2014.
Average short-term borrowings increased $108.57 million during 2014 while the effective rate paid increased 7 basis points.
Average long-term debt decreased $5.05 million during 2014 as the effective rate increased 89 basis points. The increase in effective
rate was primarily a result of higher rates on mandatorily redeemable securities, offset by lower effective rates on FHLB borrowings.
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The following table provides an analysis of net interest income and illustrates interest income earned and interest expense charged
for each major component of interest earning assets and the interest bearing liabilities. Yields/rates are computed on a tax-equivalent
basis, using a 35% rate. Nonaccrual loans and leases are included in the average loan and lease balance outstanding.
(Dollars in thousands)
ASSETS
Investment securities:
Taxable
Tax-exempt
Mortgages held for sale
Net loans and leases
Other investments
Total earning assets
Cash and due from banks
Reserve for loan and lease losses
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits
Short-term borrowings
Subordinated notes
Long-term debt and mandatorily redeemable securities
Total interest bearing liabilities
Noninterest bearing deposits
Other liabilities
Shareholders’ equity
2014
Interest
Income/
Expense
Average
Balance
Yield/
Rate
Average
Balance
2013
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2012
Interest
Income/
Expense
Yield/
Rate
$
694,830
$ 13,054
1.88% $
731,371
$ 14,414
1.97% $
775,103
$ 16,426
2.12%
127,191
11,143
4,834
462
3,639,985
161,027
40,482
1,016
4,513,631
180,393
3.80
4.15
4.42
2.51
4.00
109,427
7,571
4,565
300
3,433,938
161,192
43,600
940
4,325,907
181,411
4.17
3.96
4.69
2.16
4.19
107,289
16,700
4,939
592
3,209,490
161,253
65,861
943
4,174,443
184,153
4.60
3.54
5.02
1.43
4.41
62,263
(86,982)
317,893
$ 4,806,805
58,762
(85,203)
308,483
$ 4,607,949
60,099
(83,430)
321,767
$ 4,472,879
$ 3,015,693
$ 11,356
0.38% $ 3,010,183
$ 16,604
0.55% $ 2,957,785
$ 21,877
0.74%
263,377
58,764
57,757
541
4,220
2,108
3,395,591
18,225
0.21
7.18
3.65
0.54
154,804
58,764
62,807
211
4,220
1,733
3,286,558
22,768
0.14
7.18
2.76
0.69
137,937
88,425
55,383
169
6,484
1,779
3,239,530
30,309
0.12
7.33
3.21
0.94
762,050
47,272
601,892
690,326
55,403
575,662
$ 4,607,949
616,426
71,292
545,631
$ 4,472,879
Total liabilities and shareholders’ equity
$ 4,806,805
Net interest income
Net interest margin on a tax equivalent basis
$ 162,168
$ 158,643
$ 153,844
3.59%
3.67%
3.69%
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The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each. The following table shows changes in tax equivalent interest earned and
interest paid, resulting from changes in volume and changes in rates.
(Dollars in thousands)
2014 compared to 2013
Interest earned on:
Investment securities:
Taxable
Tax-exempt
Mortgages held for sale
Net loans and leases
Other investments
Total earning assets
Interest paid on:
Interest bearing deposits
Short-term borrowings
Subordinated notes
Long-term debt and mandatorily redeemable securities
Total interest bearing liabilities
Net interest income
2013 compared to 2012
Interest earned on:
Investment securities:
Taxable
Tax-exempt
Mortgages held for sale
Net loans and leases
Other investments
Total interest earning assets
Interest paid on:
Interest bearing deposits
Short-term borrowings
Subordinated notes
Long-term debt and mandatorily redeemable securities
Total interest bearing liabilities
Net interest income
$
$
$
$
$
$
$
$
$
$
Increase (Decrease) due to
Volume
Rate
Net
(718) $
(642) $
(1,360)
594
147
9,385
(58)
9,350
21
190
—
(124)
87
9,263
$
$
$
$
(325)
15
(9,550)
134
269
162
(165)
76
(10,368) $
(1,018)
(5,269) $
(5,248)
140
—
499
(4,630) $
(5,738) $
330
—
375
(4,543)
3,525
(886) $
(1,126) $
(2,012)
98
(372)
10,900
(403)
9,337
456
12
(2,134)
835
$
$
(472)
80
(10,961)
400
(374)
(292)
(61)
(3)
(12,079) $
(2,742)
(5,729) $
30
(130)
(881)
(5,273)
42
(2,264)
(46)
(7,541)
4,799
(831) $
10,168
$
(6,710) $
(5,369) $
Noninterest Income — Noninterest income increased slightly in 2014 from 2013 following a $3.98 million or 4.90% decrease
in 2013 over 2012. The following table shows noninterest income for the most recent three years ended December 31.
(Dollars in thousands)
Noninterest income:
Trust fees
Service charges on deposit accounts
Debit card income
Mortgage banking income
Insurance commissions
Equipment rental income
Gains (losses) on investment securities available-for-sale
Other income
Total noninterest income
2014
2013
2012
$
18,511
$
17,383
$
8,684
9,585
5,381
5,556
17,156
963
12,051
9,177
8,882
5,944
5,492
16,229
(168)
14,273
$
77,887
$
77,212
$
16,498
10,418
8,389
8,357
5,494
18,796
282
12,958
81,192
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Trust fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary
fees) increased by $1.13 million or 6.49% in 2014 from 2013 compared to an increase of $0.89 million or 5.36% in 2013 over
2012. Trust fees are largely based on the size of client relationships and the market value of assets under management. The market
value of trust assets under management at December 31, 2014 and 2013, was $3.95 billion and $3.80 billion, respectively. At
December 31, 2014, these trust assets were comprised of $2.40 billion of personal and agency trusts and estate administration
assets, $1.10 billion of employee benefit plan assets, $345.75 million of individual retirement accounts, and $108.24 million of
custody assets. The increase in trust fees in 2014 and 2013 was primarily a result of an increase in the market values of investments
held in the trust accounts of clients.
Service charges on deposit accounts decreased $0.49 million or 5.37% in 2014 from 2013 compared to a decrease of $1.24 million
or 11.91% in 2013 from 2012. The decline in service charges on deposit accounts in 2014 and 2013 was primarily due to lower
volumes of nonsufficient fund transactions.
Debit card income increased $0.70 million or 7.91% in 2014 from 2013 compared to an increase of $0.49 million or 5.88% in
2013 from 2012. The increase in 2014 was primarily the result of an increase in the amount of debit card transactions. The increase
in 2013 was the result of increased transaction fees coupled with an increase in the amount of debit card transactions.
Mortgage banking income decreased $0.56 million or 9.47% in 2014 over 2013, compared to a decrease of $2.41 million or 28.87%
in 2013 over 2012. We had no MSR impairment in 2014 or 2013 compared to $0.24 million in valuation recovery adjustments in
2012. During 2014, 2013 and 2012, we determined that no permanent write-down was necessary for previously recorded impairment
on MSRs. During 2014, mortgage banking income was negatively impacted by decreased gains on loan sales due to reduced profit
margins offset by lower MSR amortization expense and higher secondary market loan production volumes. Mortgage banking
income was negatively impacted by lower loan production volumes in 2013 as compared to 2012.
Insurance commissions increased slightly in 2014 from 2013 and were flat in 2013 compared to 2012.
Equipment rental income generated from operating leases increased by $0.93 million or 5.71% during 2014 from 2013 compared
to a decrease of $2.57 million or 13.66% during 2013 from 2012. The average equipment rental portfolio increased 5.55% in 2014
over 2013 as the result of improving market conditions for equipment finance. The average equipment rental portfolio decreased
15.31% in 2013 over 2012 due to decreased demand, resulting in lower rental income. In addition, new leases were at lower rates
due to market conditions including lower rates and increased competition.
Sales of investment securities available-for-sale resulted in gains of $0.96 million for the year ended 2014 compared to losses of
$0.17 million for the year ended 2013 and gains of $0.28 million for the year ended 2012. During 2014, gains were the result of
a sale of a marketable equity security. The loss in 2013 related to an investment portfolio loss on an adjustable rate security. The
gain in 2012 resulted from gains on the sale of corporate equity and agency securities.
Other income decreased $2.22 million or 15.57% in 2014 from 2013 compared to an increase of $1.32 million or 10.15% in 2013
from 2012. The decrease in 2014 was mainly the result of losses on partnership investments, lower monogram fund income,
dividend income and customer swap fees offset by higher mutual fund income. The increase in 2013 was mainly attributable to
the collection of fees on previously charged off loans in addition to higher mutual fund income and dividend income.
Noninterest Expense — Noninterest expense increased slightly in 2014 over 2013 following a $2.22 million or 1.47% decrease
in 2013 from 2012. The following table shows Noninterest expense for the recent three years ended December 31.
(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits
Net occupancy expense
Furniture and equipment expense
Depreciation — leased equipment
Professional fees
Supplies and communications
FDIC and other insurance
Business development and marketing expense
Loan and lease collection and repossession expense
Other expense
Total noninterest expense
2014
2013
2012
$
80,488
$
79,783
$
9,311
17,657
13,893
5,046
5,589
3,384
6,049
1,102
7,521
8,700
16,895
13,055
5,321
5,690
3,462
4,938
4,030
7,440
82,599
7,819
15,406
15,202
6,083
5,701
3,602
4,232
5,772
5,120
$
150,040
$
149,314
$
151,536
Total salaries and employee benefits increased $0.71 million or 0.88% in 2014 from 2013, following a $2.82 million or 3.41%
decrease in 2013 from 2012.
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Employee salaries increased $0.53 million or 0.83% in 2014 from 2013 compared to a decrease of $2.36 million of 3.56% in 2013
from 2012. The increase in 2014 was a result of higher base salaries offset by lower producer commissions. Higher base salary
expense was primarily due to more full time equivalent employees as a result of opening three new banking centers and increases
from the annual performance raises. Producer commissions were lower due to decreased residential mortgage loan production
volumes. The decrease in 2013 was primarily due to lower base salaries and producer commissions. Lower base salary expense
was mainly due to fewer full time equivalent employees offset by increases from the annual performance raises. Loan producer
commissions were lower due to decreased residential mortgage loan production volumes.
Employee benefits increased slightly in 2014 from 2013, compared to a decrease of $0.46 million or 2.80% in 2013 from 2012.
The decrease in 2013 was primarily due to fewer full time equivalent employees, offset by higher group insurance costs.
Occupancy expense increased $0.61 million or 7.02% in 2014 from 2013, compared to an increase of $0.88 million or 11.27% in
2013 from 2012. The higher expense in 2014 was mainly due to higher snow removal services and real estate taxes. The higher
expense in 2013 was mainly due to the receipt of real estate tax refunds in 2012, higher depreciation on buildings as a result of
branch remodeling in 2013, and new branches opened during 2013.
Furniture and equipment expense, including depreciation, grew by $0.76 million or 4.51% in 2014 from 2013 compared to an
increase of $1.49 million or 9.67% in 2013 from 2012. The higher expense during 2014 was in the areas of computer processing
charges and equipment repair. Additionally, in 2014, purchases of furniture and equipment increased due to renovations of six
existing banking centers and the opening of three new banking centers. The higher expense in 2013 was in the areas of equipment
depreciation, computer processing charges and software maintenance.
Depreciation on equipment owned under operating leases increased $0.84 million or 6.42% in 2014 from 2013, following a $2.15
million or 14.12% decrease in 2013 from 2012. In 2014 and 2013, depreciation on equipment owned under operating leases
changed in conjunction with the change in equipment rental income.
Professional fees declined $0.28 million or 5.17% in 2014 from 2013, compared to a $0.76 million or 12.53% decrease in 2013
from 2012. The decrease in 2014 and 2013 was primarily due to the reduced utilization of consulting services.
Supplies and communications expense decreased slightly in 2014 from 2013, and were flat in 2013 from 2012.
FDIC and other insurance expense was flat in 2014 from 2013 and flat in 2013 from 2012.
Business development and marketing expense increased $1.11 million or 22.50% in 2014 from 2013 compared to a $0.71 million
or 16.68% increase in 2013 from 2012. The higher expense in 2014 was the result of increased charitable contributions and
increased retail marketing. The higher expense in 2013 was the result of increased charitable contributions. Charitable contributions
were $1.46 million in 2014 compared to $0.50 million in 2013.
Loan and lease collection and repossession expenses decreased $2.93 million or 72.66% in 2014 from 2013 compared to a decrease
of $1.74 million or 30.18% in 2013 from 2012. Loan and lease collection and repossession expense was lower in 2014 mainly
due to reduced repurchased mortgage loan losses as a result of fewer loan repurchase requests and gains on the sale of other real
estate and repossessions. The decrease in 2013 was mainly due to a reduction in the average repossessions outstanding and reduced
valuation adjustments as credit quality slowly improved.
Other expenses were flat in 2014 as compared to 2013 and increased $2.32 million or 45.31% in 2013 from 2012. The increase
in 2013 was mainly due to the gain on the sale of the corporate headquarters’ parking garage that occurred in 2012, a previously
reported trustee matter, and a higher provision on unfunded loan commitments.
Income Taxes — 1st Source recognized income tax expense in 2014 of $26.37 million, compared to $28.99 million in 2013, and
$26.05 million in 2012. The effective tax rate in 2014 was 31.23% compared to 34.53% in 2013, and 34.42% in 2012. The provision
for income taxes included a one-time benefit of $3.30 million for the twelve months ended December 31, 2014 which resulted in
a lower effective tax rate for 2014 compared to 2013 and 2012. These benefits were the result of a reduction in uncertain tax
positions due to settlements with taxing authorities and the lapse of the applicable statute of limitations.
Effective January 1, 2014, the Indiana Financial Institutions Tax (FIT) rate decreased from 8.5% to 8.0% and will continue to
decrease by 0.5% each of the next three years. As a result of the change, we decreased the carrying value of certain state deferred
tax assets. The impact of the change was not material and was recorded in the financial statements during the second quarter of
2013. Additionally, on March 25, 2014, FIT tax rate decreases from 6.5% in 2018 to 4.9% in 2023 were enacted. These further
decreases did not have an impact on our deferred taxes and as a result, no amount was recorded in our financial statements for
this rate change. For a detailed analysis of 1st Source’s income taxes see Part II, Item 8, Financial Statements and Supplementary
Data — Note 17 of the Notes to Consolidated Financial Statements.
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FINANCIAL CONDITION
Loan and Lease Portfolio — The following table shows 1st Source’s loan and lease distribution at the end of each of the last five
years as of December 31.
(Dollars in thousands)
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer loans
Total loans and leases
2014
2013
2012
2011
2010
$
710,758
$
679,492
$
639,069
$
545,570
$
397,902
247,153
727,665
399,940
616,587
445,759
142,810
391,649
237,854
738,133
333,088
583,997
460,981
124,130
396,602
213,547
696,479
278,974
554,968
438,641
109,273
378,604
217,157
620,782
261,204
545,457
423,606
98,163
530,228
326,340
232,984
614,357
285,634
594,729
390,951
95,400
$
3,688,574
$
3,549,324
$
3,327,553
$
3,090,543
$
3,070,623
At December 31, 2014, 10.0% of total loans and leases were concentrated with auto rental and leasing.
Loans and leases, net of unearned discount, at December 31, 2014, were $3.69 billion and were 76.43% of total assets, compared
to $3.55 billion and 75.15% of total assets at December 31, 2013. Average loans and leases, net of unearned discount, increased
$206.05 million or 6.00% and increased $224.45 million or 6.99% in 2014 and 2013, respectively.
Commercial and agricultural lending, excluding those loans secured by real estate, increased $31.27 million or 4.60% in 2014
over 2013. Commercial and agricultural lending outstandings were $710.76 million and $679.49 million at December 31, 2014,
and December 31, 2013, respectively. This increase was mainly attributed to an improved economy in our target markets, resulting
in greater line of credit usage and the financing of increased capital expenditures by our clients. In 2014, we also grew our business
client base.
Auto and light truck loans increased $6.25 million or 1.60% in 2014 over 2013. At December 31, 2014, auto and light truck loans
had outstandings of $397.90 million and $391.65 million at December 31, 2013. This increase was primarily attributable to the
expansion of financing with many existing clients and an increase in client base offset by selective credit pruning and client
consolidations during the year.
Medium and heavy duty truck loans and leases grew by $9.30 million or 3.91% in 2014. Medium and heavy duty truck financing
at December 31, 2014 and 2013, had outstandings of $247.15 million and $237.85 million, respectively. Most of the increase at
December 31, 2014, from December 31, 2013, can be attributed to clients reacting to their aging equipment by normalizing their
replacement policies. Consequently, demand has increased as the trucking industry acquired new equipment.
Aircraft financing at year-end 2014 decreased $10.47 million or 1.42% from year-end 2013. Aircraft financing at December 31,
2014 and 2013, had outstandings of $727.67 million and $738.13 million, respectively. The decrease was mainly due to paydowns
in our foreign loan outstandings.
Construction equipment financing increased $66.85 million or 20.07% in 2014 compared to 2013. Construction equipment
financing at December 31, 2014, had outstandings of $399.94 million, compared to outstandings of $333.09 million at December 31,
2013. The increase in this category was primarily due to a continued gradual improvement in the construction industry and the
need to replace older equipment in addition to increases in equipment rental.
Commercial loans secured by real estate, the majority of which is owner occupied, increased $32.59 million or 5.58% in 2014
over 2013. Commercial loans secured by real estate outstanding at December 31, 2014, were $616.59 million and $584.00 million
at December 31, 2013. The increase was mainly due to general improvements in the business economy within our markets.
Residential real estate loans were $445.76 million at December 31, 2014, and $460.98 million at December 31, 2013. Residential
real estate loans decreased $15.22 million or 3.30% in 2014 from 2013. The decrease in residential real estate loans was primarily
due to a softening in residential refinance demand, limited purchase mortgage activity and anemic new home construction activity.
Consumer loans increased $18.68 million or 15.05% in 2014 over 2013. Consumer loans outstanding at December 31, 2014, were
$142.81 million and $124.13 million at December 31, 2013. The increase during 2014 was due to higher demand in auto, personal
loans, home equity and other personal line of credit loans as a result of favorable interest rates.
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The following table shows the maturities of loans and leases in the categories of commercial and agriculture, auto and light truck,
medium and heavy duty truck, aircraft and construction equipment outstanding as of December 31, 2014.
(Dollars in thousands)
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Total
0-1 Year
1-5 Years
Over 5 Years
Total
$
386,863
$
274,106
$
49,789
$
162,463
77,078
177,639
108,673
234,596
166,453
467,190
270,801
843
3,622
82,836
20,466
710,758
397,902
247,153
727,665
399,940
$
912,716
$
1,413,146
$
157,556
$
2,483,418
The following table shows amounts due after one year are also classified according to the sensitivity to changes in interest rates.
Rate Sensitivity (Dollars in thousands)
1 – 5 Years
Over 5 Years
Total
Fixed Rate
Variable Rate
Total
$
$
918,530
39,935
958,465
$
$
494,616
117,621
612,237
$
$
1,413,146
157,556
1,570,702
During 2014, approximately 88% of the Bank’s residential mortgage originations were sold into the secondary market. Mortgage
loans held for sale were $13.60 million at December 31, 2014, and were $6.08 million at December 31, 2013. Although 1st Source
Bank is participating in the U.S. Treasury Making Home Affordable programs, we do not feel it has a material effect on our
financial condition or results of operations.
1st Source Bank sells residential mortgage loans to Fannie Mae as well as FHA-insured and VA-guaranteed loans in Ginnie Mae
mortgage-backed securities. Additionally, we have sold loans on a service released basis to various other financial institutions in
recent years. The agreements under which we sell these mortgage loans contain various representations and warranties regarding
the acceptability of loans for purchase. On occasion, we may be asked to indemnify the loan purchaser for credit losses on loans
that were later deemed ineligible for purchase or we may be asked to repurchase a loan. Both circumstances are collectively referred
to as “repurchases.” Within the industry, repurchase demands had been increasing during prior years but did slow during 2014.
While we believe the loans we have underwritten and sold to these entities have met or exceeded applicable transaction parameters,
we must acknowledge the trend of mortgage insurance rescissions and speculative repurchase requests.
Our liability for repurchases, included in accrued expenses and other liabilities on the Statements of Financial Condition, was
$1.72 million and $2.46 million as of December 31, 2014 and 2013, respectively. Our expense for repurchase losses, included in
loan and lease collection and repossession expense on the Statements of Income, was $(0.27) million in 2014 compared to $1.99
million in 2013 and $2.05 million in 2012. The mortgage repurchase liability represents our best estimate of the loss that we may
incur. The estimate is based on specific loan repurchase requests and a historical loss ratio with respect to origination dollar volume.
Because the level of mortgage loan repurchase losses are dependent on economic factors, investor demand strategies and other
external conditions that may change over the life of the underlying loans, the level of liability for mortgage loan repurchase losses
is difficult to estimate and requires considerable management judgment.
CREDIT EXPERIENCE
Reserve for Loan and Lease Losses — Our reserve for loan and lease losses is provided for by direct charges to operations.
Losses on loans and leases are charged against the reserve and likewise, recoveries during the period for prior losses are credited
to the reserve. Our management evaluates the reserve quarterly, reviewing all loans and leases over a fixed-dollar amount ($100,000)
where the internal credit quality grade is at or below a predetermined classification, actual and anticipated loss experience, current
economic events in specific industries, and other pertinent factors including general economic conditions. Determination of the
reserve is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows
or fair value of collateral on collateral-dependent impaired loans and leases, estimated losses on pools of homogeneous loans and
leases based on historical loss experience, and consideration of environmental factors, principally economic risk and concentration
risk, all of which may be susceptible to significant and unforeseen changes. We review the status of the loan and lease portfolio
to identify borrowers that might develop financial problems in order to aid borrowers in the handling of their accounts and to
mitigate losses. See Part II, Item 8, Financial Statements and Supplementary Data — Note 1 of the Notes to Consolidated Financial
Statements for additional information on management’s evaluation of the reserve for loan and lease losses.
The reserve for loan and lease loss methodology has been consistently applied for several years, with enhancements instituted
periodically. Reserve ratios are reviewed quarterly and revised periodically to reflect recent loss history and to incorporate current
risks and trends which may not be recognized in historical data. As we update our historical charge-off analysis, we review the
look-back periods for each business loan portfolio.
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During 2014, the medium-term portion of the look-back period was six years given that 2009 through 2014 losses were considerably
impacted by the severe recession. Although the recession began in December 2007, its financial consequences were not recognized
in the loan portfolios until 2009. We gave the greatest weight to this recent six year period in our calculation, as we feel it is most
consistent with our current expectations for 2015. Furthermore, we perform a thorough analysis of charge-offs, non-performing
asset levels, special attention outstandings and delinquency in order to review portfolio trends and other factors, including specific
industry risks and economic conditions, which may have an impact on the reserves and reserve ratios applied to various portfolios.
We adjust the calculated historical based ratio as a result of our analysis of environmental factors, principally economic risk and
concentration risk. Key economic factors affecting our portfolios are growth in gross domestic product, unemployment rates,
housing market trends, commodity prices, inflation and global economic and political issues. Concentration risk is impacted
primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in our business banking and
commercial real estate portfolios and by collateral concentration in our specialty finance portfolios.
Weaknesses overseas could negatively impact the U.S. recovery, as could geopolitical events. Current concerns include the weak
EU economies and deflationary pressures, the recessionary pressures in Japan and Brazil and the resultant decline in value of the
real, the continued slowdown in China, and the geopolitical threats to the Russian economy as a result of the crisis in the Ukraine
as well as the economic decline due to Russia’s significant dependence on oil. We include a factor in our loss ratios for global
risk, as we are increasingly aware of the threat that global concerns may affect our customers. While we are unable to determine
with any precision the impact of global economic and political issues on 1st Source Bank’s loan portfolios, we feel the risks are
real and significant. We believe there is a risk of negative consequences for our borrowers that would affect their ability to repay
their financial obligations. Therefore, we continue to include a factor for global risk in our analysis for 2014.
Another area of concern continues to be our aircraft portfolio where we have collateral concentration and a sizable foreign exposure.
The aircraft industry was among the sectors affected most by the sluggish economy. We have seen some evidence that depressed
private jet markets have stabilized. As the U.S. economy slowly improves, the industry is likely to benefit and we should see a
decrease in the fleet of unsold pre-owned aircraft which will result in further strengthening of values. Nevertheless, we remain
concerned about the prolonged low prices for several models. We also have foreign exposure in this portfolio, particularly in Brazil
and Mexico. The recession in Brazil and the currency fluctuations are having a negative impact on our clients’ cost of paying
dollar denominated debts and, as a result, we have experienced increasing delinquency in this portfolio and we continue to
experience higher default rates in this portfolio than in our other lending segments. We reassessed our ratios, which were established
based on the higher and more volatile loss histories and pronounced exposure to global risks, and believe our reserve ratios remain
appropriate.
We experienced ongoing improvement in the medium and heavy duty truck portfolio. We recognized sizable losses during 2009
and the first half of 2010; however, since then we have had no charge-offs. Current favorable conditions with lower oil prices and
growth in GDP, manufacturing and jobs bode well for the industry. Industry concerns include the worsening driver shortage,
unresolved infrastructure funding issues and increased regulation. Nevertheless, the underlying industry fundamentals are expected
to remain relatively stable. As a result, we maintained our risk factors at levels consistent with last year.
Our construction equipment portfolio is characterized by increasing outstanding loan balances and improved credit quality in
2014. The construction industry, which was hard hit during the recession, is positioned to benefit from an improving economy,
buoyed by growth in private non-residential construction. We are talking to our larger customers with exposure to the energy sector
and anticipate some negative repercussions for some of our borrowers as a result of the significant decline in oil prices, but the
Bank’s exposure to this segment is limited. Historically, 1st Source has experienced less volatility in this portfolio than the industry
as losses have been mitigated by appropriate underwriting and the advantage of strong collateral values due to the global market
for used construction equipment. The underlying risk has not changed significantly for this portfolio; our reserve factors are similar
to last year.
The auto and light truck portfolio outstanding loan balances remained relatively stable for the past three years, with normal seasonal
fluctuations. Used cars held their values better than we anticipated in 2014. Industry growth is projected to be accompanied by
increasing rental rates and used auto sales are expected to remain strong. As a result, we did not change the reserve ratio for the
auto portfolio.
There are several industries represented in the commercial and agricultural portfolio. The outlook for the business banking portfolio
is guardedly optimistic. While recent economic news indicates improvement, exemplified by lower unemployment and increased
consumer and small business confidence, we remain mindful of uncertainties and risks. In general, the decline in oil prices will
be good for businesses and individuals in our local market. However, the decline in commodities prices, particularly corn and
soybeans, will negatively impact the crop sector of our agriculture portfolio. We anticipate some of our borrowers will be unable
to repay their lines of credit in full, resulting in carry-over debt. Overall, we are experiencing trends of generally improving credit
quality, with low delinquencies and fewer accounts in Special Attention than this time last year. We have reviewed the calculated
loss ratios and the environmental factors and concentration issues affecting these portfolios and incorporated minor adjustments
to the reserve ratios as deemed appropriate.
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Similar to the commercial portfolio, our commercial real estate loans are concentrated in our local market with local customers,
with over fifty percent of the Bank’s exposure being owner occupied facilities where we are the primary relationship bank for our
customers. Nevertheless, we were not immune to the dramatic declines in real estate values following the great recession, similar
to other U.S. markets and we experienced losses from 2009 through 2011. Furthermore, our recent portfolio growth has been in
the more risky non-owner occupied sector, principally the hotel industry. Our recent loss history is favorable; however, as a result
of our growth in more risky sectors, we are maintaining the reserve ratios established last year.
The reserve for loan and lease losses at December 31, 2014, totaled $85.07 million and was 2.31% of loans and leases, compared
to $83.51 million or 2.35% of loans and leases at December 31, 2013, and $83.31 million or 2.50% of loans and leases at
December 31, 2012. It is our opinion that the reserve for loan and lease losses was appropriate to absorb probable losses inherent
in the loan and lease portfolio as of December 31, 2014.
Charge-offs for loan and lease losses were $6.03 million for 2014, compared to $3.83 million for 2013 and $7.64 million for 2012.
Charge-offs increased in 2014 as a result of a sizable charge-off on a commercial relationship. Charge-offs decreased in 2013 due
to a decrease in average nonperforming loans and leases reflecting a slowly improving economy. In 2013, the largest loss was on
an aircraft account. The provision for loan and lease losses was $3.73 million for 2014, compared to $0.77 million for 2013 and
$5.75 million for 2012.
The following table summarizes our loan and lease loss experience for each of the last five years ended December 31.
$
$
$
2014
3,688,574
3,639,985
83,505
5,007
42
—
—
4
99
46
833
6,031
929
1,283
142
240
525
347
97
298
3,861
2,170
3,733
(Dollars in thousands)
Amounts of loans and leases outstanding at end of period
Average amount of net loans and leases outstanding during
period
Balance of reserve for loan and lease losses at beginning of
period
Charge-offs:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer loans
Total charge-offs
Recoveries:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer loans
Total recoveries
Net charge-offs
Provision for loan and lease losses
Balance at end of period
Ratio of net charge-offs to average net loans and leases
outstanding
Ratio of reserve for loan and lease losses to net loans and
leases outstanding end of period
Coverage ratio of reserve for loan and lease losses to
nonperforming loans and leases
2013
3,549,324
3,433,938
83,311
$
$
$
2012
3,327,553
3,209,490
81,644
$
$
$
2011
3,090,543
3,078,581
86,874
$
$
$
2010
3,070,623
3,109,508
88,236
$
$
$
538
226
57
1,308
88
170
316
1,125
3,828
468
139
462
884
323
627
14
333
3,250
578
772
524
3,754
41
600
120
471
594
1,532
7,636
484
230
1,185
711
268
223
43
407
3,551
4,085
5,752
1,667
105
241
4,681
853
3,120
282
1,640
4,000
490
2,403
6,507
2,372
6,219
486
1,629
12,589
24,106
1,923
1,612
133
44
964
308
346
56
456
4,230
8,359
3,129
53
77
636
345
105
47
662
3,537
20,569
19,207
86,874
0.66%
2.83%
$
85,068
$
83,505
$
83,311
$
81,644
$
0.06%
2.31%
0.02%
2.35%
0.13%
2.50%
0.27%
2.64%
239.07%
225.73%
226.03%
143.49%
115.50%
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The following table shows net charge-offs (recoveries) as a percentage of average loans and leases by portfolio type:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer loans
2014
2013
2012
2011
2010
0.58%
0.01%
0.01%
(0.30)
(0.06)
(0.03)
(0.14)
(0.04)
(0.01)
0.41
0.02
(0.19)
0.06
(0.08)
(0.08)
0.07
0.67
0.85
(0.53)
(0.02)
(0.05)
0.05
0.13
1.08
(0.05)%
(0.01)
0.09
0.61
0.20
0.49
0.06
1.24
0.44%
0.14
0.87
0.96
0.67
1.05
0.11
0.95
Total net charge-offs to average portfolio loans and leases
0.06%
0.02%
0.13%
0.27 %
0.66%
The reserve for loan and lease losses has been allocated according to the amount deemed necessary to provide for the estimated
probable losses that have been incurred within the categories of loans and leases set forth in the table below. The following table
shows the amount of such components of the reserve at December 31 and the ratio of such loan and lease categories to total
outstanding loan and lease balances.
2014
2013
2012
2011
2010
Percentage
of Loans and
Leases in
Each
Category to
Total Loans
and Leases
Reserve
Amount
Percentage
of Loans and
Leases in
Each
Category to
Total Loans
and Leases
Percentage
of Loans and
Leases in
Each
Category to
Total Loans
and Leases
Reserve
Amount
Percentage
of Loans and
Leases in
Each
Category to
Total Loans
and Leases
Reserve
Amount
Percentage
of Loans and
Leases in
Each
Category to
Total Loans
and Leases
Reserve
Amount
19.27% $ 11,515
19.14% $ 12,326
19.21% $ 13,091
17.65% $ 20,544
10.79
9,657
11.04
8,864
11.92
7,037
12.25
5,612
6.70
19.73
10.84
16.72
12.08
3.87
4,212
34,037
5,972
12,406
4,093
1,613
6.70
20.80
9.38
16.45
12.99
3.50
3,721
34,205
5,390
13,778
3,652
1,375
6.42
20.93
8.38
16.68
13.18
3.28
5,174
28,626
6,295
16,772
3,362
1,287
7.03
20.09
8.45
17.65
13.70
3.18
7,698
29,811
8,439
11,177
2,518
1,075
17.27%
10.62
7.59
20.01
9.30
19.37
12.73
3.11
Reserve
Amount
$ 11,760
10,326
4,500
32,234
7,008
13,270
4,102
1,868
$ 85,068
100.00% $ 83,505
100.00% $ 83,311
100.00% $ 81,644
100.00% $ 86,874
100.00%
(Dollars in thousands)
Commercial and
agricultural loans
Auto and light truck
Medium and heavy duty
truck
Aircraft financing
Construction equipment
financing
Commercial real estate
Residential real estate
Consumer loans
Total
Nonperforming Assets — Nonperforming assets include loans past due over 90 days, nonaccrual loans, other real estate, former
bank premises held for sale, repossessions and other nonperforming assets we own. Our policy is to discontinue the accrual of
interest on loans and leases where principal or interest is past due and remains unpaid for 90 days or more, or when an individual
analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential
mortgage loans, which are placed on nonaccrual at the time the loan is placed in foreclosure and consumer loans that are both well
secured and in the process of collection.
Nonperforming assets amounted to $42.48 million at December 31, 2014, compared to $46.75 million at December 31, 2013, and
$42.27 million at December 31, 2012. During 2014, interest income on nonaccrual loans and leases would have increased by
approximately $3.03 million compared to $2.93 million in 2013 if these loans and leases had earned interest at their full contractual
rate.
Nonperforming assets at December 31, 2014, decreased from December 31, 2013, mainly due to decreases in nonaccrual loans
and leases and the sale of other real estate. The decrease in nonaccrual loans and leases occurred primarily in the auto and light
truck and the commercial real estate portfolios, offset by increases in commercial and agricultural loans and aircraft financing.
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Nonperforming assets at December 31 (Dollars in thousands)
2014
2013
2012
2011
2010
Loans past due over 90 days
Nonaccrual loans and leases:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer loans
Total nonaccrual loans and leases
Total nonperforming loans and leases
Other real estate
Former bank premises held for sale
Repossessions:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Consumer loans
Total repossessions
Operating leases
$
981
$
287
$
442
$
460
$
361
14,284
38
56
12,473
751
4,807
1,968
225
34,602
35,583
1,109
626
—
25
—
5,123
—
8
5,156
6
11,765
3,511
188
10,365
1,032
7,064
2,399
383
36,707
36,994
4,539
951
23
145
—
4,082
—
12
4,262
—
9,179
35
875
5,292
5,285
13,055
2,323
373
36,417
36,859
7,311
1,034
—
52
—
—
—
11
63
—
10,966
193
3,408
12,526
4,137
20,569
4,380
261
56,440
56,900
7,621
1,134
33
222
—
6,490
—
47
6,792
29
8,083
706
7,692
17,897
8,568
26,621
4,958
328
74,853
75,214
6,392
1,200
24
405
240
4,795
201
5
5,670
236
Total nonperforming assets
$
42,480
$
46,746
$
45,267
$
72,476
$
88,712
Nonperforming loans and leases to loans and leases, net of unearned
discount
Nonperforming assets to loans and leases and operating leases, net of
unearned discount
0.96%
1.04%
1.11%
1.84%
2.45%
1.13%
1.29%
1.25%
2.28%
2.81%
Potential Problem Loans — Potential problem loans consist of loans that are performing but for which management has concerns
about the ability of a borrower to continue to comply with repayment terms because of the borrower’s potential operating or
financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. As of
December 31, 2014 and 2013, we had $16.18 million and $4.33 million, respectively, in loans of this type which are not included
in either of the non-accrual or 90 days past due loan categories. At December 31, 2014, potential problem loans consisted of three
foreign aircraft credit relationships. Weakness in these companies’ operating performance and payment patterns has caused us to
heighten attention given to these credits.
Foreign Outstandings — Our foreign loan and lease outstandings, all denominated in U.S. dollars except for one loan denominated
in Euros at December 31, 2013, which was not significant, were $224.51 million and $270.30 million as of December 31, 2014
and 2013, respectively. Foreign loans and leases are in aircraft financing. Loan and lease outstandings to borrowers in Brazil and
Mexico were $105.39 million and $100.76 million as of December 31, 2014, respectively, compared to $142.79 million and $77.96
million as of December 31, 2013, respectively. Outstanding balances to borrowers in other countries were insignificant.
INVESTMENT PORTFOLIO
The amortized cost of securities at year-end 2014 decreased from 2013, following a decrease from year-end 2012 to year-end
2013. The amortized cost of securities at December 31, 2014, was $776.06 million or 16.07% of total assets, compared to $822.16
million or 17.41% of total assets at December 31, 2013.
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The following table shows the amortized cost of securities available-for-sale as of December 31.
(Dollars in thousands)
U.S. Treasury and Federal agencies securities
U.S. States and political subdivisions securities
Mortgage-backed securities — Federal agencies
Corporate debt securities
Foreign government and other securities
Marketable equity securities
2014
2013
2012
$
371,878
$
394,558
$
121,510
248,299
31,677
800
1,893
120,416
273,495
30,828
700
2,166
410,983
100,055
301,136
30,897
3,700
2,368
Total investment securities available-for-sale
$
776,057
$
822,163
$
849,139
Yields on tax-exempt obligations are calculated on a fully tax equivalent basis assuming a 35% tax rate. The following table shows
the maturities of securities available-for-sale at December 31, 2014, at the amortized costs and weighted average yields of such
securities.
(Dollars in thousands)
U.S. Treasury and Federal agencies securities
Under 1 year
1 – 5 years
5 – 10 years
Over 10 years
Total U.S. Treasury and Federal agencies securities
U.S. States and political subdivisions securities
Under 1 year
1 – 5 years
5 – 10 years
Over 10 years
Total U.S. States and political subdivisions securities
Corporate debt securities
Under 1 year
1 – 5 years
5 – 10 years
Over 10 years
Total Corporate debt securities
Foreign government and other securities
Under 1 year
1 – 5 years
5 – 10 years
Over 10 years
Total Foreign government and other securities
Mortgage-backed securities — Federal agencies
Marketable equity securities
Total investment securities available-for-sale
Amount
Yield
$
15,501
356,377
—
—
371,878
8,287
66,872
44,139
2,212
121,510
4,525
27,152
—
—
31,677
200
600
—
—
800
248,299
1,893
776,057
$
2.27 %
1.53
—
—
1.56
5.15
3.92
3.36
5.48
3.83
1.49
1.70
—
—
1.67
1.27
1.98
—
—
1.80
2.43
6.74
2.21%
At December 31, 2014, the residential mortgage-backed securities we held consisted primarily of GNMA, FNMA and FHLMC
pass-through certificates (Government Sponsored Enterprise, GSEs). The type of loans underlying the securities were all
conforming loans at the time of issuance. The underlying GSE backing these mortgage-backed securities are rated Aaa or AA+
from the rating agencies. At December 31, 2014, the vintage of the underlying loans comprising our securities are: 24% in the
years 2013 and 2014; 40% in the years 2011 and 2012; 25% in the years 2009 and 2010; and 11% in years 2008 and prior.
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DEPOSITS
The following table shows the average daily amounts of deposits and rates paid on such deposits.
2014
2013
2012
(Dollars in thousands)
Amount
Rate
Amount
Rate
Amount
Rate
Noninterest bearing demand deposits
$
762,050
—% $
690,326
—% $
616,426
—%
Interest bearing demand deposits
Savings deposits
Time deposits
Total deposits
1,296,929
710,216
1,008,548
0.12
0.08
0.91
1,234,145
691,942
1,084,096
0.13
0.09
1.33
1,151,617
656,245
1,149,923
0.16
0.14
1.66
$
3,777,743
$
3,700,509
$
3,574,211
See Part II, Item 8, Financial Statements and Supplementary Data — Note 10 of the Notes to Consolidated Financial Statements
for additional information on deposits.
SHORT-TERM BORROWINGS
The following table shows the distribution of our short-term borrowings and the weighted average interest rates thereon at the end
of each of the last three years. Also provided are the maximum amount of borrowings and the average amount of borrowings, as
well as weighted average interest rates for the last three years.
(Dollars in thousands)
2014
Federal Funds
Purchased and
Securities
Repurchase
Agreements
Commercial
Paper
Other
Short-Term
Borrowings
Total
Borrowings
Balance at December 31, 2014
$
138,843
$
Maximum amount outstanding at any month-end
Average amount outstanding
Weighted average interest rate during the year
Weighted average interest rate for outstanding amounts at
December 31, 2014
2013
Balance at December 31, 2013
Maximum amount outstanding at any month-end
Average amount outstanding
Weighted average interest rate during the year
Weighted average interest rate for outstanding amounts at
December 31, 2013
2012
Balance at December 31, 2012
Maximum amount outstanding at any month-end
Average amount outstanding
Weighted average interest rate during the year
Weighted average interest rate for outstanding amounts at
December 31, 2012
LIQUIDITY
230,075
143,270
0.15%
0.13%
$
181,120
$
181,120
121,294
0.11 %
0.17 %
11,778
17,245
13,137
0.26%
0.27%
10,814
16,552
9,035
0.22 %
0.24 %
$
95,201
$
155,573
106,970
0.27%
0.29%
$
122,197
$
122,197
24,475
0.22 %
0.28 %
$
158,680
$
3,469
$
7,039
$
189,150
121,495
0.13 %
0.20 %
10,114
6,739
0.21 %
0.22 %
11,531
9,703
— %
— %
245,822
402,893
263,377
0.21%
0.20%
314,131
319,869
154,804
0.14 %
0.22 %
169,188
210,795
137,937
0.12 %
0.19 %
Core Deposits — Our major source of investable funds is provided by stable core deposits consisting of all interest bearing and
noninterest bearing deposits, excluding brokered certificates of deposit and certain certificates of deposit over $250,000 based on
established FDIC insured deposits. In 2014, average core deposits equaled 74.85% of average total assets, compared to 78.35%
in 2013 and 77.32% in 2012. The effective rate of core deposits in 2014 was 0.28%, compared to 0.43% in 2013 and 0.58% in
2012.
Average noninterest bearing core deposits increased 10.39% in 2014 compared to an increase of 11.99% in 2013. These represented
21.18% of total core deposits in 2014, compared to 19.12% in 2013, and 17.82% in 2012.
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Purchased Funds — We use purchased funds to supplement core deposits, which include certain certificates of deposit over
$250,000, brokered certificates of deposit, overnight borrowings, securities sold under agreements to repurchase, commercial
paper, and other short-term borrowings. Purchased funds are raised from customers seeking short-term investments and are used
to manage the Bank’s interest rate sensitivity. During 2014, our reliance on purchased funds increased to 9.23% of average total
assets from 5.31% in 2013.
Shareholders’ Equity — Average shareholders’ equity equated to 12.52% of average total assets in 2014, compared to 12.49%
in 2013. Shareholders’ equity was 12.72% of total assets at year-end 2014, compared to 12.39% at year-end 2013. We include
unrealized gains (losses) on available-for-sale securities, net of income taxes, in accumulated other comprehensive income (loss)
which is a component of shareholders’ equity. While regulatory capital adequacy ratios exclude unrealized gains (losses), it does
impact our equity as reported in the audited financial statements. The unrealized gains (losses) on available-for-sale securities,
net of income taxes, were $9.41 million and $6.58 million at December 31, 2014 and 2013, respectively.
Other Liquidity — Under Indiana law governing the collateralization of public fund deposits, the Indiana Board of Depositories
determines which financial institutions are required to pledge collateral based on the strength of their financial ratings. We have
been informed that no collateral is required for our public fund deposits. However, the Board of Depositories could alter this
requirement in the future and adversely impact our liquidity. Our potential liquidity exposure if we must pledge collateral is
approximately $548 million.
Liquidity Risk Management — The Bank’s liquidity is monitored and closely managed by the Asset/Liability Management
Committee (ALCO), whose members are comprised of the Bank’s senior management. Asset and liability management includes
the management of interest rate sensitivity and the maintenance of an adequate liquidity position. The purpose of interest rate
sensitivity management is to stabilize net interest income during periods of changing interest rates.
Liquidity management is the process by which the Bank ensures that adequate liquid funds are available to meet financial
commitments on a timely basis. Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and
borrowers, take advantage of market opportunities and provide a cushion against unforeseen needs.
Liquidity of the Bank is derived primarily from core deposits, principal payments received on loans, the sale and maturity of
investment securities, net cash provided by operating activities, and access to other funding sources. The most stable source of
liability-funded liquidity is deposit growth and retention of the core deposit base. The principal source of asset-funded liquidity
is available-for-sale investment securities, cash and due from banks, overnight investments, securities purchased under agreements
to resell, and loans and interest bearing deposits with other banks maturing within one year. Additionally, liquidity is provided by
repurchase agreements, and the ability to borrow from the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB).
The Bank’s liquidity strategy is guided by internal policies and the Interagency Policy Statement on Funding and Liquidity Risk
Management. Internal guidelines consist of:
(i) Available Liquidity (sum of short term borrowing capacity) greater than $500 million;
(ii) Liquidity Ratio (total of net cash, short term investments and unpledged marketable assets divided by the sum of net
deposits and short term liabilities) greater than 15%;
(iii) Dependency Ratio (net potentially volatile liabilities minus short term investments divided by total earning assets
minus short term investments) less than 15%; and
(iv) Loans to Deposits Ratio less than 100%
At December 31, 2014, we were in compliance with the foregoing internal policies and regulatory guidelines.
The Bank also maintains a contingency funding plan that assesses the liquidity needs under various scenarios of market conditions,
asset growth and credit rating downgrades. The plan includes liquidity stress testing which measures various sources and uses of
funds under the different scenarios. The contingency plan provides for ongoing monitoring of unused borrowing capacity and
available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could
affect liquidity.
We have borrowing sources available to supplement deposits and meet our funding needs. 1st Source Bank has established
relationships with several banks to provide short term borrowings in the form of federal funds purchased. While at December 31,
2014, there was $10.50 million outstanding, we could borrow approximately $254.50 million in additional funds for a short time
from these banks on a collective basis. As of December 31, 2014, we had $128.58 million outstanding in FHLB advances and
could borrow an additional $79.34 million. We also had $377.16 million available to borrow from the FRB with no amounts
outstanding as of December 31, 2014.
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Interest Rate Risk Management — ALCO monitors and manages the relationship of earning assets to interest bearing liabilities
and the responsiveness of asset yields, interest expense, and interest margins to changes in market interest rates. In the normal
course of business, we face ongoing interest rate risks and uncertainties. We may utilize interest rate swaps to partially manage
the primary market exposures associated with the interest rate risk related to underlying assets, liabilities, and anticipated
transactions.
A hypothetical change in net interest income was modeled by calculating an immediate 200 basis point (2.00%) and 100 basis
point (1.00%) increase and a 100 basis point (1.00%) decrease in interest rates across all maturities. The following table shows
the aggregate hypothetical impact to pre-tax net interest income.
Percentage Change in Net Interest Income
December 31, 2014
December 31, 2013
Basis Point Interest Rate Change
12 Months
24 Months
12 Months
24 Months
Up 200
Up 100
Down 100
1.12%
(0.23)%
(1.94)%
8.15%
3.50%
(6.11)%
(0.81)%
(1.36)%
(1.18)%
3.36%
0.73%
(4.45)%
The earnings simulation model excludes the earnings dynamics related to how fee income and noninterest expense may be affected
by changes in interest rates. Actual results may differ materially from those projected. The use of this methodology to quantify
the market risk of the balance sheet should not be construed as an endorsement of its accuracy or the accuracy of the related
assumptions.
At December 31, 2014 and 2013, the impact of these hypothetical fluctuations in interest rates on our derivative holdings was not
significant, and, as such, separate disclosure is not presented. We manage the interest rate risk related to mortgage loan commitments
by entering into contracts for future delivery of loans with outside parties. See Part II, Item 8, Financial Statements and
Supplementary Data — Note 18 of the Notes to Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
In the ordinary course of operations, we enter into certain contractual obligations. Such obligations include the funding of operations
through debt issuances as well as leases for premises and equipment. The following table summarizes our significant fixed,
determinable, and estimated contractual obligations, by payment date, at December 31, 2014, except for obligations associated
with short-term borrowing arrangements. Payments for borrowings do not include interest. Further discussion of the nature of
each obligation is included in the referenced note to the consolidated financial statements.
The following table shows contractual obligation payments by period.
(Dollars in thousands)
Note
0 – 1 Year
1 – 3 Years
3 – 5 Years
Over 5 Years
Indeterminate
maturity
Total
Deposits without stated maturity
— $
2,824,935
$
— $
— $
— $
— $
2,824,935
Certificates of deposit
Long-term debt
Subordinated notes
Operating leases
Purchase obligations
10
11
12
18
—
437,478
1,068
—
3,162
22,793
356,422
32,467
—
5,335
2,563
164,156
1,526
—
4,450
1,584
19,869
5,493
58,764
3,123
1,080
—
15,678
—
—
—
977,925
56,232
58,764
16,070
28,020
Total contractual obligations
$
3,289,436
$
396,787
$
171,716
$
88,329
$
15,678
$
3,961,946
We routinely enter into contracts for services. These contracts may require payment for services to be provided in the future and
may also contain penalty clauses for early termination of the contract. We have made a diligent effort to estimate such payments
and penalties, where applicable. Additionally, where necessary, we have made reasonable estimates as to certain purchase
obligations as of December 31, 2014. Our management has used the best information available to make the estimations necessary
to value the related purchase obligations. Our management is not aware of any additional commitments or contingent liabilities
which may have a material adverse impact on our liquidity or capital resources at year-end 2014.
We also enter into derivative contracts under which we are required to either receive cash from, or pay cash to, counterparties
depending on changes in interest rates. Derivative contracts are carried at fair value on the consolidated balance sheet with the
fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the
balance sheet date. The fair value of the contracts changes daily as market interest rates change. Because the derivative assets and
liabilities recorded on the balance sheet at December 31, 2014 do not necessarily represent the amounts that may ultimately be
paid under these contracts, these assets and liabilities are not included in the table of contractual obligations presented above.
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Assets under management and assets under custody are held in fiduciary or custodial capacity for our clients. In accordance with
U.S. generally accepted accounting principles, these assets are not included on our balance sheet.
We are also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs
of our clients. These financial instruments include commitments to extend credit and standby letters of credit. Further discussion
of these commitments is included in Part II, Item 8, Financial Statements and Supplementary Data — Note 18 of the Notes to
Consolidated Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated selected quarterly statement of operations data for the years ended
December 31, 2014 and 2013.
Three Months Ended (Dollars in thousands, except per share amounts)
March 31
June 30
September 30
December 31
2014
Interest income
Interest expense
Net interest income
Provision for (recovery of) loan and lease losses
Gains on investment securities available-for-sale
Income before income taxes
Net income
Diluted net income per common share
2013
Interest income
Interest expense
Net interest income
Provision for (recovery of) loan and lease losses
Losses on investment securities available-for-sale
Income before income taxes
Net income
Diluted net income per common share
$
43,355
$
44,850
$
45,152
$
4,737
38,618
804
963
21,239
13,632
0.55
4,688
40,162
2,543
—
22,416
14,494
0.59
4,442
40,710
1,206
—
21,243
14,947
0.62
$
43,878
$
44,611
$
46,966
$
6,124
37,754
757
—
19,395
12,404
0.50
5,740
38,871
1,293
—
21,955
13,942
0.56
5,808
41,158
(419)
(28)
23,305
14,896
0.60
45,196
4,357
40,839
(820)
—
19,544
14,996
0.62
44,130
5,096
39,034
(859)
(140)
19,288
13,716
0.56
Net income was $15.00 million for the fourth quarter of 2014, compared to the $13.72 million of net income reported for the fourth
quarter of 2013. Diluted net income per common share for the fourth quarter of 2014 amounted to $0.62, compared to $0.56 per
common share reported in the fourth quarter of 2013.
The net interest margin was 3.61% for the fourth quarter of 2014 versus 3.59% for the same period in 2013. Tax-equivalent net
interest income was $41.29 million for the fourth quarter of 2014, up 4.53% from 2013’s fourth quarter.
Our recovery of provision for loan and lease losses was $(0.82) million in the fourth quarter of 2014 compared to a recovery of
provision for loan and lease losses of $(0.86) million in the fourth quarter of 2013. Net charge-offs were $1.51 million for the
fourth quarter 2014, compared to net charge-offs of $0.14 million a year ago.
Noninterest income for the fourth quarter of 2014 was $19.88 million, compared to $17.99 million for the fourth quarter of 2013.
Noninterest expense for the fourth quarter of 2014 was $41.99 million and was $38.59 million in the fourth quarter 2013.
The provision for income taxes included a one-time benefit of $2.12 million for the fourth quarter of 2014 which resulted in a
lower effective tax rate. This benefit was the result of a reduction in uncertain tax positions due to settlements with taxing authorities
and the lapse of the applicable statute of limitations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
For information regarding Quantitative and Qualitative Disclosures about Market Risk, see Part II, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, Interest Rate Risk Management.
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Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of 1st Source Corporation
We have audited 1st Source Corporation’s (the “Company’s”) internal control over financial reporting as of December 31, 2014,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework) (the COSO criteria). 1st Source Corporation’s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, 1st Source Corporation maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2014 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition of 1st Source Corporation as of December 31, 2014 and 2013, and the related
consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the
period ended December 31, 2014 and our report dated February 20, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
February 20, 2015
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The Board of Directors and Shareholders of 1st Source Corporation
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated statements of financial condition of 1st Source Corporation (“the Company”) as
of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of 1st Source Corporation at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), 1st
Source Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria) and our report dated February 20, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
February 20, 2015
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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31 (Dollars in thousands)
ASSETS
Cash and due from banks
Federal funds sold and interest bearing deposits with other banks
Investment securities available-for-sale
(amortized cost of $776,057 and $822,163 at December 31, 2014, and December 31, 2013, respectively)
Other investments
Trading account securities
Mortgages held for sale
Loans and leases, net of unearned discount:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer loans
Total loans and leases
Reserve for loan and lease losses
Net loans and leases
Equipment owned under operating leases, net
Net premises and equipment
Goodwill and intangible assets
Accrued income and other assets
Total assets
LIABILITIES
Deposits:
Noninterest bearing
Interest bearing
Total deposits
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase
Other short-term borrowings
Total short-term borrowings
Long-term debt and mandatorily redeemable securities
Subordinated notes
Accrued expenses and other liabilities
Total liabilities
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 25,641,887 shares at December 31, 2014 and 2013
Retained earnings
Cost of common stock in treasury (1,779,442 shares at December 31, 2014, and 1,319,377 shares at December 31, 2013)
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are a part of the consolidated financial statements.
2014
2013
$
64,834
$
1,356
791,118
20,801
205
13,604
710,758
397,902
247,153
727,665
399,940
616,587
445,759
142,810
77,568
2,484
832,700
22,400
192
6,079
679,492
391,649
237,854
738,133
333,088
583,997
460,981
124,130
3,688,574
3,549,324
(85,068)
(83,505)
3,603,506
3,465,819
74,143
50,328
85,371
60,967
46,630
86,343
124,692
121,644
$
4,829,958
$
4,722,826
$
796,241
$
735,212
3,006,619
3,802,860
2,918,438
3,653,650
138,843
106,979
245,822
56,232
58,764
51,807
181,120
133,011
314,131
58,335
58,764
52,568
4,215,485
4,137,448
—
—
346,535
302,242
(43,711)
9,407
614,473
346,535
261,626
(29,364)
6,581
585,378
$
4,829,958
$
4,722,826
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CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (Dollars in thousands, except per share amounts)
2014
2013
2012
Interest income:
Loans and leases
Investment securities, taxable
Investment securities, tax-exempt
Other
Total interest income
Interest expense:
Deposits
Short-term borrowings
Subordinated notes
Long-term debt and mandatorily redeemable securities
Total interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Noninterest income:
Trust fees
Service charges on deposit accounts
Debit card income
Mortgage banking income
Insurance commissions
Equipment rental income
Gains (losses) on investment securities available-for-sale
Other income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Net occupancy expense
Furniture and equipment expense
Depreciation — leased equipment
Professional fees
Supplies and communications
FDIC and other insurance
Business development and marketing expense
Loan and lease collection and repossession expense
Other expense
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Basic net income per common share
Diluted net income per common share
The accompanying notes are a part of the consolidated financial statements.
$
161,215
$
161,137
$
161,376
13,054
3,269
1,016
14,414
3,094
940
16,426
3,340
943
178,554
179,585
182,085
11,356
541
4,220
2,108
18,225
160,329
3,733
156,596
16,604
211
4,220
1,733
22,768
156,817
772
156,045
18,511
17,383
8,684
9,585
5,381
5,556
17,156
963
12,051
77,887
80,488
9,311
17,657
13,893
5,046
5,589
3,384
6,049
1,102
7,521
9,177
8,882
5,944
5,492
16,229
(168)
14,273
77,212
79,783
8,700
16,895
13,055
5,321
5,690
3,462
4,938
4,030
7,440
21,877
169
6,484
1,779
30,309
151,776
5,752
146,024
16,498
10,418
8,389
8,357
5,494
18,796
282
12,958
81,192
82,599
7,819
15,406
15,202
6,083
5,701
3,602
4,232
5,772
5,120
150,040
149,314
151,536
84,443
26,374
58,069
2.39
2.39
$
$
$
83,943
28,985
54,958
2.23
2.23
$
$
$
75,680
26,047
49,633
2.02
2.02
$
$
$
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31 (Dollars in thousands)
2014
2013
2012
Net income
Other comprehensive income (loss):
Change in unrealized appreciation (depreciation) of available-for-sale securities
Reclassification adjustment for realized (gains) losses included in net income
Income tax effect
Other comprehensive income (loss), net of tax
Comprehensive income
$
58,069
$
54,958
$
49,633
5,488
(963)
(1,699)
2,826
(20,915)
168
7,789
(12,958)
$
60,895
$
42,000
$
1,946
(282)
(636)
1,028
50,661
The accompanying notes are a part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
Preferred
Stock
Common
Stock
Retained
Earnings
Cost of Common
Stock
in Treasury
Accumulated Other
Comprehensive
Income (Loss), Net
Total
Balance at January 1, 2012
$
— $
346,535
$
190,261
$
(31,389) $
18,511
$
523,918
Net income
Other comprehensive income
Issuance of 184,220 common shares under
stock based compensation awards,
including related tax effects
Cost of 154,637 shares of common stock
acquired for treasury
Common stock dividend ($0.66 per share)
—
—
—
—
—
—
—
—
—
—
49,633
—
(21)
—
(16,158)
—
—
3,956
(3,701)
—
—
1,028
49,633
1,028
—
—
—
3,935
(3,701)
(16,158)
Balance at December 31, 2012
$
— $
346,535
$
223,715
$
(31,134) $
19,539
$
558,655
Net income
Other comprehensive loss
Issuance of 169,942 common shares under
stock based compensation awards,
including related tax effects
Cost of 90,058 shares of common stock
acquired for treasury
Common stock dividend ($0.68 per share)
—
—
—
—
—
—
—
—
—
—
54,958
—
(388)
—
(16,659)
—
—
4,043
(2,273)
—
—
(12,958)
54,958
(12,958)
—
—
—
3,655
(2,273)
(16,659)
Balance at December 31, 2013
$
— $
346,535
$
261,626
$
(29,364) $
6,581
$
585,378
Net income
Other comprehensive income
Issuance of 83,341 common shares under
stock based compensation awards,
including related tax effects
Cost of 543,406 shares of common stock
acquired for treasury
Common stock dividend ($0.71 per share)
—
—
—
—
—
—
—
—
—
—
58,069
—
—
—
—
2,826
58,069
2,826
(243)
1,995
—
(17,210)
(16,342)
—
—
—
—
1,752
(16,342)
(17,210)
Balance at December 31, 2014
$
— $
346,535
$
302,242
$
(43,711) $
9,407
$
614,473
The accompanying notes are a part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (Dollars in thousands)
2014
2013
2012
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses
Depreciation of premises and equipment
Depreciation of equipment owned and leased to others
Amortization of investment security premiums and accretion of discounts, net
Amortization of mortgage servicing rights
Mortgage servicing asset recoveries
Deferred income taxes
(Gains) losses on investment securities available-for-sale
Originations of loans held for sale, net of principal collected
Proceeds from the sales of loans held for sale
Net gain on sale of loans held for sale
Change in trading account securities
Change in interest receivable
Change in interest payable
Change in other assets
Change in other liabilities
Other
Net change in operating activities
Investing activities:
Proceeds from sales of investment securities
Proceeds from maturities of investment securities
Purchases of investment securities
Net change in other investments
Loans sold or participated to others
Net change in loans and leases
Net change in equipment owned under operating leases
Purchases of premises and equipment
Net change in investing activities
Financing activities:
Net change in demand deposits and savings accounts
Net change in time deposits
Net change in short-term borrowings
Proceeds from issuance of long-term debt
Payments on subordinated notes
Payments on long-term debt
Net proceeds from issuance of treasury stock
Acquisition of treasury stock
Cash dividends paid on common stock
Net change in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental Information:
Non-cash transactions:
Loans transferred to other real estate and repossessed assets
Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan
Cash paid for:
Interest
Income taxes
The accompanying notes are a part of the consolidated financial statements.
$
58,069
$
54,958
$
49,633
3,733
4,748
13,893
4,351
1,278
—
4,341
(963)
(121,440)
117,447
(3,532)
(13)
(603)
(917)
(484)
(857)
2,733
81,784
1,236
190,323
772
4,727
13,055
3,499
1,571
—
(1,947)
168
(102,195)
110,390
(3,395)
(46)
160
(1,883)
10,654
(4,360)
738
86,866
5,752
4,241
15,202
4,214
2,921
(238)
(7,641)
(282)
(210,276)
219,269
(7,228)
(14)
928
(1,001)
15,571
1,254
888
93,193
48,888
175,875
61,001
295,241
(148,841)
(201,029)
(355,811)
1,599
16,889
209
25,054
(3,635)
28,919
(165,463)
(255,345)
(273,439)
(27,069)
(8,489)
(21,849)
(6,508)
2,176
(9,478)
(139,815)
(234,705)
(255,026)
102,130
47,080
(68,309)
7,161
—
(11,660)
1,752
(16,342)
(17,643)
44,169
(13,862)
80,052
166,683
(137,380)
144,943
6,502
—
(21,119)
3,655
(2,273)
(17,054)
143,957
(3,882)
83,934
$
$
$
66,190
$
80,052
$
7,154
$
—
$
7,942
2,801
19,143
$
24,651
$
29,211
33,831
223,037
(118,831)
43,954
36,169
(30,928)
(5,673)
3,935
(3,701)
(16,522)
131,440
(30,393)
114,327
83,934
3,425
2,643
31,309
33,833
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Accounting Policies
1st Source Corporation is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries
(collectively referred to as “1st Source” or “the Company”), a broad array of financial products and services. 1st Source Bank
(“Bank”), its banking subsidiary, offers commercial and consumer banking services, trust and investment management services,
and insurance to individual and business clients in Indiana and Michigan. The following is a summary of significant accounting
policies followed in the preparation of the consolidated financial statements.
Basis of Presentation — The financial statements consolidate 1st Source and its subsidiaries (principally the Bank). All significant
intercompany balances and transactions have been eliminated. For purposes of the parent company only financial information
presented in Note 22, investments in subsidiaries are carried at equity in the underlying net assets.
Use of Estimates in the Preparation of Financial Statements — Financial statements prepared in accordance with U.S. generally
accepted accounting principles (GAAP) require the Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Business Combinations — Business combinations are accounted for under the purchase method of accounting. Under the purchase
method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with
any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill.
Results of operations of the acquired business are included in the income statement from the date of acquisition.
Cash Flows — For purposes of the consolidated and parent company only statements of cash flows, the Company considers cash
and due from banks, federal funds sold and interest bearing deposits with other banks with original maturities of three months or
less as cash and cash equivalents.
Securities — Securities that the Company has the ability and positive intent to hold to maturity are classified as investment
securities held-to-maturity. Held-to-maturity investment securities, when present, are carried at amortized cost. As of December 31,
2014 and 2013, the Company held no securities classified as held-to-maturity. Securities that may be sold in response to, or in
anticipation of, changes in interest rates and resulting prepayment risk, or for other factors, are classified as available-for-sale and
are carried at fair value. Unrealized gains and losses on these securities are reported, net of applicable taxes, as a separate component
of accumulated other comprehensive income (loss) in shareholders’ equity.
The initial indication of other-than-temporary impairment (OTTI) for both debt and equity securities is a decline in fair value
below amortized cost. Quarterly, any impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI.
Declines in the fair value of available-for-sale debt securities below their cost that are deemed to be other-than-temporary are
reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related
to other factors is recognized in other comprehensive income. In estimating OTTI impairment losses, the Company considers
among other things, (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition
and near-term prospects of the issuer, and (iii) whether it is more likely than not that the Company will not have to sell any such
securities before an anticipated recovery of cost.
Debt and equity securities that are purchased and held principally for the purpose of selling them in the near term are classified
as trading account securities and are carried at fair value with unrealized gains and losses reported in earnings. Realized gains and
losses on the sales of all securities are reported in earnings and computed using the specific identification cost basis.
Other investments consist of shares of Federal Home Loan Bank of Indianapolis (FHLBI) and Federal Reserve Bank stock. As
restricted member stocks, these investments are carried at cost. Both cash and stock dividends received on the stocks are reported
as income. Quarterly, the Company reviews its investment in FHLBI for impairment. Factors considered in determining impairment
are: history of dividend payments; determination of cause for any net loss; adequacy of capital; and review of the most recent
financial statements. As of December 31, 2014 and 2013, it was determined that the Company’s investment in FHLBI stock is
appropriately valued at cost, which equates to par value. In addition, other investments include interest bearing deposits with other
banks with original maturities of greater than three months. These investments are in denominations, including accrued interest,
that are fully insured by the FDIC.
Loans and Leases — Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and
costs and net of unearned income. Interest income is accrued as earned based on unpaid principal balances. Origination fees and
direct loan and lease origination costs are deferred and the net amount amortized to interest income over the estimated life of the
related loan or lease. Loan commitment fees are deferred and amortized into other income over the commitment period.
Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of
unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized
over the term of the lease to achieve a constant periodic rate of return on the outstanding investment.
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The accrual of interest on loans and leases is discontinued when a loan or lease becomes contractually delinquent for 90 days, or
when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except
for residential mortgage loans and consumer loans that are well secured and in the process of collection. Residential mortgage
loans are placed on nonaccrual at the time the loan is placed in foreclosure. When interest accruals are discontinued, interest
credited to income in the current year is reversed and interest accrued in the prior year is charged to the reserve for loan and lease
losses. However, in some cases, the Company may elect to continue the accrual of interest when the net realizable value of collateral
is sufficient to cover the principal and accrued interest. When a loan or lease is classified as nonaccrual and the future collectibility
of the recorded loan or lease balance is doubtful, collections on interest and principal are applied as a reduction to principal
outstanding. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current
and future payments are reasonably assured, which is typically evidenced by a sustained repayment performance of at least six
months.
A loan or lease is considered impaired, based on current information and events, if it is probable that the Company will be unable
to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement.
Interest on impaired loans and leases, which are not classified as nonaccrual, is recognized on the accrual basis. The Company
evaluates loans and leases exceeding $100,000 for impairment and establishes a specific reserve as a component of the reserve
for loan and lease losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan or
lease and the recorded investment in the loan or lease exceeds its fair value.
Loans and leases that have been modified and economic concessions have been granted to borrowers who have experienced
financial difficulties are considered a troubled debt restructuring (TDR) and, by definition, are deemed an impaired loan. These
concessions typically result from the Company’s loss mitigation activities and may include reductions in the interest rate, payment
extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of
restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance
for a reasonable period of at least six months.
When the Company modifies loans and leases in a TDR, it evaluates any possible impairment similar to other impaired loans
based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease
agreement, or uses the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determines
that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees
or costs and unamortized premium or discount), impairment is recognized through a reserve for loan and lease losses estimate or
a charge-off to the reserve for loan and lease losses. In periods subsequent to modification, the Company evaluates all TDRs,
including those that have payment defaults, for possible impairment and recognizes impairment through the reserve for loan and
lease losses.
The Company sells mortgage loans to the Government National Mortgage Association (GNMA) in the normal course of business
and retains the servicing rights. The GNMA programs under which the loans are sold allow the Company to repurchase individual
delinquent loans that meet certain criteria from the securitized loan pool. At its option, and without GNMA’s prior authorization,
the Company may repurchase a delinquent loan for an amount equal to 100% of the remaining principal balance on the loan. Once
the Company has the unconditional ability to repurchase a delinquent loan, the Company is deemed to have regained effective
control over the loan and the Company is required to recognize the loan on its balance sheet and record an offsetting liability,
regardless of its intent to repurchase the loan. At December 31, 2014 and 2013, residential real estate portfolio loans included
$5.20 million and $6.73 million, respectively, of loans available for repurchase under the GNMA optional repurchase programs
with the offsetting liability recorded within other short-term borrowings.
Mortgage Banking Activities — Loans held for sale are composed of performing one-to-four family residential mortgage loans
originated for resale. Mortgage loans originated with the intent to sell are carried at fair value.
The Company recognizes the rights to service mortgage loans for others as separate assets, whether the servicing rights are acquired
through a separate purchase or through the sale of originated loans with servicing rights retained. The Company allocates a portion
of the total proceeds of a mortgage loan to servicing rights based on the relative fair value. These assets are amortized as reductions
of mortgage servicing fee income over the estimated servicing period in proportion to the estimated servicing income to be received.
Gains and losses on the sale of MSRs are recognized in Noninterest Income on the Statements of Income in the period in which
such rights are sold.
MSRs are evaluated for impairment at each reporting date. For purposes of impairment measurement, MSRs are stratified based
on the predominant risk characteristics of the underlying servicing, principally by loan type. If temporary impairment exists within
a tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds
the fair value. If it is later determined all or a portion of the temporary impairment no longer exists for a particular tranche, the
valuation allowance is reduced through a recovery of income.
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MSRs are also reviewed for other-than-temporary impairment. Other-than-temporary impairment exists when recoverability of a
recorded valuation allowance is determined to be remote considering historical and projected interest rates, prepayments, and loan
pay-off activity. When this situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down
to the carrying value of the MSRs. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of
the MSRs and the valuation allowance, precluding subsequent recoveries.
As part of mortgage banking operations, the Company enters into commitments to originate loans whereby the interest rate on
these loans is determined prior to funding (“rate lock commitments”). Similar to loans held for sale, the fair value of rate lock
commitments is subject to change primarily due to changes in interest rates. Under the Company’s risk management policy, these
fair values are hedged primarily by selling forward contracts on agency securities. The rate lock commitments on mortgage loans
intended to be sold and the related hedging instruments are recorded at fair value with changes in fair value recorded in current
earnings.
Reserve for Loan and Lease Losses — The reserve for loan and lease losses is maintained at a level believed to be appropriate
by the Company to absorb probable losses inherent in the loan and lease portfolio. The determination of the reserve requires
significant judgment reflecting the Company’s best estimate of probable loan and lease losses related to specifically identified
impaired loans and leases as well as probable losses in the remainder of the various loan and lease portfolios. For purposes of
determining the reserve, the Company has segmented loans and leases into classes based on the associated risk within these
segments. The Company has determined that eight classes exist within the loan and lease portfolio. The methodology for assessing
the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, formula
reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not
deemed impaired, and reserves for pooled homogeneous loans and leases. The Company’s evaluation is based upon a continuing
review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic
and geopolitical events, all of which are subject to judgment and will change.
Specific reserves are established for certain business and specialty finance credits based on a regular analysis of special attention
loans and leases. This analysis is performed by the Credit Policy Committee (CPC), the Loan Review Department, Credit
Administration, and the Loan Workout Departments. The specific reserves are based on an analysis of underlying collateral values,
cash flow considerations and, if applicable, guarantor capacity. Sources for determining collateral values include appraisals,
evaluations, auction values and industry guides. Generally, for loans secured by commercial real estate and dependent on cash
flows from the underlying collateral to service the debt, a new appraisal is obtained at the time the credit is deemed to be impaired.
For non-income producing commercial real estate, an appraisal or evaluation is ordered depending on an analysis of the underlying
factors, including an assessment of the overall credit worthiness of the borrower, the value of non-real estate collateral supporting
the transaction and the date of the most recent existing appraisal or evaluation. An evaluation may be performed in lieu of obtaining
a new appraisal for less complex transactions secured by local market properties. Values based on evaluations are discounted more
heavily than those determined by appraisals when calculating loan impairment. Appraisals, evaluations and industry guides are
used to determine aircraft values. Appraisals, industry guides and auction values are used to determine construction equipment,
truck and auto values.
The formula reserves determined for each business lending division portfolio are calculated quarterly by applying loss factors to
outstanding loans and leases based upon a review of historical loss experience and qualitative factors, which include but are not
limited to, economic trends, current market risk assessment by industry, recent loss experience in particular segments of the
portfolios, movement in equipment values collateralizing specialized industry portfolios, concentrations of credit, delinquencies,
trends in volume, experience and depth of relationship managers and division management, and the effects of changes in lending
policies and practices, including changes in quality of the loan and lease origination, servicing and risk management processes.
Special attention loans and leases without specific reserves receive a higher percentage allocation ratio than credits not considered
special attention.
Pooled loans and leases are smaller credits and are homogeneous in nature, such as consumer credits and residential mortgages.
Pooled loan and lease loss reserves are based on historical net charge-offs, adjusted for delinquencies, the effects of lending
practices and programs and current economic conditions, and current trends in the geographic markets which the Company serves.
A comprehensive analysis of the reserve is performed on a quarterly basis by reviewing all loans and leases over a fixed dollar
amount ($100,000) where the internal credit quality grade is at or below a predetermined classification. Although the Company
determines the amount of each element of the reserve separately and relies on this process as an important credit management
tool, the entire reserve is available for the entire loan and lease portfolio. The actual amount of losses incurred can vary significantly
from the estimated amounts both positively and negatively. The Company’s methodology includes several factors intended to
minimize the difference between estimated and actual losses. These factors allow the Company to adjust its estimate of losses
based on the most recent information available.
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Impaired loans are reviewed quarterly to assess the probability of being able to collect the portion considered impaired. When a
review and analysis of the underlying credit and collateral indicates ultimate collection is improbable, the deficiency is charged-
off and deducted from the reserve. Loans and leases, which are deemed uncollectible or have a low likelihood of collection, are
charged-off and deducted from the reserve, while recoveries of amounts previously charged-off are credited to the reserve. A
(recovery of) provision for loan and lease losses is credited or charged to operations based on the Company’s periodic evaluation
of the factors previously mentioned, as well as other pertinent factors.
Equipment Owned Under Operating Leases — The Company finances various types of construction equipment, medium and
heavy duty trucks, automobiles and other equipment under leases classified as operating leases. The equipment underlying the
operating leases is reported at cost, net of accumulated depreciation, in the Statements of Financial Condition. These operating
lease arrangements require the lessee to make a fixed monthly rental payment over a specified lease term generally ranging from
three to seven years. Revenue consists of the contractual lease payments and is recognized on a straight-line basis over the lease
term and reported as noninterest income. Leased assets are being depreciated on a straight-line method over the lease term to the
estimate of the equipment’s fair market value at lease termination, also referred to as “residual” value. The depreciation of these
operating lease assets is reported as Noninterest Expense on the Statements of Income. For automobile leases, fair value is based
upon published industry market guides. For other equipment leases, fair value may be based upon observable market prices, third-
party valuations, or prices received on sales of similar assets at the end of the lease term. These residual values are reviewed
periodically to ensure the recorded amount does not exceed the fair market value at the lease termination. At the end of the lease,
the operating lease asset is either purchased by the lessee or returned to the Company.
Other Real Estate — Other real estate acquired through partial or total satisfaction of nonperforming loans is included in Other
Assets and recorded at fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer,
with any difference between the fair value of the property less cost to sell, and the carrying value of the loan charged to the reserve
for loan losses or other income, if a positive adjustment. Other real estate also includes bank premises qualifying as held for sale.
Bank premises are transferred at fair value less anticipated selling costs. Subsequent fair value write-downs or write-ups, to the
extent of previous write-downs, property maintenance costs, and gains or losses recognized upon the sale of other real estate are
recognized in Noninterest Expense on the Statements of Income. Gains or losses resulting from the sale of other real estate are
recognized on the date of sale. As of December 31, 2014 and 2013, other real estate had carrying values of $1.74 million and $5.49
million, respectively, and is included in Other Assets in the Statements of Financial Condition.
Repossessed Assets — Repossessed assets may include fixtures and equipment, inventory and receivables, aircraft, construction
equipment, and vehicles acquired from business banking and specialty finance activities. Repossessed assets are included in Other
Assets at fair value of the equipment or vehicle less estimated selling costs. At the time of repossession, the recorded amount of
the loan or lease is written down to the fair value of the equipment or vehicle by a charge to the reserve for loan and lease losses
or other income, if a positive adjustment. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs,
equipment maintenance costs, and gains or losses recognized upon the sale of repossessions are recognized in Noninterest Expense
on the Statements of Income. Gains or losses resulting from the sale of repossessed assets are recognized on the date of sale.
Repossessed assets totaled $5.16 million and $4.26 million, as of December 31, 2014 and 2013, respectively, and are included in
Other Assets in the Statements of Financial Condition.
Premises and Equipment — Premises and equipment are stated at cost, less accumulated depreciation and amortization. The
provision for depreciation is computed by the straight-line method, primarily with useful lives ranging from three to 31.5 years.
Maintenance and repairs are charged to expense as incurred, while improvements, which extend the useful life, are capitalized
and depreciated over the estimated remaining life.
Goodwill and Intangibles — Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets
acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill
because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in
combination with a related contract, asset, or liability. Goodwill is reviewed for impairment at least annually or on an interim basis
if an event occurs or circumstances change that would more likely than not reduce the carrying amount. Goodwill is allocated into
two reporting units. Fair value for each reporting unit is estimated using stock price multiples or revenue multiples. Intangible
assets that have finite lives are amortized over their estimated useful lives and are subject to impairment testing. All of the Company’s
other intangible assets have finite lives and are amortized on a straight-line basis over varying periods not exceeding eleven years.
The Company performed the required annual impairment test of goodwill during the fourth quarter of 2014 and determined that
no impairment exists.
Partnership Investment — The Company accounts for its investments in partnerships for which it owns three percent or more
of the partnership on the equity method. The partnerships in which the Company has investments account for their investments
at fair value. As a result, the Company’s investments in these partnerships reflect the underlying fair value of the partnerships’
investments. The Company accounts for its investments in partnerships of which it owns less than three percent at the lower of
cost or fair value. Investments in partnerships are included in Other Assets in the Statements of Financial Condition. The balances
as of December 31, 2014 and 2013, were $2.78 million and $4.28 million, respectively.
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Short-Term Borrowings — Short-term borrowings consist of Federal funds purchased, securities sold under agreements to
repurchase, commercial paper, Federal Home Loan Bank notes, and borrowings from non-affiliated banks. Federal funds purchased,
securities sold under agreements to repurchase, and other short-term borrowings mature within one to 365 days of the transaction
date. Commercial paper matures within seven to 270 days. Other short-term borrowings in the Statements of Financial Condition
include the Company’s liability related to mortgage loans available for repurchase under GNMA optional repurchase programs.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized
financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair
value of collateral either received from or provided to a third party is continually monitored and additional collateral obtained or
requested to be returned to the Company as deemed appropriate.
Trust Fees — Trust fees are recognized on the accrual basis.
Income Taxes — 1st Source and its subsidiaries file a consolidated Federal income tax return. The provision for incomes taxes
is based upon income in the consolidated financial statements, rather than amounts reported on the income tax return. Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense
in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount
most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable
income and recoverable taxes paid in prior years. Although realization is not assured, the Company believes it is more likely than
not that all of the deferred tax assets will be realized.
Positions taken in the tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions
are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination
by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is
greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all
relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the
taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties
are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties
are classified within Income Tax Expense in the Statements of Income.
Net Income Per Common Share — Basic earnings per common share is computed by dividing net income available to common
shareholders by the weighted-average number of shares of common stock outstanding. Diluted earnings per common share is
computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock
outstanding, plus the dilutive effect of outstanding stock options, stock warrants and nonvested stock-based compensation awards.
Stock-Based Employee Compensation — The Company recognizes stock-based compensation as compensation cost in the
Statements of Income based on their fair values on the measurement date, which, for its purposes, is the date of grant. The Company
accounts for stock-based compensation using the modified prospective transition method.
Segment Information — 1st Source has one principal business segment, commercial banking. While our chief decision makers
monitor the revenue streams of various products and services, the identifiable segments’ operations are managed and financial
performance is evaluated on a company-wide basis. Accordingly, all of the Company’s financial service operations are considered
to be aggregated in one reportable operating segment.
Derivative Financial Instruments — The Company occasionally enters into derivative financial instruments as part of its interest
rate risk and foreign currency risk management strategies. These derivative financial instruments consist primarily of interest rate
swaps and foreign currency forward contracts. All derivative instruments are recorded on the Statements of Financial Condition,
as either an asset or liability, at their fair value. The accounting for the gain or loss resulting from the change in fair value depends
on the intended use of the derivative. For a derivative used to hedge changes in fair value of a recognized asset or liability, or an
unrecognized firm commitment, the gain or loss on the derivative will be recognized in earnings together with the offsetting loss
or gain on the hedged item. This results in an earnings impact only to the extent that the hedge is ineffective in achieving offsetting
changes in fair value. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is
discontinued and the adjustment to fair value of the derivative instrument is recorded in earnings. For a derivative used to hedge
changes in cash flows associated with forecasted transactions, the gain or loss on the effective portion of the derivative will be
deferred, and reported as accumulated other comprehensive income, a component of shareholders’ equity, until such time the
hedged transaction affects earnings. For derivative instruments not accounted for as hedges, changes in fair value are recognized
in noninterest income/expense. Deferred gains and losses from derivatives that are terminated and were in a cash flow hedge are
amortized over the shorter of the original remaining term of the derivative or the remaining life of the underlying asset or liability.
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Fair Value Measurements — The Company records certain assets and liabilities at fair value. Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Securities available for sale, trading securities, mortgage loans held for sale, and derivative instruments are
carried at fair value on a recurring basis. Fair value measurements are also utilized to determine the initial value of certain assets
and liabilities, to perform impairment assessments, and for disclosure purposes. The Company uses quoted market prices and
observable inputs to the maximum extent possible when measuring fair value. In the absence of quoted market prices, various
valuation techniques are utilized to measure fair value. When possible, observable market data for identical or similar financial
instruments are used in the valuation. When market data is not available, fair value is determined using valuation models that
incorporate management’s estimates of the assumptions a market participant would use in pricing the asset or liability.
Fair value measurements are classified within one of three levels based on the observability of the inputs used to determine fair
value, as follows:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant
to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow
methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would
use in pricing the instrument, or valuations that require significant management judgment or estimation.
Reclassifications — Certain amounts in the prior periods consolidated financial statements have been reclassified to conform
with the current year presentation. These reclassifications had no effect on total assets, shareholders’ equity or net income as
previously reported.
Note 2 — Recent Accounting Pronouncements
Troubled Debt Restructurings by Creditors: In August 2014, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2014-14 “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40)
- Classification of Certain Government Guaranteed Mortgage Loans upon Foreclosure.” ASU 2014-14 requires that a mortgage
loan be derecognized and a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure,
the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be
recovered from the guarantor. ASU 2014-14 is effective for annual periods and interim periods within those annual periods,
beginning after December 15, 2014. The amendments can be applied using either a prospective transition method or a modified
retrospective transition method. Early adoption is permitted. The Company adopted ASU 2014-14 on January 1, 2015, and it did
not have an impact on its accounting and disclosures.
Share Based Payments: In June 2014, the FASB issued ASU No. 2014-12 “Compensation - Stock Compensation (Topic 718) -
Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after
the Requisite Service Period.” ASU 2014-12 requires that a performance target that affects vesting and that could be achieved
after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for interim and annual periods
beginning after December 15, 2015. The amendments can be applied prospectively to all awards granted or modified after the
effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest
annual period presented and to all new or modified awards thereafter. Early adoption is permitted. The Company has determined
that ASU 2014-12 will not have an impact on its accounting and disclosures.
Repurchase to Maturity Transactions, Repurchase Financings and Disclosures: In June 2014, the FASB issued ASU No.
2014-11 “Transfers and Servicing (Topic 860) - Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures.”
ASU 2014-11 aligns the accounting for repurchase to maturity transactions and repurchase agreements executed as a repurchase
financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted
for as secured borrowings. ASU 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. In
addition the disclosure of certain transactions accounted for as a sale is effective for the first interim or annual period beginning
on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual
periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is prohibited.
The Company adopted ASU 2014-11 on January 1, 2015, and it did not have a material impact on its accounting and disclosures.
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Revenue from Contracts with Customers: In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with
Customers (Topic 606).” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods and services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting
period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application.
Early application is not permitted. The Company is assessing the impact of ASU 2014-09 on its accounting and disclosures.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure: In January 2014,
the FASB issued ASU No. 2014-04 “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification
of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.” ASU 2014-04 clarifies when an in
substance repossession or foreclosure occurs and requires interim and annual disclosures of the amount of foreclosed residential
real estate property and the recorded investment in consumer mortgage loans collateralized by residential real estate property that
are in the process of foreclosure. ASU 2014-04 is effective either on a modified retrospective transition method or a prospective
transition method for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. The Company
adopted ASU 2014-04 on January 1, 2015, and it did not have a material impact on its disclosures.
Accounting for Investments in Qualified Affordable Housing Projects: In January 2014, the FASB issued ASU No. 2014-01
“Investments - Equity method and Joint Ventures (Topic 323) - Accounting for Investments in Qualified Affordable Housing
Projects.” ASU 2014-01 allows investors to use the proportional amortization method to account for investments in limited liability
entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits if certain conditions
are met. ASU 2014-01 is effective retrospectively for interim and annual periods in fiscal years that begin after December 15,
2014. Early adoption is permitted. The Company adopted ASU 2014-01 on January 1, 2015, and it did not have a material impact
on its accounting and disclosures for affordable housing projects.
Note 3 — Investment Securities
The following table shows investment securities available-for-sale.
(Dollars in thousands)
December 31, 2014
Amortized Cost
Gross
Unrealized Gains
Gross
Unrealized Losses
Fair Value
U.S. Treasury and Federal agencies securities
$
371,878
$
3,593
$
(1,968) $
U.S. States and political subdivisions securities
Mortgage-backed securities - Federal agencies
Corporate debt securities
Foreign government and other securities
Total debt securities
Marketable equity securities
Total investment securities available-for-sale
December 31, 2013
U.S. Treasury and Federal agencies securities
U.S. States and political subdivisions securities
Mortgage-backed securities - Federal agencies
Corporate debt securities
Foreign government and other securities
Total debt securities
Marketable equity securities
$
$
121,510
248,299
31,677
800
774,164
1,893
776,057
394,558
120,416
273,495
30,828
700
819,997
2,166
$
$
3,392
5,490
281
11
12,767
5,285
18,052
5,008
3,670
5,148
241
9
14,076
5,404
$
$
(214)
(781)
(26)
—
(2,989)
(2)
(2,991) $
(4,527) $
(847)
(3,563)
(4)
—
(8,941)
(2)
Total investment securities available-for-sale
$
822,163
$
19,480
$
(8,943) $
373,503
124,688
253,008
31,932
811
783,942
7,176
791,118
395,039
123,239
275,080
31,065
709
825,132
7,568
832,700
At December 31, 2014, the residential mortgage-backed securities held by the Company consisted primarily of GNMA, FNMA
and FHLMC pass-through certificates which are guaranteed by those respective agencies of the United States government
(Government Sponsored Enterprise, GSEs).
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The following table shows the contractual maturities of investments in securities available-for-sale at December 31, 2014. Expected
maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
(Dollars in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total debt securities available-for-sale
Amortized
Cost
Fair Value
$
28,513
$
451,001
44,139
2,212
248,299
$
774,164
$
28,892
455,126
44,644
2,272
253,008
783,942
The following table shows the gross realized gains and losses on sale of securities from the securities available-for-sale portfolio,
including marketable equity securities.
(Dollars in thousands)
Gross realized gains
Gross realized losses
Net realized gains (losses)
2014
2013
2012
$
$
963
—
963
$
$
903
$
(1,071)
(168) $
282
—
282
The following table summarizes gross unrealized losses and fair value by investment category and age.
(Dollars in thousands)
December 31, 2014
Less than 12 Months
12 months or Longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Treasury and Federal agencies securities
$
54,944
$
(148) $ 115,195
$
(1,820) $ 170,139
$
(1,968)
U.S. States and political subdivisions securities
Mortgage-backed securities - Federal agencies
Corporate debt securities
Foreign government and other securities
Total debt securities
Marketable equity securities
16,805
21,754
3,072
—
96,575
—
Total temporarily impaired available-for-sale securities
$
96,575
December 31, 2013
U.S. Treasury and Federal agencies securities
$ 153,868
$
$
U.S. States and political subdivisions securities
Mortgage-backed securities - Federal agencies
Corporate debt securities
Foreign government and other securities
Total debt securities
Marketable equity securities
37,115
99,488
6,332
—
(112)
(62)
(26)
—
8,333
32,781
—
—
(102)
(719)
—
—
25,138
54,535
3,072
—
(348)
156,309
(2,641)
252,884
—
3
(2)
3
$
$
(348) $ 156,312
(4,404) $
15,085
(814)
(3,099)
(4)
—
1,419
5,352
—
—
$
$
(2,643) $ 252,887
(123) $ 168,953
(33)
(464)
—
—
38,534
104,840
6,332
—
(214)
(781)
(26)
—
(2,989)
(2)
(2,991)
(4,527)
(847)
(3,563)
(4)
—
(8,941)
(2)
296,803
(8,321)
21,856
(620)
318,659
—
—
4
(2)
4
Total temporarily impaired available-for-sale securities
$ 296,803
$
(8,321) $
21,860
$
(622) $ 318,663
$
(8,943)
There were no OTTI write-downs in 2014, 2013 or 2012.
At December 31, 2014, the Company does not have the intent to sell any of the available-for-sale securities in the table above and
believes that it is more likely than not that it will not have to sell any such securities before an anticipated recovery of cost. The
unrealized losses on debt securities are due to market volatility. The fair value is expected to recover on all debt securities as they
approach their maturity date or repricing date or if market yields for such investments decline. The Company does not believe any
of the securities are impaired due to reasons of credit quality.
At December 31, 2014 and 2013, investment securities with carrying values of $231.50 million and $237.42 million, respectively,
were pledged as collateral for security repurchase agreements and for other purposes.
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Note 4 — Loan and Lease Financings
Total loans and leases outstanding were recorded net of unearned income and deferred loan fees and costs at December 31, 2014
and 2013, and totaled $3.69 billion and $3.55 billion, respectively. At December 31, 2014 and 2013, net deferred loan and lease
costs were $4.00 million and $3.81 million, respectively.
The loan and lease portfolio includes direct financing leases, which are included in auto and light truck, medium and heavy duty
truck, aircraft financing, and construction equipment financing on the Statements of Financial Condition.
The following table shows the summary of the gross investment in lease financing and the components of the investment in lease
financing at December 31, 2014 and 2013.
(Dollars in thousands)
Direct finance leases:
Rentals receivable
Estimated residual value of leased assets
Gross investment in lease financing
Unearned income
Net investment in lease financing
2014
2013
$
234,772
$
245,207
13,458
248,230
(37,356)
12,537
257,744
(38,946)
$
210,874
$
218,798
At December 31, 2014, the direct financing minimum future lease payments receivable for each of the years 2015 through 2019
were $48.18 million, $41.22 million, $38.29 million, $32.85 million, and $25.14 million, respectively.
In the ordinary course of business, the Company has extended loans to certain directors, executive officers, and principal
shareholders of equity securities of 1st Source and to their affiliates. In the opinion of management, these loans are made on
substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions
with persons not related to the Company and did not involve more than the normal risk of collectability, or present other unfavorable
features. The loans are consistent with sound banking practices and within applicable regulatory and lending limitations. The
aggregate dollar amounts of these loans were $27.93 million and $17.96 million at December 31, 2014 and 2013, respectively.
During 2014, $12.36 million of new loans and other additions were made and repayments and other reductions totaled $2.39
million.
The Company evaluates loans and leases for credit quality at least annually but more frequently if certain circumstances occur
(such as material new information which becomes available and indicates a potential change in credit risk). The Company uses
two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease
credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree
of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate
individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include
categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.
All loans and leases, except residential real estate loans and consumer loans, are assigned credit quality grades on a scale from 1
to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential
problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and
their effect on our safety and soundness. Loans or leases graded 7 or weaker are considered “special attention” credits and, as
such, relationships in excess of $100,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the
reserve for loan and lease losses. Grade 7 credits are defined as “watch” and contain greater than average credit risk and are
monitored to limit our exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are
defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses
and a distinct possibility of loss are considered ‘‘classified’’ and are graded 9 through 12 corresponding to the regulatory definitions
of “substandard” (grades 9 and 10) and the more severe ‘‘doubtful’’ (grade 11) and ‘‘loss’’ (grade 12).
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The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.
(Dollars in thousands)
December 31, 2014
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Total
December 31, 2013
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Total
Credit Quality Grades
1-6
7-12
Total
$
683,169
$
27,589
$
$
$
380,425
243,798
691,018
393,965
592,787
2,985,162
652,620
378,392
235,465
704,997
325,849
557,692
$
$
17,477
3,355
36,647
5,975
23,800
114,843
26,872
13,257
2,389
33,136
7,239
26,305
$
$
710,758
397,902
247,153
727,665
399,940
616,587
3,100,005
679,492
391,649
237,854
738,133
333,088
583,997
$
2,855,015
$
109,198
$
2,964,213
For residential real estate and consumer loans, credit quality is based on the aging status of the loan and by payment activity. The
following table shows the recorded investment in residential real estate and consumer loans by performing or nonperforming
status. Nonperforming loans are those loans which are on nonaccrual status or are 90 days or more past due.
(Dollars in thousands)
December 31, 2014
Residential real estate
Consumer
Total
December 31, 2013
Residential real estate
Consumer
Total
Performing
Nonperforming
Total
$
$
$
$
442,918
142,476
585,394
458,385
123,663
582,048
$
$
$
$
2,841
334
3,175
2,596
467
3,063
$
$
$
$
445,759
142,810
588,569
460,981
124,130
585,111
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The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual
status.
(Dollars in thousands)
December 31, 2014
Current
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
More Past Due
and Accruing
Total
Accruing Loans
Nonaccrual
Total Financing
Receivables
Commercial and agricultural loans
$
696,351
$
— $
123
$
— $
696,474
$
14,284
$
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total
December 31, 2013
397,815
247,097
699,054
396,821
611,780
441,508
141,577
$ 3,632,003
Commercial and agricultural loans
$
667,462
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total
$
$
48
—
541
999
—
1,099
676
3,363
263
222
20
$
$
1
—
15,597
1,369
—
311
223
17,624
2
36
—
$
$
10,309
3,627
973
—
1,334
786
—
—
269
220
—
—
—
—
—
873
109
982
397,864
247,097
715,192
399,189
611,780
443,791
142,585
$
3,653,972
— $
—
—
—
—
—
197
84
667,727
388,139
237,665
727,768
332,056
576,933
458,582
123,747
$
$
38
56
12,473
751
4,807
1,968
225
34,602
11,765
3,510
189
10,365
1,032
7,064
2,399
383
$
$
387,881
237,645
713,832
331,083
576,933
456,782
122,657
710,758
397,902
247,153
727,665
399,940
616,587
445,759
142,810
3,688,574
679,492
391,649
237,854
738,133
333,088
583,997
460,981
124,130
$ 3,494,275
$
13,907
$
4,154
$
281
$
3,512,617
$
36,707
$
3,549,324
Interest income for the years ended December 31, 2014, 2013, and 2012, would have increased by approximately $3.03 million,
$2.93 million, and $3.58 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.
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The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and
lease losses.
(Dollars in thousands)
December 31, 2014
With no related reserve recorded:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total with no related reserve recorded
With a reserve recorded:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total with a reserve recorded
Total impaired loans
December 31, 2013
With no related reserve recorded:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total with no related reserve recorded
With a reserve recorded:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total with a reserve recorded
Total impaired loans
Recorded
Investment
Unpaid Principal
Balance
Related Reserve
$
14,468
$
14,467
$
—
—
12,740
746
11,707
—
—
—
—
12,741
746
11,707
—
—
39,661
39,661
74
—
—
—
—
798
373
—
1,245
74
—
—
—
—
798
376
—
1,248
$
$
40,906
$
40,909
$
11,231
$
11,230
$
3,499
—
9,764
938
14,897
—
—
3,499
—
9,764
938
14,897
—
—
40,329
40,328
—
—
—
563
—
—
381
—
944
—
—
—
563
—
—
381
—
944
$
41,273
$
41,272
$
—
—
—
—
—
—
—
—
—
5
—
—
—
—
80
156
—
241
241
—
—
—
—
—
—
—
—
—
—
—
—
113
—
—
161
—
274
274
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The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated
by class, for years ending December 31, 2014, 2013 and 2012.
(Dollars in thousands)
2014
2013
2012
Average
Recorded
Investment
Interest
Income
Average
Recorded
Investment
Interest
Income
Average
Recorded
Investment
Interest
Income
Commercial and agricultural loans
$
16,325
$
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer loans
Total
407
—
4,088
938
13,162
376
—
48
—
—
28
—
588
16
—
$
10,077
$
143
$
9,322
$
488
431
9,254
2,799
17,655
32
—
—
—
79
5
610
—
—
1,590
1,219
7,976
4,409
22,126
87
—
$
35,296
$
680
$
40,736
$
837
$
46,729
$
16
7
2
—
6
441
6
—
478
The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during 2014, 2013 and
2012, segregated by class, as well as the recorded investment as of December 31. The classification between nonperforming and
performing is shown at the time of modification. Modification programs focused on extending maturity dates or modifying payment
patterns with most TDRs experiencing a combination of concessions. The modifications did not result in the contractual forgiveness
of principal or interest. There were three modifications during 2014, two modifications during 2013, and no modifications during
2012 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modifications was
immaterial.
(Dollars in thousands)
Performing TDRs:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total performing TDR modifications
Nonperforming TDRs:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total nonperforming TDR modifications
Total TDR modifications
2014
2013
2012
Number of
Modifications
Recorded
Investment
Number of
Modifications
Recorded
Investment
Number of
Modifications
Recorded
Investment
2
—
—
2
—
—
—
—
4
4
—
—
—
—
1
—
—
5
9
$
$
273
—
—
337
—
—
—
—
610
7,315
—
—
—
—
798
—
—
8,113
8,723
1
—
—
—
—
—
1
—
2
1
—
—
1
—
—
—
—
2
4
$
750
—
—
—
—
—
381
—
1,131
158
—
—
4,157
—
—
—
—
4,315
5,446
$
1
—
—
—
—
1
1
—
3
—
—
—
—
3
1
—
—
4
7
$
$
127
—
—
—
—
7,014
101
—
7,242
—
—
—
—
1,316
1,141
—
—
2,457
9,699
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The following table shows the number of troubled debt restructured loans and leases which had payment defaults within twelve
months following modification during the years ended December 31, 2014, 2013 and 2012, segregated by class, as well as the
recorded investment as of December 31. The classification between nonperforming and performing is shown at the time of
modification. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.
(Dollars in thousands)
Performing TDRs:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total performing TDR defaults
Nonperforming TDRs:
Commercial and agricultural loans
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total nonperforming TDR defaults
Total TDR defaults
2014
2013
2012
Number of
Defaults
Recorded
Investment
Number of
Defaults
Recorded
Investment
Number of
Defaults
Recorded
Investment
— $
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
1
1
$
—
—
—
—
—
—
—
—
—
255
—
—
—
—
—
—
—
255
255
1
—
—
—
—
—
—
—
1
—
—
—
—
—
1
—
—
1
2
$
750
— $
—
—
—
—
—
—
—
750
—
—
—
—
—
—
—
—
—
$
750
—
—
—
—
—
—
—
—
3
—
—
—
1
2
—
—
6
6
$
—
—
—
—
—
—
—
—
—
113
—
—
—
—
171
—
—
284
284
The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of December 31.
Year Ended December 31 (Dollars in thousands)
Performing TDRs
Nonperforming TDRs
Total TDRs
2014
2013
$
$
9,118
14,507
23,625
$
$
8,786
11,824
20,610
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Note 5 — Reserve for Loan and Lease Losses
The following table shows the changes in the reserve for loan and lease losses, segregated by class, for each of the three years
ended December 31.
(Dollars in thousands)
December 31, 2014
Reserve for loan and lease losses
Balance, beginning of year
Charge-offs
Recoveries
Net charge-offs (recoveries)
Provision (recovery of provision)
Balance, end of year
Ending balance, individually
evaluated for impairment
Ending balance, collectively
evaluated for impairment
Total reserve for loan and lease
losses
Recorded investment in loans
Ending balance, individually
evaluated for impairment
Ending balance, collectively
evaluated for impairment
Total recorded investment in loans
December 31, 2013
Reserve for loan and lease losses
Balance, beginning of year
Charge-offs
Recoveries
Net charge-offs (recoveries)
Provision (recovery of provision)
Balance, end of year
Ending balance, individually
evaluated for impairment
Ending balance, collectively
evaluated for impairment
Commercial and
agricultural loans
Auto and light
truck
Medium and
heavy duty
truck
Aircraft
financing
Construction
equipment
financing
Commercial
real estate
Residential
real estate
Consumer
loans
Total
$
$
$
$
$
$
$
$
$
11,515
$
9,657
$
4,212
$
34,037
$
5,972
$
12,406
$
4,093
$
1,613
$
83,505
5,007
929
4,078
4,323
11,760
5
11,755
$
$
42
1,283
(1,241)
(572)
—
142
(142)
146
—
240
(240)
(2,043)
4
525
(521)
515
99
347
(248)
616
46
97
(51)
(42)
833
298
535
790
6,031
3,861
2,170
3,733
10,326
$
4,500
$
32,234
$
7,008
$
13,270
— $
— $
— $
— $
80
$
$
4,102
156
$
$
1,868
$
85,068
— $
241
10,326
4,500
32,234
7,008
13,190
3,946
1,868
84,827
11,760
$
10,326
$
4,500
$
32,234
$
7,008
$
13,270
$
4,102
$
1,868
$
85,068
14,542
$
— $
— $
12,740
$
746
$
12,505
$
373
$
— $
40,906
696,216
397,902
247,153
714,925
399,194
604,082
445,386
142,810
3,647,668
710,758
$
397,902
$
247,153
$
727,665
$
399,940
$
616,587
$
445,759
$
142,810
$ 3,688,574
12,326
$
8,864
$
3,721
$
34,205
$
5,390
$
13,778
$
3,652
$
1,375
$
83,311
538
468
70
(741)
226
139
87
880
57
462
(405)
86
1,308
884
424
256
88
323
(235)
347
170
627
(457)
(1,829)
316
14
302
743
1,125
333
792
1,030
3,828
3,250
578
772
11,515
$
9,657
$
4,212
$
34,037
— $
— $
— $
113
$
$
5,972
$
12,406
$
4,093
— $
— $
161
$
$
1,613
$
83,505
— $
274
11,515
9,657
4,212
33,924
5,972
12,406
3,932
1,613
83,231
Total reserve for loan and lease losses
$
11,515
$
9,657
$
4,212
$
34,037
$
5,972
$
12,406
$
4,093
$
1,613
$
83,505
Recorded investment in loans
Ending balance, individually
evaluated for impairment
Ending balance, collectively
evaluated for impairment
Total recorded investment in loans
December 31, 2012
Reserve for loan and lease losses
Balance, beginning of year
Charge-offs
Recoveries
Net charge-offs (recoveries)
Provision (recovery of provision)
Balance, end of year
Ending balance, individually
evaluated for impairment
Ending balance, collectively
evaluated for impairment
$
$
$
$
$
11,231
$
3,499
$
— $
10,327
$
938
$
14,897
$
381
$
— $
41,273
668,261
388,150
237,854
727,806
332,150
569,100
460,600
124,130
3,508,051
679,492
$
391,649
$
237,854
$
738,133
$
333,088
$
583,997
$
460,981
$
124,130
$ 3,549,324
13,091
$
7,037
$
5,174
$
28,626
$
6,295
$
16,772
$
3,362
$
1,287
$
81,644
524
484
40
(725)
12,326
729
11,597
$
$
3,754
230
3,524
5,351
41
1,185
(1,144)
(2,597)
600
711
(111)
5,468
120
268
(148)
(1,053)
471
223
248
(2,746)
8,864
$
3,721
$
34,205
— $
— $
852
$
$
5,390
$
13,778
— $
42
$
$
594
43
551
841
1,532
407
1,125
1,213
7,636
3,551
4,085
5,752
3,652
$
1,375
$
83,311
— $
— $
1,623
8,864
3,721
33,353
5,390
13,736
3,652
1,375
81,688
Total reserve for loan and lease losses
$
12,326
$
8,864
$
3,721
$
34,205
$
5,390
$
13,778
$
3,652
$
1,375
$
83,311
Recorded investment in loans
Ending balance, individually
evaluated for impairment
Ending balance, collectively
evaluated for impairment
Total recorded investment in loans
$
$
8,647
$
— $
474
$
5,201
$
5,109
$
21,185
$
101
$
— $
40,717
630,422
396,602
213,073
691,278
273,865
533,783
438,540
109,273
3,286,836
639,069
$
396,602
$
213,547
$
696,479
$
278,974
$
554,968
$
438,641
$
109,273
$ 3,327,553
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Note 6 — Operating Leases
Operating lease equipment at December 31, 2014 and 2013, was $74.14 million and $60.97 million, respectively, net of accumulated
depreciation of $29.62 million and $26.99 million, respectively.
The minimum future lease rental payments due from clients on operating lease equipment at December 31, 2014, totaled $54.87
million, of which $17.24 million is due in 2015, $14.62 million in 2016, $10.93 million in 2017, $7.35 million in 2018, $3.82
million in 2019, and $0.91 million thereafter. Depreciation expense related to operating lease equipment for the years ended
December 31, 2014, 2013 and 2012, was $13.89 million, $13.06 million and $15.20 million, respectively.
Note 7 — Premises and Equipment
The following table shows premises and equipment as of December 31.
(Dollars in thousands)
Land
Buildings and improvements
Furniture and equipment
Total premises and equipment
Accumulated depreciation and amortization
Net premises and equipment
2014
2013
$
15,785
$
51,412
36,737
103,934
(53,606)
$
50,328
$
14,029
48,149
37,564
99,742
(53,112)
46,630
Depreciation and amortization of properties and equipment totaled $4.75 million in 2014, $4.73 million in 2013, and $4.24 million
in 2012.
During 2014, the Company recorded long-lived asset impairment charges totaling $275,000. The impairment was recorded as a
result of an appraisal on a building and was recognized in Other Expense on the Statements of Income.
Note 8 — Mortgage Servicing Rights
The unpaid principal balance of residential mortgage loans serviced for third parties was $825.17 million at December 31, 2014,
compared to $839.26 million at December 31, 2013, and $921.20 million at December 31, 2012.
Amortization expense on MSRs is expected to total $0.84 million, $0.70 million, $0.57 million, $0.47 million, and $0.39 million
in 2015, 2016, 2017, 2018 and 2019, respectively. Projected amortization excludes the impact of future asset additions or disposals.
The following table shows changes in the carrying value of MSRs and the associated valuation allowance.
(Dollars in thousands)
Mortgage servicing rights:
Balance at beginning of year
Additions
Amortization
Sales
Carrying value before valuation allowance at end of year
Valuation allowance:
Balance at beginning of year
Impairment recoveries
Balance at end of year
Net carrying value of mortgage servicing rights at end of year
Fair value of mortgage servicing rights at end of year
2014
2013
$
4,844
$
1,167
(1,278)
—
4,733
—
—
— $
4,733
6,979
$
$
$
$
$
4,645
1,770
(1,571)
—
4,844
—
—
—
4,844
8,127
At December 31, 2014, the fair value of MSRs exceeded the carrying value reported in the Statements of Financial Condition by
$2.25 million. This difference represents increases in the fair value of certain MSRs that could not be recorded above cost basis.
Funds held in trust at 1st Source for the payment of principal, interest, taxes and insurance premiums applicable to mortgage loans
being serviced for others, were approximately $14.74 million and $12.27 million at December 31, 2014, and December 31, 2013,
respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were $3.01 million, $3.21 million,
and $3.63 million for 2014, 2013, and 2012, respectively. Mortgage loan contractual servicing fees are included in Mortgage
Banking Income on the Statements of Income.
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Note 9 — Intangible Assets and Goodwill
At December 31, 2014, intangible assets consisted of goodwill of $83.68 million and other intangible assets of $1.69 million,
which was net of accumulated amortization of $8.13 million. At December 31, 2013, intangible assets consisted of goodwill of
$83.68 million and other intangible assets of $2.66 million, which was net of accumulated amortization of $7.16 million. Intangible
asset amortization was $0.97 million, $1.16 million, and $1.32 million for 2014, 2013, and 2012, respectively. Amortization on
other intangible assets is expected to total $0.70 million, $0.58 million, $0.36 million, and $0.05 million in 2015, 2016, 2017, and
2018, respectively.
The following table shows a summary of core deposit intangible and other intangible assets as of December 31.
(Dollars in thousands)
Core deposit intangibles:
Gross carrying amount
Less: accumulated amortization
Net carrying amount
Other intangibles:
Gross carrying amount
Less: accumulated amortization
Net carrying amount
Note 10 — Deposits
2014
2013
$
$
$
$
9,566
(7,888)
1,678
254
(241)
13
$
$
$
$
9,566
(6,947)
2,619
254
(209)
45
The aggregate amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more outstanding at
December 31, 2014 and 2013, was $295.42 million and $178.39 million, respectively.
The following table shows the amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more
outstanding at December 31, 2014, by time remaining until maturity.
(Dollars in thousands)
Under 3 months
4 – 6 months
7 – 12 months
Over 12 months
Total
$
111,366
54,745
16,760
112,552
295,423
$
The following table shows scheduled maturities of time deposits, including both private and public funds, at December 31, 2014.
(Dollars in thousands)
2015
2016
2017
2018
2019
Thereafter
Total
$
437,478
169,782
186,640
137,284
26,872
19,869
$
977,925
Note 11 — Borrowed Funds and Mandatorily Redeemable Securities
The following table shows the details of long-term debt and mandatorily redeemable securities as of December 31, 2014 and 2013.
(Dollars in thousands)
Federal Home Loan Bank borrowings (1.10% – 6.54%)
Mandatorily redeemable securities
Other long-term debt
Total long-term debt and mandatorily redeemable securities
2014
2013
$
$
38,582
$
15,678
1,972
56,232
$
42,512
14,072
1,751
58,335
Annual maturities of long-term debt outstanding at December 31, 2014, for the next five years and thereafter beginning in 2015,
are as follows (in thousands): $1,068; $6,224; $26,243; $808; $718; and $21,171.
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At December 31, 2014, the Federal Home Loan Bank borrowings represented a source of funding for community economic
development activities, agricultural loans and general funding for the bank and consisted of 18 fixed rate notes with maturities
ranging from 2016 to 2024. These notes were collateralized by $48.23 million of certain real estate loans.
Mandatorily redeemable securities as of December 31, 2014 and 2013, of $15.68 million and $14.07 million, respectively reflected
the “book value” shares under the 1st Source Executive Incentive Plan. See Note 16 - Employee Stock Benefit Plans for additional
information. Dividends paid on these shares and changes in book value per share are recorded as other interest expense. Total
interest expense recorded for 2014, 2013, and 2012 was $1.47 million, $1.00 million, and $1.11 million, respectively.
The following table shows the details of short-term borrowings as of December 31, 2014 and 2013.
(Dollars in thousands)
Federal funds purchased
Security repurchase agreements
Commercial paper
Other short-term borrowings
Total short-term borrowings
Note 12 — Subordinated Notes
2014
2013
Amount
Weighted Average
Rate
Amount
Weighted Average
Rate
$
$
10,500
128,343
11,778
95,201
245,822
0.50% $
0.10
0.27
0.29
$
63,500
117,620
10,814
122,197
314,131
0.34%
0.08
0.24
0.28
The Company sponsors one trust, 1st Source Master Trust (Capital Trust) of which 100% of the common equity is owned by the
Company. The Capital Trust was formed in 2007 for the purpose of issuing corporation-obligated mandatorily redeemable capital
securities (the capital securities) to third-party investors and investing the proceeds from the sale of the capital securities solely
in junior subordinated debenture securities of the Company (the subordinated notes). The subordinated notes held by the Capital
Trust are the sole assets of the Capital Trust. The Capital Trust qualifies as a variable interest entity for which the Company is not
the primary beneficiary and therefore reported in the financial statements as an unconsolidated subsidiary. The junior subordinated
debentures are reflected as subordinated notes in the Statements of Financial Condition with the corresponding interest distributions
reflected as Interest Expense in the Statements of Income. The common shares issued by the Capital Trust are included in Other
Assets in the Statements of Financial Condition.
Distributions on the capital securities issued by the Capital Trust are payable quarterly at a rate per annum equal to the interest
rate being earned by the Capital Trust on the subordinated notes held by the Capital Trust. The capital securities are subject to
mandatory redemption, in whole or in part, upon repayment of the subordinated notes. The Company has entered into agreements
which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees.
The capital securities held by the Capital Trust qualify as Tier 1 capital under Federal Reserve Board guidelines.
The following table shows subordinated notes at December 31, 2014.
(Dollars in thousands)
June 2007 issuance (1)
August 2007 issuance (2)
Total
Amount of
Subordinated
Notes
$
$
41,238
17,526
58,764
Interest Rate
Maturity Date
7.22%
7.10%
6/15/2037
9/15/2037
(1) Fixed rate through life of debt.
(2) Fixed rate through September 15, 2017, then LIBOR +1.48% through remaining life of debt.
Note 13 — Earnings Per Share
Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing
net income available to common shareholders by the weighted-average number of common shares outstanding during the applicable
period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards. Non-
vested restricted stock awards are considered participating securities to the extent the holders of these securities receive non-
forfeitable dividends at the same rate as holders of common stock. Diluted earnings per common share is computed using the
weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of
stock compensation using the treasury stock method.
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Stock options, where the exercise price was greater than the average market price of the common shares, were excluded from the
computation of diluted earnings per common share because the result would have been antidilutive. No stock options were
considered antidilutive as of December 31, 2014, 2013 and 2012.
The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per
common share for the three years ending December 31.
(Dollars in thousands - except per share amounts)
Distributed earnings allocated to common stock
Undistributed earnings allocated to common stock
Net earnings allocated to common stock
Net earnings allocated to participating securities
Net income allocated to common stock and participating securities
Weighted average shares outstanding for basic earnings per common share
Dilutive effect of stock compensation
Weighted average shares outstanding for diluted earnings per common share
Basic earnings per common share
Diluted earnings per common share
Note 14 — Accumulated Other Comprehensive Income
2014
2013
2012
17,091
$
16,563
$
40,249
57,340
729
37,673
54,236
722
58,069
$
54,958
$
16,027
32,923
48,950
683
49,633
24,031,608
24,344,623
24,267,471
—
586
9,857
24,031,608
24,345,209
24,277,328
2.39
2.39
$
$
2.23
2.23
$
$
2.02
2.02
$
$
$
$
The following table presents reclassifications out of accumulated other comprehensive income related to unrealized gains and
losses on available-for-sale securities for the two years ending December 31.
(Dollars in thousands)
Realized gains (losses) included in net income
Tax effect
Net of tax
Note 15 — Employee Benefit Plans
2014
2013
Affected Line Item in the Statements of Income
963
963
(361)
$
(168) Gains (losses) on investment securities available-for-sale
(168)
Income before income taxes
63
Income tax expense
602
$
(105) Net income
$
$
The 1st Source Corporation Employee Stock Ownership and Profit Sharing Plan (as amended, the “Plan”) includes an employee
stock ownership component, which is designed to invest in and hold 1st Source common stock, and a 401(k) plan component,
which holds all Plan assets not invested in 1st Source common stock. The Plan encourages diversification of investments with
opportunities to change investment elections and contribution levels.
Employees are eligible to participate in the Plan the first of the month following 90 days of employment. The Company matches
dollar for dollar on the first 4% of deferred compensation, plus 50 cents on the dollar of the next 2% deferrals. The Company will
also contribute to the Plan an amount designated as a fixed 2% employer contribution. The amount of fixed contribution is equal
to two percent of the participant’s eligible compensation. Additionally, each year the Company may, in its sole discretion, make
a discretionary profit sharing contribution. As of December 31, 2014 and 2013, there were 1,308,041 and 1,399,533 shares,
respectively, of 1st Source Corporation common stock held in relation to employee benefit plans.
The Company contributions are allocated among the participants on the basis of compensation. Each participant’s account is
credited with cash and/or shares of 1st Source common stock based on that participant’s compensation earned during the year.
After completing 5 years of service in which they worked at least 1,000 hours per year, a participant will be completely vested in
the Company's contribution. An employee is always 100% vested in their deferral. Plan participants are entitled to receive
distributions from their Plan accounts upon termination of service, retirement, or death.
Contribution expense for the years ended December 31, 2014, 2013, and 2012, amounted to $4.32 million, $4.38 million, and
$4.52 million, respectively.
In addition to the 1st Source Corporation Employee Stock Ownership and Profit Sharing Plan, the Company provides a limited
health care and life insurance benefit for some of its retired employees. Effective March 31, 2009, the Company amended the plan
so that no new retirees would be covered by the plan. The amendment will have no effect on the coverage for retirees covered at
the time of the amendment. Prior to amendment, all full-time employees became eligible for these retiree benefits upon reaching
age 55 with 20 years of credited service. The retiree medical plan pays a stated percentage of eligible medical expenses reduced
by any deductibles and payments made by government programs and other group coverage. The lifetime maximum benefit payable
under the medical plan is $15,000 and for life insurance is $3,000.
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The Company’s net periodic post retirement benefit cost (recovery) recognized in the Statements of Income for the years ended
December 31, 2014, 2013 and 2012, amounted to $(0.05) million, $(0.04) million, and $(0.01) million, respectively. The accrued
post retirement benefit cost was not material at December 31, 2014, 2013, and 2012.
Note 16 — Stock Based Compensation
As of December 31, 2014, the Company had four active stock-based employee compensation plans. These plans include three
executive stock award plans, the Executive Incentive Plan (EIP), the Restricted Stock Award Plan (RSAP), the 1998 Performance
Compensation Plan (PCP); and the Employee Stock Purchase Plan (ESPP). The 2011 Stock Option Plan was approved by the
shareholders on April 21, 2011, but the Company had not made any grants through December 31, 2014. These stock-based employee
compensation plans were established to help retain and motivate key employees. All of the plans have been approved by the
shareholders of 1st Source Corporation. The Executive Compensation and Human Resources Committee (the “Committee”) of
the 1st Source Corporation Board of Directors has sole authority to select the employees, establish the awards to be issued, and
approve the terms and conditions of each award under the stock-based compensation plans.
Stock-based compensation to employees is recognized as compensation cost in the Statements of Income based on their fair values
on the measurement date, which, for 1st Source, is the date of grant. Stock-based compensation expense is recognized ratably over
the requisite service period for all awards. The total fair value of share awards vested was $3.66 million during 2014, $1.97 million
in 2013, and $4.30 million in 2012.
The following table shows the combined summary of activity regarding active stock option and stock award plans.
Non-Vested Stock
Awards Outstanding
Stock Options Outstanding
Shares
Available
for Grant
Number of
Shares
Weighted-
Average
Grant-Date
Fair Value
Number of
Shares
Weighted-
Average
Exercise
Price
2,320,492
530,848
$
18.76
22,000
$
12.04
Balance, January 1, 2012
Shares authorized - 2012 EIP
Shares authorized - 1998 Performance Compensation Plan
Granted
Stock options exercised
Stock awards vested
Forfeited
Canceled
Balance, December 31, 2012
Shares authorized - 2013 EIP
Shares authorized - 1998 Performance Compensation Plan
Granted
Stock options exercised
Stock awards vested
Forfeited
Canceled
Balance, December 31, 2013
Shares authorized - 2014 EIP
Granted
Stock awards vested
Forfeited
Canceled
76,815
2,302
(98,617)
—
—
4,124
—
2,305,116
61,970
2,010
(88,980)
—
—
5,642
—
2,285,758
69,300
(110,851)
—
3,057
—
—
—
98,617
—
(190,674)
(5,587)
—
433,204
—
—
88,980
—
(85,985)
(10,754)
—
425,445
—
110,851
(130,657)
(5,607)
—
—
—
21.95
—
17.24
19.71
—
20.15
—
—
24.19
—
19.58
20.71
—
21.09
—
25.86
20.33
20.87
—
22.66
—
—
—
—
—
—
(14,500)
12.04
—
—
—
—
—
—
7,500
12.04
—
—
—
—
—
—
(7,500)
12.04
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
Balance, December 31, 2014
2,247,264
400,032
$
Stock Option Plans — Incentive stock option plans include the 2001 Stock Option Plan (the “2001 Plan”) and the 2011 Stock
Option Plan (the “2011 Plan”). The 2001 Plan was terminated, except for outstanding options, after the 2011 Plan was approved
by the shareholders. During 2013, all remaining shares available for issuance upon exercise from previous grants under the 2001
Plan were exercised. No additional grants will be made under the 2001 Plan. There were 2,000,000 shares available for issuance
under the 2011 Plan.
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Each award from all plans is evidenced by an award agreement that specifies the option price, the duration of the option, the
number of shares to which the option pertains, and such other provisions as the Committee determines. The option price is equal
to the fair market value of a share of 1st Source Corporation’s common stock on the date of grant. Options granted expire at such
time as the Committee determines at the date of grant and in no event does the exercise period exceed a maximum of ten years.
Upon merger, consolidation, or other corporate consolidation in which 1st Source Corporation is not the surviving corporation,
as defined in the plans, all outstanding options immediately vest.
There were zero, 7,500 and 14,500 stock options exercised during 2014, 2013 and 2012, respectively. All shares issued in connection
with stock option exercises and non-vested stock awards are issued from available treasury stock.
No stock-based compensation expense related to stock options was recognized in 2014, 2013 or 2012.
The fair value of each option on the date of grant is estimated using the Black-Scholes option pricing model. Expected volatility
is based on the historical volatility estimated over a period equal to the expected life of the options. In estimating the fair value
of stock options under the Black-Scholes valuation model, separate groups of employees that have similar historical exercise
behavior are considered separately. The expected life of the options granted is derived based on past experience and represents
the period of time that options granted are expected to be outstanding.
Stock Award Plans — Incentive stock award plans include the EIP, the PCP and the RSAP. The EIP is administered by the
Committee. Awards under the EIP and PCP include “book value” shares and “market value” shares of common stock. These shares
are awarded annually based on weighted performance criteria and generally vest over a period of five years. The EIP book value
shares may only be sold to 1st Source and such sale is mandatory in the event of death, retirement, disability, or termination of
employment. The RSAP is designed for key employees. Awards under the RSAP are made to employees recommended by the
Chief Executive Officer and approved by the Committee. Shares granted under the RSAP vest over two to ten years and vesting
is based upon meeting certain various criteria, including continued employment with 1st Source.
Stock-based compensation expense relating to the EIP, PCP and RSAP totaled $3.18 million in 2014, $2.90 million in 2013, and
$2.07 million in 2012. The total income tax benefit recognized in the accompanying Statements of Income related to stock-based
compensation was $1.20 million in 2014, $1.10 million in 2013, and $0.78 million in 2012. Unrecognized stock-based compensation
expense related to non-vested stock awards (EIP/PCP/RSAP) was $6.37 million at December 31, 2014. At such date, the weighted-
average period over which this unrecognized expense was expected to be recognized was 3.12 years.
The fair value of non-vested stock awards for the purposes of recognizing stock-based compensation expense is market price of
the stock on the measurement date, which, for the Company’s purposes is the date of the award.
Employee Stock Purchase Plan — The Company offers an ESPP for substantially all employees with at least two years of service
on the effective date of an offering under the plan. Eligible employees may elect to purchase any dollar amount of stock, so long
as such amount does not exceed 25% of their base rate of pay and the aggregate stock accrual rate for all offerings does not exceed
$25,000 in any calendar year. The purchase price for shares offered is the lower of the closing market bid price for the offering
date or the average market bid price for the five business days preceding the offering date. The purchase price and discount to the
actual market closing price on the offering date for the 2014, 2013, and 2012 offerings were $30.39 (0.88%), $24.32 (1.82%), and
$20.54 (0.15%), respectively. Payment for the stock is made through payroll deductions over the offering period, and employees
may discontinue the deductions at any time and exercise the option or take the funds out of the program. The most recent offering
began June 2, 2014, and runs through May 31, 2016, with $148,228 in stock value to be purchased at $30.39 per share.
Note 17 — Income Taxes
The following table shows the composition of income tax expense.
Year Ended December 31 (Dollars in thousands)
2014
2013
2012
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total provision
$
20,999
$
28,634
$
1,034
22,033
4,022
319
4,341
2,298
30,932
(2,337)
390
(1,947)
$
26,374
$
28,985
$
30,041
3,647
33,688
(7,087)
(554)
(7,641)
26,047
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The following table shows the reasons for the difference between income tax expense and the amount computed by applying the
statutory federal income tax rate (35%) to income before income taxes.
2014
2013
2012
Year Ended December 31 (Dollars in thousands)
Statutory federal income tax
(Decrease) increase in income taxes resulting from:
Tax-exempt interest income
State taxes, net of federal income tax benefit
Reduction in uncertain tax positions
Other
Total
Amount
$
29,555
(1,236)
2,300
(3,300)
(945)
Percent of
Pretax
Income
Amount
Percent of
Pretax
Income
Percent of
Pretax
Income
Amount
35.0% $
29,380
35.0% $
26,488
35.0%
(1.5)
2.7
(3.9)
(1.1)
(1,219)
1,747
—
(923)
(1.5)
2.1
—
(1.1)
(1,370)
2,010
—
(1,081)
(1.8)
2.7
—
(1.5)
34.4%
$
26,374
31.2% $
28,985
34.5% $
26,047
The tax expense (benefit) related to gains (losses) on investment securities available-for-sale for the years 2014, 2013, and 2012
was approximately $361,000, $(63,000), and $108,000, respectively.
The following table shows the composition of deferred tax assets and liabilities as of December 31, 2014 and 2013.
(Dollars in thousands)
Deferred tax assets:
Reserve for loan and lease losses
Accruals for employee benefits
Other
Total deferred tax assets
Deferred tax liabilities:
Differing depreciable bases in premises and leased equipment
Net unrealized gains on securities available-for-sale
Differing bases in assets related to acquisitions
Mortgage servicing
Capitalized loan costs
Prepaid expenses
Other
Total deferred tax liabilities
Net deferred tax (liability) asset
2014
2013
$
33,088
$
32,545
3,346
1,079
37,513
24,506
5,654
5,160
1,644
1,437
1,035
443
39,879
$
(2,366) $
4,153
2,243
38,941
22,296
3,956
4,725
1,588
816
931
956
35,268
3,673
No valuation allowance for deferred tax assets was recorded at December 31, 2014 and 2013, as the Company believes it is more
likely than not that all of the deferred tax assets will be realized.
The following table shows a reconciliation of the beginning and ending amounts of unrecognized tax benefits.
(Dollars in thousands)
Balance, beginning of year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Reductions due to lapse in statute of limitations
Settlements
Balance, end of year
2014
2013
2012
$
4,611
$
4,068
$
66
592
(553)
(1,650)
(3,066)
484
1,118
—
(1,059)
—
$
— $
4,611
$
3,387
704
1,471
(49)
(1,445)
—
4,068
There were no unrecognized tax benefits that would affect the effective tax rate if recognized at December 31, 2014, and the total
amount of unrecognized tax benefits that would affect the effective tax rate if recognized was $2.62 million at December 31, 2013,
and $2.02 million at December 31, 2012. Interest and penalties are recognized through the income tax provision. For the years
2014, 2013 and 2012, the Company recognized approximately $(0.69) million, $0.14 million and $(0.02) million in interest, net
of tax effect, and penalties, respectively. There were no accrued interest and penalties at December 31, 2014, and interest and
penalties of approximately $0.69 million and $0.55 million were accrued at December 31, 2013 and 2012, respectively.
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Tax years that remain open and subject to audit include the federal 2011-2014 years and the Indiana 2013-2014 years. Additionally,
during 2014 the Company reached a state tax settlement for the 2010-2013 years and as a result recorded a reduction of unrecognized
tax benefits in the amount of $2.93 million that affected the effective tax rate and increased earnings in the amount of $2.12 million.
The Company does not anticipate a significant change in the amount of uncertain tax positions within the next 12 months.
Note 18 — Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk
Contingent Liabilities —1st Source and its subsidiaries are defendants in various legal proceedings arising in the normal course
of business. In the opinion of management, based upon present information including the advice of legal counsel, the ultimate
resolution of these proceedings will not have a material effect on the Company’s consolidated financial position or results of
operations.
1st Source Bank sells residential mortgage loans to Fannie Mae as well as FHA-insured and VA-guaranteed loans in Ginnie Mae
mortgage-backed securities. Additionally, the Bank has sold loans on a service released basis to various other financial institutions
in recent years. The agreements under which the Bank sells these mortgage loans contain various representations and warranties
regarding the acceptability of loans for purchase. On occasion, the Bank may be required to indemnify the loan purchaser for
credit losses on loans that were later deemed ineligible for purchase or may be required to repurchase a loan. Both circumstances
are collectively referred to as “repurchases.”
The Company’s liability for repurchases, included in accrued expenses and other liabilities on the Statements of Financial Condition,
was $1.72 million and $2.46 million as of December 31, 2014 and 2013, respectively. The mortgage repurchase liability represents
the Company’s best estimate of the loss that it may incur. The estimate is based on specific loan repurchase requests and a historical
loss ratio with respect to origination dollar volume. Because the level of mortgage loan repurchase losses are dependent on economic
factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level
of liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment.
Commitments — 1st Source and its subsidiaries are obligated under operating leases for certain office premises and equipment.
Future minimum rental commitments for all noncancellable operating leases total approximately, $3.16 million in 2015, $2.82
million in 2016, $2.52 million in 2017, $2.27 million in 2018, $2.18 million in 2019, and $3.12 million, thereafter. As of
December 31, 2014, future minimum rentals to be received under noncancellable subleases totaled $2.25 million.
The following table shows rental expense of office premises and equipment and related sublease income.
Year Ended December 31 (Dollars in thousands)
Gross rental expense
Sublease rental income
Net rental expense
2014
2013
2012
$
$
3,799
(878)
2,921
$
$
3,875
(910)
2,965
$
$
3,787
(878)
2,909
Financial Instruments with Off-Balance-Sheet Risk —To meet the financing needs of our clients, 1st Source and its subsidiaries
are parties to financial instruments with off-balance-sheet risk in the normal course of business. These off-balance-sheet financial
instruments include commitments to originate and sell loans, and standby letters of credit. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial
condition.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan
commitments and standby letters of credit is represented by the dollar amount of those instruments. The Company uses the same
credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company grants mortgage loan commitments to borrowers, subject to normal loan
underwriting standards. The interest rate risk associated with these loan commitments is managed by entering into contracts for
future deliveries of loans.
Standby letters of credit are conditional commitments issued to guarantee the performance of a client to a third party. The credit
risk involved in and collateral obtained when issuing standby letters of credit are essentially the same as those involved in extending
loan commitments to clients. Standby letters of credit totaled $26.94 million and $19.27 million at December 31, 2014 and 2013,
respectively. Standby letters of credit generally have terms ranging from six months to one year.
Note 19 — Derivative Financial Instruments
Commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans
are considered derivative instruments. See Note 18 for further information.
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The Company has certain interest rate derivative positions that are not designated as hedging instruments. These derivative positions
relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an
offsetting interest rate swap with another financial institution. In connection with each transaction, the Company agrees to pay
interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount
at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on
the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the
client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other
financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the
underlying derivative contracts are not materially different and do not significantly impact the Company’s results of operations.
The following table shows the amounts of non-hedging derivative financial instruments at December 31, 2014 and 2013.
(Dollars in thousands)
Interest rate swap contracts
Loan commitments
Forward contracts - mortgage loan
Total - December 31, 2014
Interest rate swap contracts
Loan commitments
Forward contracts - mortgage loan
Asset derivatives
Liability derivatives
Notional or
contractual
amount
Statement of Financial
Condition
classification
Fair value
Statement of Financial
Condition
classification
Fair value
$
$
$
459,508 Other assets
11,109 Mortgages held for sale
19,800 N/A
490,417
462,790 Other assets
7,878 Mortgages held for sale
10,600 Mortgages held for sale
$
$
$
$
9,125 Other liabilities
2 N/A
— Mortgages held for sale
9,127
9,894 Other liabilities
12 N/A
121 N/A
— Other assets
10,027
$
$
$
$
9,302
—
142
9,444
10,087
—
—
7
10,094
Forward contracts - foreign exchange
1,308 N/A
Total - December 31, 2013
$
482,576
The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments at
December 31, 2014, 2013 and 2012.
(Dollars in thousands)
Interest rate swap contracts
Interest rate swap contracts
Loan commitments
Forward contracts - mortgage loan
Statement of
Income classification
Other expense
Other income
Mortgage banking income
Mortgage banking income
Forward contracts - foreign exchange
Other income
Total
Gain (loss)
2014
2013
2012
16
$
357
(10)
(263)
79
$
124
716
(208)
154
(7)
131
721
31
185
—
179
$
779
$
1,068
$
$
The following table shows the offsetting of financial assets and derivative assets at December 31, 2014 and 2013.
Gross
Amounts of
Recognized
Assets
Gross Amounts
Offset in the
Statement of
Financial Condition
Net Amounts of
Assets Presented in
the Statement of
Financial Condition
Financial
Instruments
Cash Collateral
Received
Net Amount
Gross Amounts Not Offset in the
Statement of Financial Condition
$
$
9,492
$
367
$
9,125
$
— $
— $
9,125
10,511
$
617
$
9,894
$
— $
— $
9,894
(Dollars in thousands)
December 31, 2014
Interest rate swaps
December 31, 2013
Interest rate swaps
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The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2014 and 2013.
Gross
Amounts of
Recognized
Liabilities
Gross Amounts
Offset in the
Statement of
Financial Condition
Net Amounts of
Liabilities Presented in
the Statement of
Financial Condition
Financial
Instruments
Cash Collateral
Pledged
Net Amount
Gross Amounts Not Offset in the
Statement of Financial Condition
$
$
$
$
9,669
128,343
138,012
10,704
117,620
128,324
$
$
$
$
367
—
367
617
—
617
$
$
$
$
9,302
128,343
137,645
10,087
117,620
127,707
$
$
$
$
— $
128,343
128,343
$
— $
117,620
117,620
$
9,018
—
9,018
8,409
—
8,409
$
$
$
$
284
—
284
1,678
—
1,678
(Dollars in thousands)
December 31, 2014
Interest rate swaps
Repurchase agreements
Total
December 31, 2013
Interest rate swaps
Repurchase agreements
Total
If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of
transactions against obligations owing in respect of any other transactions.
Note 20 — Regulatory Matters
The Company is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can result in certain mandatory and possible additional discretionary actions by regulators that, if
undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital
amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts
and ratios of total capital and Tier I capital to risk-weighted assets and of Tier I capital to average assets. The Company believes
that it meets all capital adequacy requirements to which it is subject.
The most recent notification from the Federal bank regulators categorized 1st Source Bank, the largest of its subsidiaries, as “well
capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that the Company believes will have changed the institution’s category.
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As discussed in Note 12, the capital securities held by the Capital Trusts qualify as Tier 1 capital under Federal Reserve Board
guidelines. The following table shows the actual and required capital amounts and ratios for 1st Source Corporation and 1st Source
Bank as of December 31, 2014 and 2013.
(Dollars in thousands)
2014
Total Capital (to Risk-Weighted Assets):
1st Source Corporation
1st Source Bank
Tier I Capital (to Risk-Weighted Assets):
1st Source Corporation
1st Source Bank
Tier I Capital (to Average Assets):
1st Source Corporation
1st Source Bank
2013
Total Capital (to Risk-Weighted Assets):
1st Source Corporation
1st Source Bank
Tier I Capital (to Risk-Weighted Assets):
1st Source Corporation
1st Source Bank
Tier I Capital (to Average Assets):
1st Source Corporation
1st Source Bank
Actual
Minimum Capital
Adequacy
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
629,023
15.89% $
316,704
8.00% $
395,880
598,038
15.15%
315,886
8.00%
394,857
576,692
548,094
576,692
548,094
14.57%
13.88%
158,352
157,943
12.16%
11.57%
189,718
189,412
4.00%
4.00%
4.00%
4.00%
237,528
236,914
237,147
236,765
$
599,603
15.86 % $
302,409
8.00 % $
378,011
566,307
15.01 %
301,783
8.00 %
377,229
549,441
518,230
549,441
518,230
14.54 %
13.74 %
12.08 %
11.41 %
151,205
150,892
182,008
181,726
4.00 %
4.00 %
4.00 %
4.00 %
226,807
226,338
227,510
227,157
10.00%
10.00%
6.00%
6.00%
5.00%
5.00%
10.00 %
10.00 %
6.00 %
6.00 %
5.00 %
5.00 %
The Bank was not required to maintain noninterest bearing cash balances with the Federal Reserve Bank as of December 31, 2014
and 2013.
Dividends that may be paid by a subsidiary bank to the parent company are subject to certain legal and regulatory limitations and
also may be affected by capital needs, as well as other factors.
Due to the Company’s mortgage activities, 1st Source Bank is required to maintain minimum net worth capital requirements
established by various governmental agencies. 1st Source Bank’s net worth requirements are governed by the Department of
Housing and Urban Development and GNMA. As of December 31, 2014, 1st Source Bank met its minimum net worth capital
requirements.
Note 21 — Fair Value Measurements
The Company determines the fair values of its financial instruments based on the fair value hierarchy, which requires an entity to
maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair
value. The Company elected fair value accounting for mortgages held for sale. The Company believes the election for mortgages
held for sale (which are economically hedged with free-standing derivatives) will reduce certain timing differences and better
match changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. At
December 31, 2014 and 2013, all mortgages held for sale are carried at fair value.
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The following table shows the differences between fair value carrying amount of mortgages held for sale measured at fair value
and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity on December 31, 2014
and 2013.
(Dollars in thousands)
December 31, 2014
Mortgages held for sale reported at fair value:
Total Loans
December 31, 2013
Mortgages held for sale reported at fair value:
Total Loans
Fair value carrying
amount
Aggregate unpaid
principal
Excess of fair value
carrying amount
over (under) unpaid
principal
$
$
13,604
$
13,526
$
78 (1)
6,079
$
5,974
$
105 (1)
(1)The excess of fair value carrying amount over (under) unpaid principal is included in mortgage banking income and includes
changes in fair value at and subsequent to funding and gains and losses on the related loan commitment prior to funding.
Financial Instruments on Recurring Basis:
The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring
basis:
Investment securities available for sale are valued primarily by a third party pricing agent. Prices supplied by the independent
pricing agent, as well as their pricing methodologies and assumptions, are reviewed by the Company for reasonableness and to
ensure such prices are aligned with market levels. In general, the Company’s investment securities do not possess a complex
structure that could introduce greater valuation risk. The portfolio mainly consists of traditional investments including U.S. Treasury
and Federal agencies securities, federal agency mortgage pass-through securities, and general obligation and revenue municipal
bonds. Pricing for such instruments is fairly generic and is easily obtained. On a quarterly basis, prices supplied by the pricing
agent are validated by comparison to prices obtained from other third party sources for a material portion of the portfolio.
The valuation policy and procedures for Level 3 fair value measurements of available for sale debt securities are decided through
collaboration between management of the Corporate Accounting and Funds Management departments. The changes in fair value
measurement for Level 3 securities are analyzed on a periodic basis under a collaborative framework with the aforementioned
departments. The methodology and variables used for input are derived from the combination of observable and unobservable
inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external
factors, such as market movement and credit rating adjustments.
Both the market and income valuation approaches are implemented using the following types of inputs:
• U.S. treasuries are priced using the market approach and utilizing live data feeds from active market exchanges for
identical securities.
• Government-sponsored agency debt securities and corporate bonds are primarily priced using available market
information through processes such as benchmark curves, market valuations of like securities, sector groupings and
matrix pricing.
• Other government-sponsored agency securities, mortgage-backed securities and some of the actively traded REMICs
and CMOs, are primarily priced using available market information including benchmark yields, prepayment speeds,
spreads and volatility of similar securities.
• Other inactive government-sponsored agency securities are primarily priced using consensus pricing and dealer quotes.
• State and political subdivisions are largely grouped by characteristics, i.e., geographical data and source of revenue
in trade dissemination systems. Since some securities are not traded daily and due to other grouping limitations, active
market quotes are often obtained using benchmarking for like securities. Local direct placement municipal securities,
with very little market activity, are priced using an appropriate market yield curve which incorporates a credit spread
assumption.
• Marketable equity (common) securities are primarily priced using the market approach and utilizing live data feeds
from active market exchanges for identical securities.
Trading account securities are priced using the market approach and utilizing live data feeds from active market exchanges for
identical securities.
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Mortgages held for sale and the related loan commitments and forward contracts (hedges) are valued using a market value approach
and utilizing an appropriate current market yield and a loan commitment closing rate based on historical analysis.
Interest rate swap positions, both assets and liabilities, are valued by a third party pricing agent using an income approach and
utilizing models that use as their basis readily observable market parameters. This valuation process considers various factors
including interest rate yield curves, time value and volatility factors. Validation of third party agent valuations is accomplished
by comparing those values to the Company’s swap counterparty valuations. Management believes an adjustment is required to
“mid-market” valuations for derivatives tied to its performing loan portfolio to recognize the imprecision and related exposure
inherent in the process of estimating expected credit losses as well as velocity of deterioration evident with systemic risks imbedded
in these portfolios.
The following table shows the balance of assets and liabilities measured at fair value on a recurring basis.
(Dollars in thousands)
December 31, 2014
Assets:
Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities
U.S. States and political subdivisions securities
Mortgage-backed securities - Federal agencies
Corporate debt securities
Foreign government and other securities
Total debt securities
Marketable equity securities
Total investment securities available-for-sale
Trading account securities
Mortgages held for sale
Accrued income and other assets (interest rate swap agreements)
Total
Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)
Total
December 31, 2013
Assets:
Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities
U.S. States and political subdivisions securities
Mortgage-backed securities - Federal agencies
Corporate debt securities
Foreign government and other securities
Total debt securities
Marketable equity securities
Total investment securities available-for-sale
Trading account securities
Mortgages held for sale
Accrued income and other assets (interest rate swap agreements)
Total
Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)
Total
Level 1
Level 2
Level 3
Total
$
19,808
$
353,695
$
— $
—
—
—
—
19,808
7,176
26,984
205
—
—
118,222
253,008
31,932
—
756,857
—
756,857
—
13,604
9,125
6,466
—
—
811
7,277
—
7,277
—
—
—
373,503
124,688
253,008
31,932
811
783,942
7,176
791,118
205
13,604
9,125
$
$
$
27,189
$
779,586
$
7,277
$
814,052
— $
— $
9,302
9,302
$
$
— $
— $
9,302
9,302
$
19,631
$
375,408
$
— $
—
—
—
—
19,631
7,568
27,199
192
—
—
117,741
275,080
31,065
709
800,003
—
800,003
—
6,079
9,894
5,498
—
—
—
5,498
—
5,498
—
—
—
395,039
123,239
275,080
31,065
709
825,132
7,568
832,700
192
6,079
9,894
$
$
$
27,391
$
815,976
$
5,498
$
848,865
— $
— $
10,087
10,087
$
$
— $
— $
10,087
10,087
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The following table shows the changes in Level 3 assets and liabilities measured at fair value on a recurring basis.
U.S. States and
political subdivisions
securities
Foreign government
and other securities
Investment securities
available-for-sale
(Dollars in thousands)
Beginning balance January 1, 2014
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Purchases
Issuances
Sales
Settlements
Maturities
Transfers into Level 3
Transfers out of Level 3
Ending balance December 31, 2014
Beginning balance January 1, 2013
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Purchases
Issuances
Sales
Settlements
Maturities
Transfers into Level 3
Transfers out of Level 3
$
5,498
$
— $
$
$
$
$
—
(99)
2,635
—
—
—
(1,568)
—
—
6,466
7,701
(140)
566
2,200
—
(2,000)
—
(2,829)
—
—
—
6
—
—
—
—
(100)
905
—
811
$
— $
—
—
—
—
—
—
—
—
—
5,498
—
(93)
2,635
—
—
—
(1,668)
905
—
7,277
7,701
(140)
566
2,200
—
(2,000)
—
(2,829)
—
—
5,498
Ending balance December 31, 2013
$
5,498
$
— $
There were no gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating
to assets and liabilities still held at December 31, 2014 or 2013. No transfers between Level 1 and 2 occurred during 2014 or 2013.
One transfer between Level 2 and 3 occurred during 2014 and no transfers between Level 2 and 3 occurred during 2013. A foreign
government debt security was transferred from Level 2 to Level 3 during 2014 due to the Company’s periodic review of valuation
methodologies and inputs. The Company determined that the observable inputs used in determining fair value warranted a transfer
to Level 3 as the unobservable inputs were deemed to be significant to the overall fair value measurement.
The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair
value on a recurring basis.
(Dollars in thousands)
December 31, 2014
Investment securities available-for-sale
Direct placement municipal securities
Foreign government
December 31, 2013
Investment securities available-for-sale
Fair value
Valuation Methodology
Unobservable Inputs
Range of Inputs
$
$
6,466 Discounted cash flows
Credit spread assumption
0.99% - 2.08%
811 Discounted cash flows
Market yield assumption
0.25% - 1.31%
Direct placement municipal securities
$
5,498 Discounted cash flows
Credit spread assumption
0.90% - 1.52%
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The sensitivity to changes in the unobservable inputs and their impact on the fair value measurement can be significant. The
significant unobservable input for direct placement municipal securities are the credit spread assumptions used to determine the
fair value measure. An increase (decrease) in the estimated spread assumption of the market will decrease (increase) the fair value
measure of the securities. The significant unobservable input for foreign government securities are the market yield assumptions.
The market yield assumption is negatively correlated to the fair value measure. An increase (decrease) in the determined market
yield assumption will decrease (increase) the fair value measurement.
Financial Instruments on Non-recurring Basis:
The Company may be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis
in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or market accounting
or impairment charges of individual assets.
The Credit Policy Committee (CPC), a management committee, is responsible for overseeing the valuation processes and
procedures for Level 3 measurements of impaired loans, other real estate and repossessions. The CPC reviews these assets on a
quarterly basis to determine the accuracy of the observable inputs, generally third party appraisals, auction values, values derived
from trade publications and data submitted by the borrower, and the appropriateness of the unobservable inputs, generally discounts
due to current market conditions and collection issues. The CPC establishes discounts based on asset type and valuation source;
deviations from the standard are documented. The discounts are reviewed periodically, annually at a minimum, to determine they
remain appropriate. Consideration is given to current trends in market values for the asset categories and gain and losses on sales
of similar assets. The Loan and Funds Management Committee of the Board of Directors is responsible for overseeing the CPC.
Discounts vary depending on the nature of the assets and the source of value. Aircraft are generally valued using quarterly trade
publications adjusted for engine time, condition, maintenance programs, discounted by 10%. Likewise, autos are valued using
current auction values, discounted by 10%; medium and heavy duty trucks are valued using trade publications and auction values,
discounted by 15%. Construction equipment is generally valued using trade publications and auction values, discounted by 20%.
Real estate is valued based on appraisals or evaluations, discounted by 20% at a minimum with higher discounts for property in
poor condition or property with characteristics which may make it more difficult to market. Commercial loans subject to borrowing
base certificates are generally discounted by 20% for receivables and 40-75% for inventory with higher discounts when monthly
borrowing base certificates are not required or received.
Impaired loans and related write-downs are based on the fair value of the underlying collateral if repayment is expected solely
from the collateral. Collateral values are reviewed quarterly and estimated using customized discounting criteria, appraisals and
dealer and trade magazine quotes which are used in a market valuation approach. In accordance with fair value measurements,
only impaired loans for which a reserve for loan loss has been established based on the fair value of collateral require classification
in the fair value hierarchy. As a result, only a portion of the Company’s impaired loans are classified in the fair value hierarchy.
Partnership investments and the adjustments to fair value primarily result from application of lower of cost or fair value accounting.
The partnership investments are priced using financial statements provided by the partnerships. Quantitative unobservable inputs
are not reasonably available for reporting purposes.
The Company has established MSRs valuation policies and procedures based on industry standards and to ensure valuation
methodologies are consistent and verifiable. MSRs and related adjustments to fair value result from application of lower of cost
or fair value accounting. For purposes of impairment, MSRs are stratified based on the predominant risk characteristics of the
underlying servicing, principally by loan type. The fair value of each tranche of the servicing portfolio is estimated by calculating
the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan
prepayment rates, discount rates, servicing costs, and other economic factors. Prepayment rates and discount rates are derived
through a third party pricing agent. Changes in the most significant inputs, including prepayment rates and discount rates, are
compared to the changes in the fair value measurements and appropriate resolution is made. A fair value analysis is also obtained
from an independent third party agent and compared to the internal valuation for reasonableness. MSRs do not trade in an active,
open market with readily observable prices and though sales of MSRs do occur, precise terms and conditions typically are not
readily available and the characteristics of the Company’s servicing portfolio may differ from those of any servicing portfolios
that do trade.
Other real estate is based on the lower of cost or fair value of the underlying collateral less expected selling costs. Collateral values
are estimated primarily using appraisals and reflect a market value approach. Fair values are reviewed quarterly and new appraisals
are obtained annually. Repossessions are similarly valued.
For assets measured at fair value on a nonrecurring basis the following represents impairment charges (recoveries) recognized on
these assets during the year ended December 31, 2014 and 2013, respectively: impaired loans - $4.49 million and $0.00 million;
partnership investments - $0.29 million and $(0.42) million; MSRs - $0.00 million and $0.00 million; repossessions - $0.73 million
and $0.02 million, and other real estate - $0.17 million and $0.34 million.
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The following table shows the carrying value of assets measured at fair value on a non-recurring basis.
(Dollars in thousands)
December 31, 2014
Impaired loans - collateral based
Accrued income and other assets (partnership investments)
Accrued income and other assets (mortgage servicing rights)
Accrued income and other assets (repossessions)
Accrued income and other assets (other real estate)
Total
December 31, 2013
Impaired loans - collateral based
Accrued income and other assets (partnership investments)
Accrued income and other assets (mortgage servicing rights)
Accrued income and other assets (repossessions)
Accrued income and other assets (other real estate)
Total
Level 1
Level 2
Level 3
Total
$
$
$
$
— $
— $
1,007
$
—
—
—
—
—
—
—
—
1,343
4,733
5,156
1,735
1,007
1,343
4,733
5,156
1,735
— $
— $
13,974
$
13,974
— $
— $
670
$
—
—
—
—
—
—
—
—
2,156
4,844
4,262
5,490
670
2,156
4,844
4,262
5,490
— $
— $
17,422
$
17,422
The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair
value on a non-recurring basis.
(Dollars in thousands)
December 31, 2014
Impaired loans
Carrying Value
Fair value
Valuation Methodology
Unobservable Inputs
Range of Inputs
$
1,007
$
1,007 Collateral based measurements
including appraisals, trade
publications, and auction values
Discount for lack of
marketability and
current conditions
20% - 25%
Mortgage servicing rights
4,733
6,979 Discounted cash flows
Constant prepayment
rate (CPR)
10.2% - 16.3%
Discount rate
9.5% - 13.0%
Repossessions
5,156
5,307 Appraisals, trade publications
and auction values
Other real estate
1,735
1,953 Appraisals
Discount for lack of
marketability
Discount for lack of
marketability
December 31, 2013
Impaired loans
$
670
$
670 Collateral based measurements
including appraisals, trade
publications, and auction values
Discount for lack of
marketability and current
conditions
0% - 3%
5% - 38%
20% - 35%
Mortgage servicing rights
4,844
8,127 Discounted cash flows
Repossessions
4,262
4,435 Appraisals, trade publications and
auction values
Other real estate
5,490
6,606 Appraisals
Constant prepayment rate
(CPR)
9.9% - 11.9%
Discount rate
10.0% - 13.0%
Discount for lack of
marketability
Discount for lack of
marketability
0% - 16%
0% - 48%
GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial
liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.
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The following table shows the fair values of the Company’s financial instruments.
(Dollars in thousands)
December 31, 2014
Assets:
Carrying or
Contract Value
Fair Value
Level 1
Level 2
Level 3
Cash and due from banks
$
64,834
$
64,834
$
64,834
$
— $
Federal funds sold and interest bearing deposits with other
banks
Investment securities, available-for-sale
Other investments and trading account securities
Mortgages held for sale
1,356
791,118
21,006
13,604
1,356
791,118
21,006
13,604
Loans and leases, net of reserve for loan and lease losses
3,603,506
3,626,682
1,356
26,984
21,006
—
—
60,371
—
—
—
756,857
—
13,604
—
—
—
9,125
60,371
4,733
9,125
60,371
6,979
9,125
$
3,802,860
$
3,803,958
$
2,824,935
$
979,023
$
245,822
245,822
123,337
122,485
56,232
58,764
9,302
—
56,044
59,427
9,302
305
—
—
—
—
56,044
59,427
9,302
305
Cash surrender value of life insurance policies
Mortgage servicing rights
Interest rate swaps
Liabilities:
Deposits
Short-term borrowings
Long-term debt and mandatorily redeemable securities
Subordinated notes
Interest rate swaps
Off-balance-sheet instruments *
December 31, 2013
Assets:
Cash and due from banks
$
77,568
$
77,568
$
77,568
$
Federal funds sold and interest bearing deposits with other banks
Investment securities, available-for-sale
Other investments and trading account securities
Mortgages held for sale
2,484
832,700
22,592
6,079
2,484
832,700
22,592
6,079
Loans and leases, net of reserve for loan and lease losses
3,465,819
3,491,718
Cash surrender value of life insurance policies
Mortgage servicing rights
Interest rate swaps
Liabilities:
Deposits
Short-term borrowings
Long-term debt and mandatorily redeemable securities
Subordinated notes
Interest rate swaps
Off-balance-sheet instruments *
58,558
4,844
9,894
58,558
8,127
9,894
$
3,653,650
$
3,657,586
$
2,722,804
$
934,782
$
314,131
314,131
184,304
129,827
58,335
58,764
10,087
—
56,896
62,602
10,087
177
—
—
—
—
56,896
62,602
10,087
177
— $
—
800,003
5,498
2,484
27,199
22,592
—
—
58,558
—
—
—
6,079
—
—
—
9,894
—
—
7,277
—
—
3,626,682
—
6,979
—
—
—
—
—
—
—
—
—
—
—
3,491,718
—
8,127
—
—
—
—
—
—
—
* Represents estimated cash outflows required to currently settle the obligations at current market rates.
The methodologies for estimating fair value of financial assets and financial liabilities that are measured at fair value on a recurring
or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and due from banks,
federal funds sold and interest bearing deposits with other banks, other investments, and cash surrender value of life insurance
policies. The methodologies for other financial assets and financial liabilities are discussed below:
Loans and Leases — For variable rate loans and leases that reprice frequently and with no significant change in credit risk, fair
values are based on carrying values. The fair values of other loans and leases are estimated using discounted cash flow analyses
which use interest rates currently being offered for loans and leases with similar terms to borrowers of similar credit quality.
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Deposits — The fair values for all deposits other than time deposits are equal to the amounts payable on demand (the carrying
value). Fair values of variable rate time deposits are equal to their carrying values. Fair values for fixed rate time deposits are
estimated using discounted cash flow analyses using interest rates currently being offered for deposits with similar remaining
maturities.
Short-Term Borrowings — The carrying values of Federal funds purchased, securities sold under repurchase agreements, and
other short-term borrowings, including the liability related to mortgage loans available for repurchase under GNMA optional
repurchase programs, approximate their fair values.
Long-Term Debt and Mandatorily Redeemable Securities — The fair values of long-term debt are estimated using discounted
cash flow analyses, based on our current estimated incremental borrowing rates for similar types of borrowing arrangements. The
carrying values of mandatorily redeemable securities are based on our current estimated cost of redeeming these securities which
approximate their fair values.
Subordinated Notes — Fair values are estimated based on calculated market prices of comparable securities.
Off-Balance-Sheet Instruments — Contract and fair values for certain of our off-balance-sheet financial instruments (guarantees)
are estimated based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties’ credit standing.
Limitations — Fair value estimates are made at a specific point in time based on relevant market information and information
about the financial instruments. Because no market exists for a significant portion of our financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other such factors.
These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire
holdings of a particular financial instrument. These estimates are subjective in nature and require considerable judgment to interpret
market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize
in a current market exchange, nor are they intended to represent the fair value of the Company as a whole. The use of different
market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair
value estimates presented herein are based on pertinent information available to management as of the respective balance sheet
date. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the
balance sheet date may differ significantly from the amounts presented herein.
Other significant assets, such as premises and equipment, other assets, and liabilities not defined as financial instruments, are not
included in the above disclosures. Also, the fair value estimates for deposits do not include the benefit that results from the low-
cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
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Note 22 — 1st Source Corporation (Parent Company Only) Financial Information
STATEMENTS OF FINANCIAL CONDITION
December 31 (Dollars in thousands)
ASSETS
Cash and cash equivalents
Short-term investments with bank subsidiary
Investment securities, available-for-sale
(amortized cost of $1,218 at December 31, 2014 and 2013)
Other investments
Trading account securities
Investments in:
Bank subsidiaries
Non-bank subsidiaries
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Commercial paper borrowings
Other liabilities
Long-term debt and mandatorily redeemable securities
Subordinated notes
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
STATEMENTS OF INCOME
2014
2013
$
51,725
$
500
6,240
1,470
205
639,035
1,165
6,356
706,696
12,168
3,641
17,650
58,764
92,223
614,473
$
$
$
$
$
706,696
$
54,348
500
5,636
1,470
192
607,695
2,374
5,475
677,690
12,351
5,373
15,824
58,764
92,312
585,378
677,690
Year Ended December 31 (Dollars in thousands)
2014
2013
2012
Income:
Dividends from bank subsidiary
Rental income from subsidiaries
Other
Investment securities and other investment (losses) gains
Total income
Expenses:
Interest on subordinated notes
Interest on long-term debt and mandatorily redeemable securities
Interest on commercial paper and other short-term borrowings
Rent expense
Other
Total expenses
Income before income tax benefit and equity in undistributed (distributed in excess of)
income of subsidiaries
Income tax benefit
Income before equity in undistributed (distributed in excess of) income of subsidiaries
Equity in (distributed in excess of) undistributed income of subsidiaries:
Bank subsidiaries
Non-bank subsidiaries
Net income
$
33,810
$
30,429
$
2,314
408
(370)
36,162
4,220
1,475
36
1,713
2,553
9,997
26,165
2,722
28,887
28,891
291
2,165
418
626
33,638
4,220
999
23
1,698
639
7,579
26,059
1,650
27,709
26,995
254
$
58,069
$
54,958
$
58,739
1,873
499
273
61,384
6,484
1,108
17
1,635
354
9,598
51,786
2,274
54,060
(4,690)
263
49,633
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STATEMENTS OF CASH FLOWS
Year Ended December 31 (Dollars in thousands)
2014
2013
2012
Operating activities:
Net income
$
58,069
$
54,958
$
49,633
Adjustments to reconcile net income to net cash provided by operating activities:
Equity (undistributed) distributed in excess of income of subsidiaries
(29,182)
(27,249)
Depreciation of premises and equipment
Realized/unrealized investment securities and other investment losses (gains)
Change in trading account securities
Other
Net change in operating activities
Investing activities:
Proceeds from sales and maturities of investment securities
Purchases of other investments
Net change in premises and equipment
Return of capital from subsidiaries
Net change in investing activities
Financing activities:
Net change in commercial paper
Proceeds from issuance of long-term debt and mandatorily redeemable securities
Payments on subordinated notes
Payments on long-term debt and mandatorily redeemable securities
Net proceeds from issuance of treasury stock
Acquisition of treasury stock
Cash dividends paid on common stock
Net change in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
21
370
(13)
(1,759)
27,506
—
—
—
1,500
1,500
(183)
1,356
—
(569)
1,752
(16,342)
(17,643)
(31,629)
(2,623)
54,348
30
(626)
(46)
1,714
28,781
9
—
—
1
10
7,692
1,331
—
(397)
3,655
(2,273)
(17,054)
(7,046)
21,745
32,603
$
51,725
$
54,348
$
4,427
39
(273)
(14)
3,600
57,412
500
(1,470)
(6)
—
(976)
(3,342)
2,627
(30,928)
(317)
3,935
(3,701)
(16,522)
(48,248)
8,188
24,415
32,603
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
1st Source carried out an evaluation, under the supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) pursuant to Exchange Act Rule 13a-14.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, at December 31, 2014, our
disclosure controls and procedures were effective in ensuring that information required to be disclosed by 1st Source in reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms and are designed to ensure that information required to be disclosed
in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required
disclosure.
In addition, there were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f))
during the fourth fiscal quarter of 2014 that have materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of 1st Source Corporation (“1st Source”) is responsible for establishing and maintaining adequate internal control
over financial reporting. 1st Source’s internal control over financial reporting includes policies and procedures pertaining to 1st
Source’s ability to record, process, and report reliable information. Actions are taken to correct any deficiencies as they are identified
through internal and external audits, regular examinations by bank regulatory agencies, 1st Source’s formal risk management
process, and other means. 1st Source’s internal control system is designed to provide reasonable assurance to 1st Source’s
management and Board of Directors regarding the preparation and fair presentation of 1st Source’s published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further,
because of changes in conditions, the effectiveness of internal control may vary over time.
1st Source’s management assessed the effectiveness of internal control over financial reporting as of December 31, 2014. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control — Integrated Framework (2013 framework). Based on management’s assessment, 1st Source believes
that, as of December 31, 2014, 1st Source’s internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, independent registered public accounting firm, has issued an attestation report on management’s assessment
of 1st Source’s internal control over financial reporting. This report appears on page 36.
By
By
/s/ CHRISTOPHER J. MURPHY III
Christopher J. Murphy III, Chief Executive Officer
/s/ ANDREA G. SHORT
Andrea G. Short, Treasurer and Chief Financial Officer
South Bend, Indiana
None
Item 9B. Other Information.
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Item 10. Directors, Executive Officers and Corporate Governance.
Part III
The information under the caption “Proposal Number 1: Election of Directors,” “Board Committees and Other Corporate
Governance Matters,” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the 2015 Proxy Statement is
incorporated herein by reference.
Item 11. Executive Compensation.
The information under the caption “Compensation Discussion & Analysis” of the 2015 Proxy Statement is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information under the caption “Voting Securities and Principal Holders Thereof” and “Proposal Number 1: Election of
Directors” of the 2015 Proxy Statement is incorporated herein by reference.
The following table shows Equity Compensation Plan Information as of December 31, 2014.
(A)
Number of Securities to be
Issued upon Exercise of
Outstanding Options,
Warrants and Rights
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
[excluding securities
reflected in column (A)]
Equity compensation plans approved by shareholders
2011 stock option plan
1997 employee stock purchase plan
1982 executive incentive plan
1982 restricted stock award plan
1998 performance compensation plan
Total plans approved by shareholders
Equity compensation plans not approved by
shareholders
Director retainer stock plan
Total equity compensation plans
— $
11,765
—
—
—
11,765
$
—
11,765
$
—
26.84
—
—
—
26.84
—
26.84
2,000,000
122,538
112,194 (1)(2)
45,393 (1)
89,677 (1)(2)
2,369,802
82,248
2,452,050
(1) Amount is to be awarded by grants administered by the Executive Compensation Committee of the 1st Source Board of
Directors.
(2) Amount includes market value stock only. Book value shares used for annual awards may only be sold to 1st Source.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information under the caption “Proposal Number 1: Election of Directors,” “Board Committees and Other Corporate
Governance Matters,” and “Transactions with Related Persons” of the 2015 Proxy Statement is incorporated herein by reference.
The information under the caption “Relationship with Independent Registered Public Accounting Firm” of the 2015 Proxy
Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
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Part IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements and Schedules:
The following Financial Statements and Supplementary Data are filed as part of this annual report:
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition — December 31, 2014 and 2013
Consolidated Statements of Income — Years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Comprehensive Income — Years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Shareholders’ Equity — Years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Cash Flows — Years ended December 31, 2014, 2013, and 2012
Notes to Consolidated Financial Statements — December 31, 2014, 2013, and 2012
Financial statement schedules required by Article 9 of Regulation S-X are not required under the related instructions, or are
inapplicable and, therefore, have been omitted.
(b) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
3(a)
3(b)
3(c)
4(a)
4(b)
10(a)(1)
10(a)(2)
10(a)(3)
10(a)(4)
10(b)
10(c)
10(d)
10(e)
10(f)
10 (g)
10 (h)
Articles of Incorporation of Registrant, amended April 30, 1996, filed as exhibit to Form 10-K, dated December 31, 1996, and
incorporated herein by reference.
By-Laws of Registrant, as amended October 23, 2014, filed as exhibit to Form 8-K, dated October 29, 2014, and incorporated
herein by reference.
Certificate of Designations for Series A Preferred Stock, dated January 23, 2009, filed as exhibit to Form 8-K, dated January 23,
2009, and incorporated herein by reference.
Form of Common Stock Certificates of Registrant, filed as exhibit to Registration Statement 2-40481 and incorporated herein
by reference.
1st Source agrees to furnish to the Commission, upon request, a copy of each instrument defining the rights of holders of
Senior and Subordinated debt of 1st Source.
Employment Agreement of Christopher J. Murphy III, dated January 1, 2008, filed as exhibit to Form 8-K, dated March 17,
2008, amended February 6, 2014, filed as exhibit to Form 8-K, dated March 12, 2014, and incorporated herein by reference.
Employment Agreement of Andrea G. Short dated January 1, 2013, filed as exhibit to Form 10-K, dated December 31, 2012,
amended February 6, 2014, filed as exhibit to Form 8-K, dated March 12, 2014, and incorporated herein by reference.
Employment Agreement of John B. Griffith, dated January 1, 2008, filed as exhibit to Form 8-K, dated March 17, 2008,
amended February 6, 2014, filed as exhibit to Form 8-K, dated March 12, 2014, and incorporated herein by reference.
Employment Agreement of Steven J. Wessell, dated June 1, 2011, filed as exhibit to Form 10-Q, dated March 31, 2012, amended
February 6, 2014, filed as exhibit to Form 8-K, dated March 12, 2014, and incorporated herein by reference.
1st Source Corporation Employee Stock Purchase Plan dated April 17, 1997, filed as exhibit to Form 10-K, dated December 31,
1997, and incorporated herein by reference.
1st Source Corporation 1982 Executive Incentive Plan, amended February 3, 2011, filed as exhibit to Form 10-K, dated
December 31, 2010, and incorporated herein by reference.
1st Source Corporation 1982 Restricted Stock Award Plan, amended January 17, 2003, filed as exhibit to Form 10-K, dated
December 31, 2003, and incorporated herein by reference.
1st Source Corporation 1998 Performance Compensation Plan, amended January 20, 2011, filed as exhibit to Form 10-K,
dated December 31, 2010, and incorporated herein by reference.
Contract with Fiserv Solutions, Inc. dated November 23, 2005, filed as exhibit to Form 10-K, dated December 31, 2005, and
incorporated herein by reference.
1st Source Corporation 2011 Stock Option Plan, dated January 20, 2011, filed as exhibit to Form 10-K, dated December 31,
2010, and incorporated herein by reference.
1st Source Corporation Director Retainer Stock Plan, amended July 24, 2014, filed as exhibit to Form 10-Q, dated September
30, 2014, and incorporated herein by reference.
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21
Subsidiaries of Registrant (unless otherwise indicated, each subsidiary does business under its own name):
Name
1st Source Bank
SFG Aircraft, Inc. *
(formerly known as SFG Equipment Leasing, Inc.)
1st Source Insurance, Inc. *
1st Source Specialty Finance, Inc. *
1st Source Leasing, Inc.
1st Source Capital Corporation *
Trustcorp Mortgage Company (Inactive)
1st Source Master Trust
Michigan Transportation Finance Corporation *
1st Source Intermediate Holding, LLC
1st Source Funding, LLC (Inactive)
1st Source Corporation Investment Advisors, Inc. *
SFG Commercial Aircraft Leasing, Inc. *
SFG Equipment Leasing Corporation I *
Washington and Michigan Insurance, Inc. *
*Wholly-owned subsidiaries of 1st Source Bank
Jurisdiction
Indiana
Indiana
Indiana
Indiana
Indiana
Indiana
Indiana
Delaware
Michigan
Delaware
Delaware
Indiana
Indiana
Indiana
Arizona
23
31.1
31.2
32.1
32.2
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
Certification of Christopher J. Murphy III, Chief Executive Officer (Rule 13a-14(a)).
Certification of Andrea G. Short, Chief Financial Officer (Rule 13a-14(a)).
Certification of Christopher J. Murphy III, Chief Executive Officer.
Certification of Andrea G. Short, Chief Financial Officer.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
(c) Financial Statement Schedules — None.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
1st SOURCE CORPORATION
By
/s/ CHRISTOPHER J. MURPHY III
Christopher J. Murphy III, Chairman of the Board
and Chief Executive Officer
Date: February 20, 2015
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ CHRISTOPHER J. MURPHY III
Chairman of the Board
February 20, 2015
Christopher J. Murphy III
and Chief Executive Officer
/s/ JAMES R. SEITZ
James R. Seitz
President
February 20, 2015
/s/ WELLINGTON D. JONES III
Vice Chairman of the Board
February 20, 2015
Wellington D. Jones III
and Director
/s/ ANDREA G. SHORT
Treasurer, Chief Financial Officer
February 20, 2015
Andrea G. Short
and Principal Accounting Officer
/s/ JOHN B. GRIFFITH
John B. Griffith
/s/ ALLISON N. EGIDI
Allison N. Egidi
Secretary
and General Counsel
Director
February 20, 2015
February 20, 2015
/s/ DANIEL B. FITZPATRICK
Director
February 20, 2015
Daniel B. Fitzpatrick
/s/ TRACY D. GRAHAM
Tracy D. Graham
/s/ CRAIG A. KAPSON
Craig A. Kapson
/s/ NAJEEB A. KHAN
Najeeb A. Khan
Director
Director
Director
February 20, 2015
February 20, 2015
February 20, 2015
/s/ VINOD M. KHILNANI
Director
February 20, 2015
Vinod M. Khilnani
/s/ REX MARTIN
Rex Martin
Director
February 20, 2015
/s/ CHRISTOPHER J. MURPHY IV
Director
February 20, 2015
Christopher J. Murphy IV
/s/ TIMOTHY K. OZARK
Director
February 20, 2015
Timothy K. Ozark
/s/ JOHN T. PHAIR
John T. Phair
Director
February 20, 2015
/s/ MARK D. SCHWABERO
Director
February 20, 2015
Mark D. Schwabero
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EXHIBIT 31.1
I, Christopher J. Murphy III, Chief Executive Officer, certify that:
1.
I have reviewed this annual report on Form 10-K of 1st Source Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 20, 2015
By /s/ CHRISTOPHER J. MURPHY III
Christopher J. Murphy III, Chief Executive Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of 1st Source Corporation (1st Source) on Form 10-K for the fiscal year ended December 31,
2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher J. Murphy III, Chief
Executive Officer of 1st Source, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities and Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of 1st Source.
Date: February 20, 2015
By /s/ CHRISTOPHER J. MURPHY III
Christopher J. Murphy III, Chief Executive Officer
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EXHIBIT 31.2
I, Andrea G. Short, Chief Financial Officer, certify that:
1.
I have reviewed this annual report on Form 10-K of 1st Source Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 20, 2015
By /s/ ANDREA G. SHORT
Andrea G. Short, Chief Financial Officer
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of 1st Source Corporation (1st Source) on Form 10-K for the fiscal year ended December 31,
2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrea G. Short, Chief Financial
Officer of 1st Source, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities and Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of 1st Source.
Date: February 20, 2015
By /s/ ANDREA G. SHORT
Andrea G. Short, Chief Financial Officer
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OFFICERS
Christopher J. Murphy III _________________________________ Chairman of the Board and Chief Executive Officer
James R. Seitz _________________________________________ President
Andrea G. Short ________________________________________ Treasurer and Chief Financial Officer
John B. Griffith _________________________________________ Secretary and General Counsel
DIRECTORS
Allison N. Egidi _________________________________________ Director of Development, University of Virginia
Daniel B. Fitzpatrick _____________________________________ Chairman and Chief Executive Officer, Quality Dining, Inc.
Tracy D. Graham ________________________________________ Managing Principal, Graham Allen Partners
Wellington D. Jones III ___________________________________ Vice Chairman of the Board
Craig A. Kapson ________________________________________ President, Jordan Automotive Group
Najeeb A. Khan ________________________________________ Chairman and Chief Executive Officer, Interlogic Outsourcing, Inc.
Vinod M. Khilnani ________________________________________ Retired Executive Chairman of the Board, CTS Corporation
Rex Martin ____________________________________________ Chairman and Chief Executive Officer, NIBCO, Inc.
Christopher J. Murphy III _________________________________ Chairman and Chief Executive Officer
Christopher J. Murphy IV _________________________________ Chief Operating Officer, Owner and Executive Director, Catharsis Productions, LLC
Timothy K. Ozark _______________________________________ Chairman and Chief Executive Officer, Aim Financial Corporation
John T. Phair ___________________________________________ President, Holladay Properties
Mark D. Schwabero _____________________________________ President and Chief Operating Officer, Brunswick Corporation
OFFICERS
Christopher J. Murphy III _________________________________ Chairman of the Board and Chief Executive Officer
James R. Seitz _________________________________________ President
Andrea G. Short ________________________________________ Executive Vice President, Treasurer and Chief Financial Officer
Jeffrey L. Buhr _________________________________________ Executive Vice President, Chief Credit Officer
John B. Griffith _________________________________________ Executive Vice President, Chief Administration Officer
Steven J. Wessell _______________________________________ Executive Vice President, Private Banking, Wealth Management and Insurance
Allen R. Qualey _________________________________________ President, Specialty Finance Group
P.O. Box 1602, South Bend, Indiana 46634
© 2015 1st Source Corporation all rights reserved.