2 0 1 5 A N N U A L R E P O R T
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Kimberly A. Richardson • Michelle L. Richardson • Susan J. Richmond • Beth A. Ricksgers • Jacqueline Rico • Diana J. Riddle • Jonah D. Ridenour • Stephen H. Rider • Amber N. Riggs • Katherine A. Riker • Daniel F. Riley • Holly M. Risner • Alishia M. Ritchie • Gina M. Ritter
• Rebecca L. Ritter • Becky S. Rizor • Julie D. Roberts • Guadalupe Robles • Obdulia M. Rodriguez • Kathy A. Rogers • Joseph T. Rogina • William P. Rohwer • Emily Rojas • Wayne R. Roller • Robert E. Romano • Christin R. Romine • Anna L. Roose • Leland L. Rose • Leslee
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Salisbury • Emily J. Sammons • Ellen J. Santa • Maribel Santamaria • Ericka R. Santiesteban • Patricia M. Sarkisian • David M. Satek • Lagena M. Saviano • Patrick T. Sawyer • Cheryl A. Scarberry • Andrea A. Schaefer • Joyce E. Schalliol • Kayla R. Schenkel • Ann M. Schepman
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Andrea D. Smiddy-Schlagel • Amber M. Smith • Chelsea R. Smith • Claire C. Smith • Darren M. Smith • Debra L. Smith • Elisa Smith • Linda A. Smith • Malorie M. Smith • Steven J. Smith • Graham R. Snyder • Jennifer R. Snyder • Lisa A. Snyder • Patricia A. Snyder • Rachel
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• Jerry D. Szmanda • Michael Szymanski • Kim M. Tagliaferri • Marlene A. Taiclet • Erin N. Talkington • Jeramie J. Tarr • Mark E. Taylor • Dianna S. Teadt • Cory M. Teagno • Darran Teamor • Lawrence M. Tepe • Stephanie L. Termont • Nicole L. Teske • Carri L. Thessin • Julie
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Charlotte D. Witt • Phillip A. Witt • Vincent J. Witte • Andrea S. Wittendorf • Deborah S. Wogoman • Linda S. Wojciechowski • Matthew V. Wold • Renie C. Wolf • Gina M. Wolff • Robin J. Wolkiewicz • Kelly L. Woloszyn • Rebecca L. Womer • Janine E. Wood • Stephen S.
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• Marcus I. Zarembka • Elizabeth M. Zarzecki • Ronald W. Zeltwanger • Guangwen G. Zhang • Cole J. Ziegler • Seth M. Zimmerman • Barbara J. Ziolkowski • Rochelle N. Zochowski • Sara A. Zolman
1st SOURCE CORPORATION DIRECTORS
Allison N. Egidi _____________________________________ Director of Development, University of Virginia
Daniel B. Fitzpatrick _________________________________ Chairman and Chief Executive Officer, Quality Dining, Inc.
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 _____________________________ Owner and Chief Executive Officer, Catharsis Productions, LLC
Timothy K. Ozark ___________________________________ Chairman and Chief Executive Officer, Aim Financial Corporation
John T. Phair ______________________________________ President, Holladay Properties
Mark D. Schwabero _________________________________ Chairman and Chief Executive Officer, Brunswick Corporation
1st SOURCE CORPORATION 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
1st SOURCE BANK 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 _______________________________ Retired President, 1st Source Bank
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 _____________________________ Owner and Chief Executive Officer, Catharsis Productions, LLC
Timothy K. Ozark ___________________________________ Chairman and Chief Executive Officer, Aim Financial Corporation
John T. Phair ______________________________________ President, Holladay Properties
Mark D. Schwabero _________________________________ Chairman and Chief Executive Officer, Brunswick Corporation
James R. Seitz _____________________________________ President
1st SOURCE BANK EXECUTIVE 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
31497 FSB_FCBC V1.indd 4-6
2/25/16 1:21 PM
2015 ANNUAL REPORT
CONTENTS
Corporate Description........................................................................................................................... i
2015 in Brief ............................................................................................................................................. i
Financial Highlights .................................................................................................................................
2015 Annual Shareholders’ Letter ................................................................................................
ii
iii
Recognition ................................................................................................................................................. v
Services ........................................................................................................................................................ v
2015 Banking Center Locations .....................................................................................................
vi
Shareholders’ Information ..................................................................................................................
vii
Financial Report ....................................................................................................................................... 1
Directors and Officers .......................................................................................
Inside Back Cover
31497 FSB_COVandEDITORIAL.indd 3
2/22/16 10:04 AM
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 81 banking centers in 17
counties in Indiana and Michigan, 10 1st Source Insurance
offices, 8 Trust and 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.
2015 IN BRIEF:
2015 net income was $57.49 million compared to $58.07
million earned in 2014. Diluted net income per common share
for 2015 was $2.17, unchanged from the previous year.
Return on average total assets was 1.15% compared to 1.21%
a year ago. Return on average common shareholders’ equity
was 9.05% for 2015, compared to 9.65% for 2014. The
average common shareholders’ equity-to-average assets
ratio for 2015 was 12.72% compared to 12.52% last year.
At year-end, total assets were $5.19 billion, up 7.41% from
a year earlier. Loans and leases were $3.99 billion, up
8.30%, deposits were $4.14 billion, up 8.84% from 2014
and common shareholders’ equity was $644.05 million, an
increase of 4.81% from a year earlier.
The reserve for loan and lease losses at year-end was 2.21%
of total loans and leases, compared to 2.31% the prior year.
The ratio of nonperforming assets to loans and leases was
0.50% for 2015, compared to 1.13% for 2014.
Average Deposits
Average Loans and Leases
($MM)
4000
3500
3000
2500
2000
1500
1000
500
0
1155%%
33555555
63
541
1177%%
33557744
41
616
1199%%
33770011
28
691
2200%%
33777788
122
762
2222%%
%% NNoonniinntteerreess tt--
bbeeaarriinngg cchheecckkiinngg
33996611
TToottaall DDeeppooss iittss
178
BBrrookkeerreedd CC DD
854
NNoonniinntteerreess tt--
bbeeaarriinngg cchheecckkiinngg
1236
1109
1056
887
860
CC DD && IIRR AA
1715
1808
1926
2007
2069
SS aavviinnggss &&
IInntteerreess tt--bbeeaarriinngg
cchheecckkiinngg
2011
2012
2013
2014
2015
($MM)
4000
3500
3000
2500
2000
1500
1000
500
0
3079
268
606
220
374
492
3209
271
653
217
413
541
3434
302
700
218
424
568
3640
364
724
242
419
584
3837
435
Total Loans and
Leas es
C ons tructtioon
757
Aiirccraaft
254
422
602
Mediium & Heavy
Duty T ruck
Auto & Liightt T ruck
C ons umer Loans
and Mortgages
1119
1114
1222
1307
1367
C ommercial Loans
and Mortgages
2011
2012
2013
2014
2015
Loan and Lease Quality (% of Loans and Leases)
Net Income (in millions)
Net C harge-Offs
Nonperforming As s ets
Loan & Leas e Los s R ess errve
2.64
2.28
0.27
3..10
2..60
2..10
1.60
1.10
0..60
0..10
(0..40))
2.50
1.25
0.13
2.35
2.31
2.21
1.29
0.002
1.13
0.06
0. 50
(0..0022))
2015
2011
2012
2013
2014
$60
50
40
30
20
10
0
55.0
58.1
57.5
48.2
49.6
2011
2012
2013
2014
2015
Net Income Summary – Year to Date
Return on Average Assets (as a percent)
(000’s)
12//31/14
12//31/15
C hange
Net interest income
$160,329 $166,521
3.9 %
Provision for loan & lease losses
3,733
2,160
(42.1)%
Net interest income – after provision
156,596
164,361
5.0 %
Noninterest income*
63,994
65,036
1.6 %
Noninterest expense*
136,147
140,834
3.4 %
Income before income taxes
84,443
88,563
4.9 %
Income tax expense
26,374
31,077
17.8 %
Net income
$ 58,069
$ 57,486
(1.0)%
* Excludes leased equipment depreciation
1.40%
1.20
1.00
0.80
0.60
0.40
0.20
0
i
1.09
1.11
1.19
1.21
1.15
2011
2012
2013
2014
2015
31497 FSB_COVandEDITORIAL.indd 4
2/22/16 10:04 AM
FINANCIAL HIGHLIGHTS
Earnings and Dividends
(Dollars in thousands, except per share amounts)
Interest and other income
Interest and other expense
Net income
Common cash dividends
Per common share*
Diluted net income
Cash dividends
Book value
Return on average common shareholders’ equity
Return on average assets
2015
2014
2013
2012
2011
$ 268,000
$ 256,441
$ 256,797
$ 263,277
$ 268,395
177,277
171,998
172,854
187,597
194,606
57,486
18,126
58,069
17,643
54,958
17,054
49,633
16,522
48,195
15,921
$
2.17
$
2.17
$
2.03
$
1.83
$
1.78
0.671
24.75
9.05%
1.15%
0.645
23.41
9.65%
1.21%
0.618
21.88
9.55%
1.19%
0.600
20.95
9.10%
1.11%
0.582
19.67
9.51%
1.09%
* Per share data gives retrospective recognition to a 10% stock dividend declared on July 22, 2015, and issued on August 14, 2015.
Statement of Condition
Average Balances: (Dollars in thousands)
Assets
Earning assets
Investments
Loans and leases
$ 4,994,208
$ 4,806,805
$ 4,607,949
$ 4,472,879
$ 4,402,554
4,668,811
4,513,631
4,325,907
4,174,443
4,090,297
786,980
822,021
840,798
882,392
899,896
3,837,149
3,639,985
3,433,938
3,209,490
3,078,581
Reserve for loan and lease losses
87,208
86,982
85,203
83,430
86,617
Deposits
Interest bearing liabilities
Shareholders’ equity
3,961,060
3,777,743
3,700,509
3,574,211
3,555,454
3,459,939
3,395,591
3,286,558
3,239,530
3,286,246
635,497
601,892
575,662
545,631
506,939
Average Common Shareholders’ Equity
Diluted Net Income Per Common Share*
$2.50
2.00
1.50
1.00
0.50
0
1.78
1.83
2.03
2.17
2.17
2011
2012
2013
2014
2015
* Per share data gives retrospective recognition to a 10%
stock dividend declared on July 22, 2015, and issued on
August 14, 2015.
Avg.. C ommon E quity (($MM)
Avg.. C ommon E quity//As s ets (%)
545.. 6
12. 20
506. 9
11. 51
650
600
550
500
450
400
350
300
250
200
575.. 7
601.. 9
12. 49
12. 52
635.. 5
12. 72
13. 5
13. 0
12. 5
12. 0
11. 5
11. 0
10. 5
10. 0
2011
2012
2013
2014
2015
Return on Average Common Shareholders’ Equity (as a percent)
12%
8
4
0
9.51
9.10
9.55
9.65
9.05
2011
2012
2013
2014
2015
ii
31497 FSB_COVandEDITORIAL.indd 5
2/22/16 10:04 AM
2015 ANNUAL SHAREHOLDERS’ LETTER
In last year’s letter I stated I
wanted to focus on “the year now
developing” and that we needed “a
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.” I then
went on to discuss the numbers
starting with net income growth,
followed by net interest income,
credit quality, noninterest income
and noninterest expense. This
year you can find these details in
Management’s Discussion
and
Analysis in the Form 10-K that
follows this letter. So I am not
going to rehash them here. I will
try to give you some insight into
what occurred during 2015 and
where we did a good job and
where we could have done better.
PERFORMANCE
A lot of good things occurred in
the year and our performance
was solid with a 1.15% return on
average assets. We had good loan
and lease growth of 5.42% to $3.84
billion average outstanding and
solid deposit growth of 4.85% to
average balances of $3.96 billion.
Credit performance was strong
with net recoveries for the year, and
we managed net interest margin
well to 3.60%. However, we did
not achieve our earnings objective.
We earned $57.49 million for the
year and $2.17 diluted earnings
per common share. These results
were relatively flat compared to
the prior year. Interest rates did
not move up during the year as
had been forecasted even by the
Fed, and the costs of our expansion
investments in new branches and
people in the prior years did not
produce the lift we had hoped. Our
mortgage volumes and fees and
interest therefrom were well below
our expectations. Additionally the
costs of the Affordable Care Act
were substantially higher than we
had expected. While beset with
these challenges during the year,
we finished stronger with year-end
to year-end loan growth of 8.30%,
nonperforming assets of only 0.50%
of loans and leases outstanding and
a consolidated expense to revenue
ratio of 60.93%.
LEAN JOURNEY
One of the primary areas of focus
for 2015 was continuing our “Lean
Journey” and our efforts to “Win
with People.” Twelve Lean teams
worked on a variety of process
improvements such as loan growth,
retail (banking center) delivery,
and human resource management
Twenty-nine
improvement.
managers were trained in Lean
daily management bringing the
number of active managers sharing
this expertise to 84. Our Lean
teams identified 1,104 wastes in
2015 which when added to our
prior work has resulted in 46,000
repurposed hours across the Bank
since April 2013. Lastly, Lean 5S
training which requires discipline
to sustain has now been completed
bank-wide.
FACILITIES &
TECHNOLOGY
Another area of focus was to
“Achieve Distinctive Convenience”
in our markets with both physical
and time convenience. We did this
through our physical facilities and
technology. During 2015, different
from many of our competitors,
iii
we continued to invest in new
branches or the refurbishment of
existing facilities. We built new
banking centers in the heart of
downtown New Haven, Indiana;
added a second location in the
Kalamazoo, Michigan, region in
Portage and moved our primary
facility in that region to the center
of downtown Kalamazoo. We also
opened a new location in a local
supermarket in Elkhart, Indiana,
offering
weekday
extended
and weekend hours and we
consolidated two facilities into one
new banking center in Valparaiso,
Indiana.
a
internal
replaced
and
We
improved
customer-facing
technology
systems inside the bank as well.
considerable
We
amount of hardware, completed
parallel
between
integration
our primary data center and its
back up, conducted a series of
disaster recovery tests, and added
additional cybersecurity training
and remediation across the Bank.
We also continued the process
of upgrading all of our ATMs
for better functionality and ease
of use. For our clients’ payment
convenience we introduced Apple
Pay,TM
Account-to-Account
and Person-to-Person mobile
payments, converted our debit
cards (mailed to our clients in late
2015 and early 2016) and merchant
processing to the new more secure
EMV chip standard, improved the
online commercial loan module
and introduced mobile applications
for Business Banking Online. We
also introduced online applications
for residential mortgages and SBA
business lending.
31497 FSB_COVandEDITORIAL.indd 6
2/22/16 10:04 AM
RESULTS
All in all, we are pleased with our
efforts this past year, but we are
not satisfied with our bottom line
results. We did, however, complete
our 28th year of consecutive
dividend growth, and we were
recognized by the MSR Group
(a customer survey organization
focused on banking) as providing
the best branch service in the
midwest. We were once again the
#1 SBA lender in every Indiana
market in which we had a banking
center, and we were named the
Indiana SBA Community Lender
of the Year for the third year in a
row. We were the #2 SBA lender in
the entire state of Indiana and that
is without a statewide presence.
Early in the year we were notified
that for the fourth straight year we
were on the KBW Bank Honor
Roll of Superior Performers and
Bank Director Magazine ranked
us 27 of 130 banks on their 2015
“Bank Performance Scorecard”
which is based on profitability,
capital strength, and credit quality.
We maintained our 5 Star rating
(the highest) from BauerFinancial
and we are in the top 15% of
performers in Seifried & Brew’s
list of community banks.
From a customer viewpoint in our
local markets we were named the
“Small Business Advocate of the
Year” by The Cornerstone Alliance
in Southwestern Michigan, the
“Best Bank for Business” and
the “Best Bank for Obtaining a
Business Loan” by the readers
of the Northwest Indiana Business
Quarterly Magazine. Lastly, for the
second year in a row we received
top honors for achieving one of the
Jim Seitz, President; Andrea Short, Chief Financial Officer; and Chris Murphy, Chairman of the
Board and Chief Executive Officer, in the 1st Source lobby.
highest customer advocacy scores
among banks in the midwest from
The MSR Group.
Now while all this is great, as
mentioned above we did not
strategic
achieve one of our
“Pillars,” that being “Superior
Financial Results.” We will
need to work harder in 2016
to maintain our pristine credit
quality in the face of competitors
who are lowering their standards
and pricing. We will need to be
smarter about how we deploy our
people and achieve productivity
improvements. We will need to
continue to practice rigorous cost
control while delivering highly
personalized
distinctively
and
convenient service to all of our
customers. We need to continue
to grow our customer counts and
keep the #1 market share in our 15
county primary market. If we can
iv
do all of these well then we should
be able to grow our bottom line.
Of course, an increase in interest
rates with a rising rate curve would
also help.
I am grateful to my colleagues across
the Bank for their commitment
to achievement and I thank our
shareholders for your support. We
know the economy and markets
are volatile and are providing
mixed messages as to the future;
nonetheless, we remain focused on
growing and performing.
Christopher J. Murphy III
Chairman and
Chief Executive Officer
1st Source Corporation
31497 FSB_COVandEDITORIAL.indd 7
2/22/16 10:04 AM
STRAIGHT TALK
and
SOUND ADVICE
SINCE 1863
PRESTIGIOUS RECOGNITION
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 financial standing.
BauerFinancial
5 Star “Superior” Rating
Highest rating possible. Based on
capital ratio, profitability/loss trend,
credit quality and CRA ratings
Seifried&Brew
Top 15th Percentile
of Community Banks
•(cid:98)
ota
s
e
n
n
i
M
•
s
a
s
n
a
K
•
a
k
s
M i s
s o u r i • (cid:98)Wisconsin•(cid:98)Illin
o
is
•
I
n
Io w a •
BEST
BRANCHES
IN THE
MIDWEST
a
r
b
e
N
•
kota•(cid:98)SouthDakota
North
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•
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•
O
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•
MSR Group
Best Branch Service in the Midwest
Highest Customer
Advocacy Score
among banks in the Midwest
Small Business Administration
2015 Indiana SBA
Community Lender Award
#1 SBA Lender in our Market
BankDirector
Bank Performance Scorecard
Northwest Indiana
Business Quarterly Magazine
Ranked #27 of 130 banks on list,
based on profitability, capital strength
and credit quality.
Recognized as
‘Best Bank for Business’, and
‘Best Bank for Obtaining a
Business Loan’
KBW, Inc
2012 – 2015
Bank Honor Roll
of Superior Performers
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
COMPREHENSIVE SERVICES
INSURANCE
BUSINESS
Loans & Leasing
Treasury Services
Merchant Card Services
Business 401(k) Plans
Retirement Plan Services
SPECIALTY
EQUIPMENT FINANCE
Aircraft & Helicopter
Auto & Light Truck
Medium & Heavy Duty
Trucks
Construction Equipment
Shuttle Bus
Step Vans
Funeral Coaches
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/Treasury Services
Specialization
Mortgage Loans
Lines of Credit
(secured and unsecured)
Checking
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
v
31497 FSB_COVandEDITORIAL.indd 8
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2015 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
3
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
t
.
County Road 400 North
80/90
Cleveland Rd.
23
933
N
.
l
V
a
p
a
r
a
s
o
S
t
.
i
F
r
a
n
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n
S
t
.
N
.
i
W
a
s
h
n
g
t
o
n
S
t
.
N. Calumet Ave.
R
o
o
s
e
v
e
l
t
Glendale Blvd.
S
i
l
h
a
v
y
R
d
.
R
d
.
E. Evans Ave.
S
t
u
r
d
y
R
d
.
Valparaiso
E. Lincolnway
130
Indiana Ave.
Valparaiso
University
P
o
r
t
a
g
e
A
v
e
.
Notre
Dame
.
d
R
e
p
a
r
G
McKinley Ave.
LincolnWayWest
49
Western Ave.
.
t
S
n
a
M
i
20
31
23
i
i
M
c
h
g
a
n
S
t
.
Mishawaka Ave.
Lincoln WayEa s t
933
I
r
o
n
w
o
o
d
D
r.
Mishawaka
331
20
30 2
31
vi
Dupont Rd.
3
27
930
State Blvd.
33
30
69
B lv d .
n
o
e ff e r s
J
27
33
327
69
.
d
R
r
e
t
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Coliseum
B
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v
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.
A
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o
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y
B
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af
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t
S
n
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i
l
C
.
d
R
n
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t
f
f
u
B
l
Tillman Rd.
27
469
30
State Blvd.
.
d
R
t
s
e
r
c
e
p
a
M
l
930
New
Haven
.
d
R
l
l
e
z
t
a
H
469
24
31497 FSB_COVandEDITORIAL.indd 9
2/22/16 10:04 AM
SHAREHOLDERS’ INFORMATION
2015 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 2015 and book value were:
Quarter Ended*
High
Low
Cash Dividends
Paid
March 31
June 30
September 30
December 31
$ 31.35
$ 26.95
$0 .164
31.75
32.37
34.35
27.69
28.06
29.35
0.164
0.164
0.180
Book value per common share at December 31, 2015: $24.75
* Per share figures have been adjusted for a 10% stock dividend declared July 22, 2015, and issued on August 14, 2015.
Annual Meeting of Shareholders
The Annual Meeting of Shareholders has been called for 10:00 a.m. EDT, April 21, 2016, 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 17, 2016,
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@1stsource.com.
Transfer Agent, Registrar and Dividend Disbursing Agent
American Stock Transfer and Trust Company
6201 15th Avenue
Brooklyn, NY 11219
Independent Auditors
BKD, LLP
200 East Main Street
Suite 700
Fort Wayne, IN 46802
Shareholder Inquiries
1st Source Corporation
Andrea G. Short, Chief Financial Officer
Post Office Box 1602
South Bend, IN 46634
(574) 235-2000
vii
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2/22/16 10:04 AM
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, 2015
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, 2015 was $644,319,912
The number of shares outstanding of each of the registrant’s classes of stock as of February 12, 2016: Common Stock, without par value — 25,880,275
shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2016 Proxy Statement for the 2016 annual meeting of shareholders to be held April 21, 2016, are incorporated by reference into Part
III.
1 SRCE
2015 Form 10-K
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
3
10
15
15
15
15
16
17
17
36
37
37
40
41
42
42
43
44
79
79
79
80
80
80
80
80
81
83
85
2 SRCE
2015 Form 10-K
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 81 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, 2015,
we had consolidated total assets of $5.19 billion, total loans and leases of $3.99 billion, total deposits of $4.14 billion, and total
shareholders’ equity of $644.05 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, treasury 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: new and used aircraft; auto and light trucks; construction equipment; and medium and
heavy duty trucks.
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, on a limited and selective basis, provided international aircraft financing, primarily
in Mexico and Brazil. Aircraft finance receivables generally range from $500,000 to $25 million with fixed or variable
interest rates and terms of one to ten years.
The auto and light truck division (including specialty vehicles such as shuttle buses, step vans, motor coach's and funeral
cars) consists of fleet financings to automobile rental and leasing companies, light truck rental and leasing companies,
and single to fleet financing for users of 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.
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 $15 million with fixed or variable interest rates and terms of one to
seven years.
3 SRCE
2015 Form 10-K
The medium and heavy duty truck division provides fleet 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.
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 ten 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, 2015, we had approximately 1,150 employees on a full-time equivalent basis. We provide a wide range of
employee benefits and consider employee relations to be good.
4 SRCE
2015 Form 10-K
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, as amended (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.
The 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 the 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 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 address 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, 2015, 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 8.00%, our common equity Tier-1 risk-based capital ratio exceeded 6.50%,
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 calculates deposit insurance premiums payable by insured
depository institutions. The Dodd-Frank Act directs the FDIC to calculate the deposit insurance assessments payable by each
insured depository institution based generally upon the institution’s average total consolidated assets minus its average tangible
equity during the assessment period. Previously, an institution's assessments were based on the amount of its 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.
5 SRCE
2015 Form 10-K
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.
6 SRCE
2015 Form 10-K
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 — The 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.
The 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 2016, the Bank must maintain reserves of 3.00% against net transaction accounts greater than $15.20 million
and up to $110.20 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 $110.20 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 the 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.
7 SRCE
2015 Form 10-K
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 — The 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, and extended the compliance date for banks to
conform their investments in certain “legacy covered funds” until July 21, 2016. These final rules exempt the 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 became effective for us on January 1, 2015 and will be fully phased-in on January 1, 2019.
Management believes that, as of December 31, 2015, 1st Source and the 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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Liquidity Requirements — Historically, the regulation and monitoring of bank and bank holding company liquidity has been
addressed as a supervisory matter, without required formulaic measures. The Basel III final framework requires banks and bank
holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity
measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required
by regulation. One test, referred to as the liquidity coverage ratio, or LCR, is designed to ensure that the banking entity maintains
an adequate level of unencumbered high-quality liquid assets equal to the entity's expected net cash outflow for a 30-day time
horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to
as the net stable funding ratio, or NSFR, is designed to promote more medium and long-term funding of the assets and activities
of banking entities over a one-year time horizon. These requirements are expected to incentivize banking entities to increase their
holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as
a funding source.
In September 2015, the federal bank regulators approved final rules implementing the LCR for advanced approaches banking
organizations (i.e,. banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total on-
balance sheet foreign exposure) and a modified version of the LCR for bank holding companies with at least $50 billion in total
consolidated assets that are not advanced approach banking organizations, neither of which would apply to 1st Source or the Bank.
The federal bank regulators have not yet proposed rules to implement the NSFR, but the Federal Reserve has stated its intent to
adopt a version of this measure as well.
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.
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2015 Form 10-K
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.
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.
Our aircraft portfolio has foreign exposure, particularly in Mexico and Brazil. We establish exposure limits for each country
through a centralized oversight process, and in consideration of relevant economic, political, social and legal risks. We monitor
exposures closely and adjust our country limits in response to changing conditions. Currency fluctuations could have a negative
impact on our client's cost of paying dollar denominated debts and, as a result, we could experience higher delinquency in this
portfolio.
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.
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2015 Form 10-K
Market Risks
Fluctuations 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.
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.
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2015 Form 10-K
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 acumen 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.
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
are 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.
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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.
The fact that certain significant shareholders have additional shares registered for sale may depress market prices of our
common stock — We have filed a registration statement with the SEC covering the potential sale by 1st Source Bank as trustee
of the certain trusts established for the benefit of the extended families of two of the children of Ernestine Raclin. Approximately
1.9 million shares of our common stock remained registered for sale as of December 31, 2015, and may be sold after February
28, 2016, under the registration statement at the direction of the principal beneficiaries of the pertinent trusts and certain other
selling shareholders. Such holders may choose to sell their remaining registered shares at any time. Some market participants may
assume that such remaining shares will become available to the market relatively soon and choose to defer purchasing our shares
on the market. This may, in turn have an effect of depressing the market price for our common stock. In addition, the future sale
of substantial amounts of common stock by the holders of such registered shares may also depress the market price of our common
stock.
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, or employees, costly litigation, a decline in revenues, and increased government
regulation.
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2015 Form 10-K
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, 2015, 1st Source leases approximately 69% of the office space in
this complex.
At December 31, 2015, we also owned property and/or buildings where 57 of 1st Source Bank’s 81 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.
During 2015, we continued work on our banking center network by investing approximately $6 million which primarily related
to the opening of three new banking centers and relocating two other ones in various markets. In 2014, we made an investment
of approximately $8 million refurbishing six banking centers and opening three new ones in our Fort Wayne, Indiana region.
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 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 breached its duties by, among other things, failing to diversify
the assets in the Morris Family Trusts.
The parties reached a settlement of these proceedings, which was approved by the Court on October 8, 2015 and became effective
on such date. Pursuant to the settlement agreement, the Morris Family Trusts were divided into the four separate family trust lines
and the trusts were modified to allow representatives of the four respective family trust lines (if and when they so choose) to direct
the trustee (or appoint a special trustee) to diversify the 1st Source stock holdings in such trusts. As part of the settlement, 1st
Source Corporation agreed to cooperate with actions of the trustee to liquidate 1st Source shares at the respective and separate
future directions of such family representatives that may be given from time to time. Such cooperation includes filing, and
maintaining the effectiveness of, a “shelf” registration statement with the Securities and Exchange Commission covering such
trust shares and shares held by members of the families within such family lines. Each family line representative may also separately
direct the trustee to vote 1st Source shares in the trusts of such family line in accordance with the recommendations of a public
proxy guidance service. If the family representative appoints a special trustee for shares in one or more trusts in such representative’s
family group, the special trustee will have power to vote such shares. Pursuant to the settlement, 1st Source Bank agreed to afford
a credit in respect of certain trustee fees associated with the trusts in the amount of $150,000 and 1st Source agreed to bear up to
$400,000 of certain expenses associated with potential transactions in future periods to diversify 1st Source shares held in the
Morris Family Trusts.
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.
Item 4. Mine Safety Disclosures.
None
15 SRCE
2015 Form 10-K
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
2015 Sales Price
Cash Dividends
2014 Sales Price
Cash Dividends
March 31
June 30
September 30
December 31
$
31.35
$
26.95
$
0.164
$
29.64
$
25.05
$
31.75
32.37
34.35
27.69
28.06
29.35
0.164
0.164
0.180
30.19
29.02
32.02
26.15
25.27
25.45
0.155
0.164
0.164
0.164
*Share and per share figures have been adjusted for 10% stock dividend declared July 22, 2015 and issued on August 14, 2015.
As of February 12, 2016, there were 854 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, 2010, 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 45 banking companies in Illinois, Indiana, Michigan, Ohio,
and Wisconsin.
NOTE: Total return assumes reinvestment of dividends.
16 SRCE
2015 Form 10-K
The following table shows our share repurchase activity during the three months ended December 31, 2015.
Period
October 01 - 31, 2015
November 01 - 30, 2015
December 01 - 31, 2015
Total Number of
Shares Purchased
Average Price
Paid Per Share
6,167
$
20,915
28,640
33.14
31.93
31.07
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
6,167
20,915
28,640
1,707,007
1,686,092
1,657,452
*1st Source maintains a stock repurchase plan that was authorized by the Board of Directors on July 24, 2014. 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 342,548** shares.
**Unadjusted for 10% stock dividend declared July 22, 2015 and issued on August 14, 2015.
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)
2015
2014
2013
2012
2011
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
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
$
184,684
$
178,554
$
179,585
$
182,085
$
187,523
18,163
166,521
2,160
164,361
83,316
159,114
88,563
31,077
57,486
5,187,916
57,379
644,053
$
$
$
$
2.17
2.17
0.671
30.85%
1.15%
9.05%
12.72%
$
$
18,225
160,329
3,733
156,596
77,887
150,040
84,443
26,374
58,069
4,829,958
56,232
614,473
2.17
2.17
0.645
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
4,722,826
58,335
585,378
2.03
2.03
0.618
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
4,550,693
71,021
558,655
1.83
1.83
0.600
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
4,374,071
37,156
523,918
1.78
1.78
0.582
32.65%
1.09%
9.51%
11.51%
*Per share data gives retrospective effect to a 10% stock dividend declared on July 22, 2015 and issued on August 14, 2015.
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.
17 SRCE
2015 Form 10-K
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.
• The ability to expand effectively into new markets that we target.
• 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.
18 SRCE
2015 Form 10-K
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.”
19 SRCE
2015 Form 10-K
EARNINGS SUMMARY
Net income in 2015 was $57.49 million, down from $58.07 million in 2014 and up from $54.96 million in 2013. Diluted net
income per common share was $2.17 in 2015 and 2014, and $2.03 in 2013. Return on average total assets was 1.15% in 2015
compared to 1.21% in 2014, and 1.19% in 2013. Return on average common shareholders’ equity was 9.05% in 2015 versus 9.65%
in 2014, and 9.55% in 2013.
Net income in 2015, as compared to 2014, was positively impacted by a $6.19 million or 3.86% increase in net interest income
and a $1.57 million or 42.14% decrease in provision for loan and lease losses and a $5.43 million or 6.97% increase in noninterest
income, which was offset by $9.07 million or 6.05% increase in noninterest expense and a $4.70 million or 17.83% increase in
in income tax expense. Net income in 2014 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 over 2013.
Dividends paid on common stock in 2015 amounted to $0.671 per share, compared to $0.645 per share in 2014, and $0.618 per
share in 2013. 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 3.60% in 2015, compared to 3.59% in 2014 and 3.67% in 2013. Net interest income was $166.52 million for
2015, compared to $160.33 million for 2014 and $156.82 million for 2013. Tax-equivalent net interest income totaled $168.22
million for 2015, up $6.05 million from the $162.17 million reported in 2014. Tax-equivalent net interest income for 2014 was
up $3.53 million from the $158.64 million reported for 2013.
During 2015, average earning assets increased $155.18 million while average interest-bearing liabilities increased $64.35 million
over the comparable period in 2014. The yield on average earning assets decreased 1 basis point to 3.99% for 2015 from 4.00%
for 2014 due to the reduction in loan and investment yields. Loan and lease net interest recoveries of $3.97 million in 2015, $1.59
million in 2014, and $3.88 million in 2013 helped offset continued pressure in the current interest rate environment. Total cost of
average interest-bearing liabilities decreased 2 basis points to 0.52% during 2015 from 0.54% in 2014 as a result of the current
low interest rate environment. The result was an increase of 1 basis point 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 2015 was the 3 basis point decrease in the loan
and lease portfolio yield. Average net loans and leases increased $197.16 million or 5.42% in 2015 from 2014 while the yield
decreased to 4.39%.
During 2015, the tax-equivalent yield on securities available for sale decreased 10 basis points to 2.08% while the average balance
decreased $35.04 million. Average mortgages held for sale decreased $0.04 million during 2015 and the yield decreased 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 $6.90 million
during 2015 while the yield increased 46 basis points. The increase in yield was primarily a result of lower outstanding balances
at higher rates.
Average interest-bearing deposits increased $91.30 million during 2015 while the effective rate paid on those deposits decreased
1 basis point. Average noninterest-bearing demand deposits increased $92.02 million during 2015.
Average short-term borrowings decreased $26.44 million during 2015 while the effective rate paid decreased 1 basis point. Average
long-term debt decreased $0.51 million during 2015 as the effective rate decreased 21 basis points. The decrease in effective rate
was primarily due to higher rates on mandatorily redeemable securities in 2014.
20 SRCE
2015 Form 10-K
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
2015
Interest
Income/
Expense
Average
Balance
Yield/
Rate
Average
Balance
2014
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2013
Interest
Income/
Expense
Yield/
Rate
$
664,480
$ 11,929
1.80% $
694,830
$ 13,054
1.88% $
731,371
$ 14,414
1.97%
122,500
11,099
4,406
439
3,837,149
168,611
33,583
997
4,668,811
186,382
3.60
3.96
4.39
2.97
3.99
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
61,400
(87,208)
351,205
$ 4,994,208
62,263
(86,982)
317,893
$ 4,806,805
58,762
(85,203)
308,483
$ 4,607,949
$ 3,106,990
$ 11,489
0.37% $ 3,015,693
$ 11,356
0.38% $ 3,010,183
$ 16,604
0.55%
236,940
58,764
57,245
484
4,220
1,970
3,459,939
18,163
0.20
7.18
3.44
0.52
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
854,070
44,702
635,497
762,050
47,272
601,892
$ 4,806,805
690,326
55,403
575,662
$ 4,607,949
Total liabilities and shareholders’ equity
$ 4,994,208
Net interest income
Net interest margin on a tax equivalent basis
$ 168,219
$ 162,168
$ 158,643
3.60%
3.59%
3.67%
21 SRCE
2015 Form 10-K
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)
2015 compared to 2014
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
2014 compared to 2013
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
$
$
$
$
$
$
$
$
$
$
(558) $
(567) $
(1,125)
(173)
(2)
8,715
(187)
7,795
342
(54)
—
(18)
270
7,525
$
$
$
$
(255)
(21)
(1,131)
168
(1,806) $
(209) $
(3)
—
(120)
(332) $
(1,474) $
(428)
(23)
7,584
(19)
5,989
133
(57)
—
(138)
(62)
6,051
(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
Noninterest Income — Noninterest income increased $5.43 million or 6.97% in 2015 from 2014 following a slight increase in
2014 over 2013. 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
22 SRCE
2015
2014
2013
$
19,126
$
18,511
$
17,383
9,313
10,217
4,570
5,465
22,302
4
12,319
8,684
9,585
5,381
5,556
17,156
963
12,051
$
83,316
$
77,887
$
9,177
8,882
5,944
5,492
16,229
(168)
14,273
77,212
2015 Form 10-K
Trust fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary
fees) increased by $0.62 million or 3.32% in 2015 from 2014 compared to an increase of $1.13 million or 6.49% in 2014 over
2013. 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, 2015 and 2014 was $3.78 billion and $3.95 billion, respectively. At
December 31, 2015, these trust assets were comprised of $2.35 billion of personal and agency trusts and estate administration
assets, $1.00 billion of employee benefit plan assets, $0.35 million of individual retirement accounts, and $0.08 million of custody
assets.
Service charges on deposit accounts grew by $0.63 million or 7.24% in 2015 from 2014 compared to a decrease of $0.49 million
or 5.37% in 2014 from 2013. The increase in service charges on deposit accounts in 2015 reflects an increase in statement fees
and ATM fees due to a change in the fee structure that went into effect January 1, 2015 and higher nonsufficient fund transactions.
The decrease in service charges on deposit accounts in 2014 was primarily due to lower volumes of nonsufficient fund transactions.
Debit card income improved $0.63 million or 6.59% in 2015 from 2014 compared to an increase of $0.70 million or 7.91% in
2014 from 2013. The increase in 2015 and 2014 was the result of an increased volume of debit card transactions.
Mortgage banking income declined $0.81 million or 15.07% in 2015 over 2014, compared to a decrease of $0.56 million or 9.47%
in 2014 over 2013. We had no MSR impairment in 2015, 2014 or 2013. During 2015, 2014 and 2013, we determined that no
permanent write-down was necessary for previously recorded impairment on MSRs. During 2015, mortgage banking income was
negatively impacted by decreased gains on loan sales due to reduced profit margins and higher MSR amortization expense. 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.
Insurance commissions decreased slightly in 2015 compared to 2014 and increased slightly in 2014 compared to 2013.
Equipment rental income generated from operating leases increased by $5.15 million or 30.00% during 2015 from 2014 compared
to an increase of $0.93 million or 5.71% during 2014 from 2013. The average equipment rental portfolio increased 35.13% in
2015 over 2014 and 5.55% in 2014 over 2013 as the result of improving market conditions for equipment finance mainly in
construction equipment, auto and light trucks and medium and heavy duty trucks. In 2015 and 2014 the increase in equipment
rental income was offset by a similar increase in depreciation on equipment owned under operating leases.
Sales of investment securities available-for-sale resulted in gains of $4,000 for the year ended 2015 compared to gains of $0.96
million for the year ended 2014 and losses of $0.17 million for the year ended 2013. During 2015, gains were the result of sales
of U.S. States and political subdivisions securities. The gains in 2014 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.
Other income increased $0.27 million or 2.22% in 2015 from 2014 compared to a decrease of $2.22 million or 15.57% in 2014
from 2013. The increase in 2015 was mainly the result of lower losses on partnership investments, higher customer swap fees and
claim proceeds from bank owned life insurance offset by lower monogram fund income and a one-time valuation adjustment in
2014. 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.
Noninterest Expense — Noninterest expense increased $9.07 million or 6.05% in 2015 over 2014 following a slight increase in
2014 from 2013. 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
2015
2014
2013
$
86,133
$
80,488
$
9,768
18,348
18,280
4,682
6,011
3,412
4,837
667
6,976
9,311
17,657
13,893
5,046
5,589
3,384
6,049
1,102
7,521
79,783
8,700
16,895
13,055
5,321
5,690
3,462
4,938
4,030
7,440
$
159,114
$
150,040
$
149,314
Total salaries and employee benefits increased $5.65 million or 7.01% in 2015 from 2014, following a $0.71 million or 0.88%
increase in 2014 from 2013.
23 SRCE
2015 Form 10-K
Employee salaries increased $4.32 million or 6.70% in 2015 from 2014 compared to an increase of $0.53 million of 0.83% in
2014 from 2013. The increase in 2015 was a result of higher base salaries, producer commissions and executive incentives. Higher
base salary expense was primarily due to more full-time equivalent employees as a result of opening three new banking centers
in 2014 and one new banking center in 2015, filling other open positions and normal performance raises. Producer commissions
increased primarily in the areas of insurance and trust due to new client relationships. 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.
Employee benefits increased $1.33 million or 8.28% in 2015 from 2014, compared to a slight increase in 2014 from 2013. During
2015, group insurance costs increased as a result of higher claims experience including the removal of lifetime caps and other
various items under the Affordable Care Act.
Occupancy expense increased $0.46 million or 4.91% in 2015 from 2014, compared to an increase of $0.61 million or 7.02% in
2014 from 2013. The higher expense in 2015 was mainly due to increased real estate taxes as a result of assessments on new
banking centers and remodeling to existing banking centers, real estate tax appeal settlements received in 2014 and increased
premises repairs. The higher expense in 2014 was mainly due to higher snow removal services and real estate taxes.
Furniture and equipment expense, including depreciation, grew by $0.69 million or 3.91% in 2015 from 2014 compared to an
increase of $0.76 million or 4.51% in 2014 from 2013. The higher expense during 2015 was primarily due to increased software
and equipment maintenance costs, computer processing charges and equipment repairs. The higher expense in 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.
Depreciation on equipment owned under operating leases increased $4.39 million or 31.58% in 2015 from 2014, following a $0.84
million or 6.42% increase in 2014 from 2013. In 2015 and 2014, depreciation on equipment owned under operating leases changed
in conjunction with the increase in equipment rental income.
Professional fees declined $0.36 million or 7.21% in 2015 from 2014, compared to a $0.28 million or 5.17% decrease in 2014
from 2013. The decrease in 2015 was primarily due to lower audit fees and the reduced utilization of consulting services offset
by higher director fees. The decrease in 2014 was primarily due to the reduced utilization of consulting services.
Supplies and communications expense increased $0.42 million or 7.55% in 2015 from 2014, and decreased slightly in 2014 from
2013. The increase in 2015 was mainly the result of replacing debit cards with the new embedded EMV chip.
FDIC and other insurance expense was flat in 2015 from 2014 and flat in 2014 from 2013.
Business development and marketing expenses were reduced by $1.21 million or 20.04% in 2015 from 2014 compared to a $1.11
million or 22.50% increase in 2014 from 2013. The lower expense in 2015 was primarily the result of decreased charitable
contributions offset by increased marketing promotions. The higher expense in 2014 was the result of increased charitable
contributions and increased retail marketing.
Loan and lease collection and repossession expenses decreased $0.44 million or 39.47% in 2015 from 2014 compared to a decrease
of $2.93 million or 72.66% in 2014 from 2013. Loan and lease collection and repossession expense was lower in 2015 mainly
due to a decrease in collection and repossession expenses and lower repurchased mortgage loan losses as a result of fewer loan
repurchase requests offset by increased valuation adjustments and fewer gains on the sale of other real estate and repossessions.
The decrease in 2014 was 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.
Other expenses declined $0.55 million or 7.25% in 2015 as compared to 2014 and were flat in 2014 as compared to 2013. The
decrease in 2015 was mainly due to lower expenses related to a previously reported proceeding that involved the Bank as trustee,
reduced intangible asset amortization as items fully amortize and fewer writedowns on a property held for sale offset by higher
mortgage servicing foreclosure expenses, provision on unfunded loan commitments, employment and relocation expenses and
increased debit card losses.
Income Taxes — 1st Source recognized income tax expense in 2015 of $31.08 million, compared to $26.37 million in 2014, and
$28.99 million in 2013. The effective tax rate in 2015 was 35.09% compared to 31.23% in 2014, and 34.53% in 2013. 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 2015 and 2013. 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.
24 SRCE
2015 Form 10-K
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.
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
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total loans and leases
2015
2014
2013
2012
2011
$
744,749
$
710,758
$
679,492
$
639,069
$
425,236
278,254
778,012
455,565
700,268
464,129
148,479
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
545,570
378,604
217,157
620,782
261,204
545,457
423,606
98,163
$
3,994,692
$
3,688,574
$
3,549,324
$
3,327,553
$
3,090,543
At December 31, 2015, there were no concentrations within the loan portfolio of 10% or more of total loans and leases.
Loans and leases, net of unearned discount, at December 31, 2015, were $3.99 billion and were 77.00% of total assets, compared
to $3.69 billion and 76.37% of total assets at December 31, 2014. Average loans and leases, net of unearned discount, increased
$197.16 million or 5.42% and increased $206.05 million or 6.00% in 2015 and 2014, respectively.
Commercial and agricultural lending, excluding those loans secured by real estate, increased $33.99 million or 4.78% in 2015
over 2014. Commercial and agricultural lending outstandings were $744.75 million and $710.76 million at December 31, 2015
and December 31, 2014, 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 2015, we continued to grow
our business client base.
Auto and light truck loans increased $27.33 million or 6.87% in 2015 over 2014. At December 31, 2015, auto and light truck loans
had outstandings of $425.24 million and $397.90 million at December 31, 2014. This increase was primarily attributable to the
expansion of financing with many existing clients and an increase in client base offset by client consolidations during the year.
Medium and heavy duty truck loans and leases grew by $31.10 million or 12.58% in 2015. Medium and heavy duty truck financing
at December 31, 2015 and 2014 had outstandings of $278.25 million and $247.15 million, respectively. Most of the increase at
December 31, 2015 from December 31, 2014 can be attributed to clients replacing aged equipment.
Aircraft financing at year-end 2015 increased $50.35 million or 6.92% from year-end 2014. Aircraft financing at December 31,
2015 and 2014 had outstandings of $778.01 million and $727.67 million, respectively. The increase during 2015 was mainly due
to growth in short-term dealer floor plans and a large helicopter syndication.
Construction equipment financing increased $55.63 million or 13.91% in 2015 compared to 2014. Construction equipment
financing at December 31, 2015 had outstandings of $455.57 million, compared to outstandings of $399.94 million at December 31,
2014. 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, of which approximately 50% is owner occupied, increased $83.68 million or 13.57% in
2015 over 2014. Commercial loans secured by real estate outstanding at December 31, 2015 were $700.27 million and $616.59
million at December 31, 2014. The increase was mainly due to general improvements in the business economy within our markets.
Residential real estate loans were $464.13 million at December 31, 2015 and $445.76 million at December 31, 2014. Residential
real estate loans increased $18.37 million or 4.12% in 2015 from 2014. The increase in residential real estate loans was primarily
due to higher demand for home equity lines of credit.
25 SRCE
2015 Form 10-K
Consumer loans increased $5.67 million or 3.97% in 2015 over 2014. Consumer loans outstanding at December 31, 2015, were
$148.48 million and $142.81 million at December 31, 2014. The increase during 2015 was due to higher demand in auto, personal
loans and other personal line of credit loans as a result of favorable interest rates.
The following table shows the maturities of loans and leases in the categories of commercial and agricultural, auto and light truck,
medium and heavy duty truck, aircraft and construction equipment outstanding as of December 31, 2015.
(Dollars in thousands)
Commercial and agricultural
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
$
361,435
$
342,121
$
41,193
$
180,463
87,258
200,031
125,736
242,756
186,200
496,569
305,968
2,017
4,796
81,412
23,861
744,749
425,236
278,254
778,012
455,565
$
954,923
$
1,573,614
$
153,279
$
2,681,816
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
$
$
1,021,358
34,421
1,055,779
$
$
552,256
118,858
671,114
$
$
1,573,614
153,279
1,726,893
During 2015, approximately 66% of the Bank’s residential mortgage originations were sold into the secondary market. Mortgage
loans held for sale were $9.83 million at December 31, 2015 and were $13.60 million at December 31, 2014. 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
and continued to decrease in 2015. 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 exposure risk for repurchases starts to reduce in 2016 as a result of the enhancements made by FNMA in 2013 to
the selling representations and warranties framework as warranties on loans sold after implementation of such changes lapse.
Our liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was
$0.98 million and $1.72 million as of December 31, 2015 and 2014, respectively. Our expense (recovery) for repurchase losses,
included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $(0.75) million in 2015
compared to $(0.27) million in 2014 and $1.99 million in 2013. 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 is 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.
26 SRCE
2015 Form 10-K
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.
During 2015, the medium-term portion of the look-back period was seven years given that 2009 through 2015 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 seven year period in our calculation,
as we feel it is most consistent with our current expectations for 2016. 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 negatively impacting the U.S. recovery, are geopolitical events. Current concerns include the unrelenting decline in
oil prices, the continued slowdown in China, the weak EU economies, the recessionary pressures in Japan and Brazil (with the
resultant decline in value of the real), the geopolitical threats to the Russian economy as well as the economic decline due to
Russia’s significant dependence on oil, and the heightened concerns of terrorist attacks. 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 2015.
Another area of concern continues to be our aircraft portfolio where we have collateral concentration and $200 million 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 Mexico and Brazil. 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 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, notwithstanding more recent currency fluctuation, made a modest adjustment
to our reserve ratio for our aircraft portfolio which we believe to be appropriate given our disciplined loan underwriting practices.
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. Our credit quality is strongest when industry conditions
are favorable. Lower gas prices and growth in GDP, and the construction sector, which leads to higher demand for trucking bode
well for the industry. Industry concerns include a persistent driver shortage, meeting emissions standards and achieving regulatory
compliance. 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 continued strong credit quality
in 2015. The construction industry, which was hard hit during the recession, is benefiting from an improving economy, buoyed
by growth in private residential and non-residential construction. The Bank has limited exposure to the industry's weakest sector,
energy, which continues to struggle as a result of ongoing declines in oil and gas prices. Historically, 1st Source has experienced
less volatility in this portfolio than the industry as losses have been mitigated by appropriate underwriting and a global market for
used construction equipment. Weak global demand and the strong dollar held down used equipment exports, but the U.S. market
remains solid. 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 in 2015. Industry growth is projected to be accompanied by increasing rental rates, although
we anticipate some dampening in the used auto market in 2016. We made a slight downward adjustment to the reserve ratio for
the auto portfolio.
27 SRCE
2015 Form 10-K
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 modest improvement, exemplified by lower unemployment and
increased consumer and small business confidence, the overall declines in the manufacturing sector are concerning. Furthermore,
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 charge-offs. 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.
Similar to the commercial portfolio, our commercial real estate loans are concentrated in our local market with local customers,
with approximately 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. Our recent loss history is favorable; however, as a result of our
growth in more risky sectors, we remain cautious and made only a modest adjustment to the reserve ratio.
The reserve for loan and lease losses at December 31, 2015, totaled $88.11 million and was 2.21% of loans and leases, compared
to $85.07 million or 2.31% of loans and leases at December 31, 2014 and $83.51 million or 2.35% of loans and leases at
December 31, 2013. 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, 2015.
Charge-offs for loan and lease losses were $4.71 million for 2015, compared to $6.03 million for 2014 and $3.83 million for 2013.
We had only one sizable charge-off in 2015 and it was on a commercial relationship. The provision for loan and lease losses was
$2.16 million for 2015, compared to $3.73 million for 2014 and $0.77 million for 2013.
28 SRCE
2015 Form 10-K
The following table summarizes our loan and lease loss experience for each of the last five years ended December 31.
(Dollars in thousands)
2015
Amounts of loans and leases outstanding at end of period
$ 3,994,692
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
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total charge-offs
Recoveries:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total recoveries
Net (recoveries) charge-offs
Provision for loan and lease losses
Balance at end of period
2014
3,688,574
3,639,985
83,505
$
$
$
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
$
$
$
$ 3,837,149
$
85,068
3,489
5,007
24
—
244
—
—
141
812
4,710
851
380
28
802
434
2,807
11
281
5,594
(884)
2,160
42
—
—
4
99
46
833
6,031
929
1,283
142
240
525
347
97
298
3,861
2,170
3,733
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
12,589
1,923
133
44
964
308
346
56
456
4,230
8,359
3,129
$
88,112
$
85,068
$
83,505
$
83,311
$
81,644
Ratio of net (recoveries) 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
(0.02)%
2.21 %
0.06%
2.31%
0.02%
2.35%
0.13%
2.50%
0.27%
2.64%
686.23 %
239.07%
225.73%
226.03%
143.49%
The following table shows net (recoveries) charge-offs as a percentage of average loans and leases by portfolio type:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
2015
2014
2013
2012
2011
0.36 %
0.58%
0.01%
0.01%
(0.08)
(0.01)
(0.07)
(0.10)
(0.44)
0.03
0.36
(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
Total net (recoveries) charge-offs to average portfolio loans and leases
(0.02)%
0.06%
0.02%
0.13%
0.27 %
29 SRCE
2015 Form 10-K
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.
2015
2014
2013
2012
2011
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
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
(Dollars in thousands)
Commercial and
agricultural
Medium and heavy duty
truck
Aircraft financing
Construction equipment
financing
Commercial real estate
Residential real estate
Consumer
Total
Auto and light truck
9,269
10.64
10,326
10.79
9,657
11.04
8,864
11.92
7,037
$ 15,456
18.64% $ 11,760
19.27% $ 11,515
19.14% $ 12,326
19.21% $ 13,091
4,699
32,373
7,592
13,762
3,382
1,579
6.97
19.48
11.40
17.53
11.62
3.72
4,500
32,234
7,008
13,270
4,102
1,868
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
$ 88,112
100.00% $ 85,068
100.00% $ 83,505
100.00% $ 83,311
100.00% $ 81,644
100.00%
17.65%
12.25
7.03
20.09
8.45
17.65
13.70
3.18
Nonperforming Assets — Nonperforming assets include loans past due over 90 days, nonaccrual loans, other real estate,
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 $20.62 million at December 31, 2015, compared to $42.48 million at December 31, 2014, and
$46.75 million at December 31, 2013. During 2015, interest income on nonaccrual loans and leases would have increased by
approximately $1.03 million compared to $3.03 million in 2014 if these loans and leases had earned interest at their full contractual
rate.
Nonperforming assets at December 31, 2015 decreased from December 31, 2014, mainly due to decreases in nonaccrual loans
and leases. The decrease in nonaccrual loans and leases occurred primarily in the commercial and agricultural, aircraft, and
commercial real estate portfolios.
30 SRCE
2015 Form 10-K
Nonperforming assets at December 31 (Dollars in thousands)
2015
2014
2013
2012
2011
$
122
$
981
$
287
$
442
$
460
Loans past due over 90 days
Nonaccrual loans and leases:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total nonaccrual loans and leases
Total nonperforming loans and leases
Other real estate
Former bank premises held for sale
Repossessions:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Consumer
Total repossessions
Operating leases
4,283
14,284
46
—
4,388
539
1,392
1,822
248
12,718
12,840
736
—
—
10
—
6,916
—
1
6,927
121
38
56
12,473
751
4,807
1,968
225
34,602
35,583
1,109
626
—
25
—
11,765
3,511
188
10,365
1,032
7,064
2,399
383
36,707
36,994
4,539
951
23
145
—
5,123
4,082
—
8
5,156
6
—
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
Total nonperforming assets
$
20,624
$
42,480
$
46,746
$
45,267
$
72,476
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
0.32%
0.96%
1.04%
1.11%
1.84%
0.50%
1.13%
1.29%
1.25%
2.28%
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, 2015 and 2014, we had $1.03 million and $16.18 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, 2015, potential problem loans consisted of one
construction equipment credit relationship. Weakness in this company’s operating performance and payment patterns has caused
us to heighten attention given to this credit.
Foreign Outstandings — Our foreign loan and lease outstandings, all denominated in U.S. dollars were $205.83 million and
$224.51 million as of December 31, 2015 and 2014, respectively. Foreign loans and leases are in aircraft financing. Loan and lease
outstandings to borrowers in Brazil and Mexico were $76.79 million and $116.73 million as of December 31, 2015, respectively,
compared to $105.39 million and $100.76 million as of December 31, 2014, respectively. Outstanding balances to borrowers in
other countries were insignificant.
INVESTMENT PORTFOLIO
The amortized cost of securities at year-end 2015 increased slightly from 2014, following a decrease from year-end 2013 to year-
end 2014. The amortized cost of securities at December 31, 2015 was $781.23 million or 15.06% of total assets, compared to
$776.06 million or 16.07% of total assets at December 31, 2014.
31 SRCE
2015 Form 10-K
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
2015
2014
2013
$
389,457
$
371,878
$
120,441
234,400
34,241
800
1,893
121,510
248,299
31,677
800
1,893
394,558
120,416
273,495
30,828
700
2,166
Total investment securities available-for-sale
$
781,232
$
776,057
$
822,163
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, 2015, 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
$
63,841
325,616
—
—
389,457
14,792
86,967
18,682
—
120,441
5,002
29,239
—
—
34,241
—
800
—
—
800
234,400
1,893
781,232
$
2.00 %
1.45
—
—
1.54
3.86
3.45
3.16
—
3.46
0.87
1.87
—
—
1.72
—
1.95
—
—
1.95
2.39
7.65
2.11%
At December 31, 2015, the residential mortgage-backed securities we held consisted 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 GSEs backing these mortgage-backed securities are rated Aaa or AA+ from the rating agencies.
At December 31, 2015, the vintage of the underlying loans comprising our securities are: 23% in the years 2014 and 2015; 39%
in the years 2012 and 2013; 19% in the years 2010 and 2011; and 19% in years 2009 and prior.
32 SRCE
2015 Form 10-K
DEPOSITS
The following table shows the average daily amounts of deposits and rates paid on such deposits.
(Dollars in thousands)
Noninterest bearing demand
Interest bearing demand
Savings
Time
Total deposits
2015
2014
2013
Amount
Rate
Amount
Rate
Amount
Rate
$
854,070
—% $
762,050
—% $
690,326
—%
1,334,850
733,848
1,038,292
0.12
0.08
0.89
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
$
3,961,060
$
3,777,743
$
3,700,509
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)
2015
Federal Funds
Purchased and
Securities
Repurchase
Agreements
Commercial
Paper
Other
Short-Term
Borrowings
Total
Borrowings
Balance at December 31, 2015
$
130,662
$
7,295
$
95,272
$
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, 2015
2014
Balance at December 31, 2014
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
LIQUIDITY
179,600
145,084
0.16%
0.29%
$
138,843
$
230,075
143,270
0.15 %
0.13 %
$
181,120
$
181,120
121,294
0.11 %
0.17 %
14,135
10,722
0.27%
0.28%
11,778
17,245
13,137
0.26 %
0.27 %
10,814
16,552
9,035
0.22 %
0.24 %
149,783
81,134
0.28%
0.38%
$
95,201
$
155,573
106,970
0.27 %
0.29 %
$
122,197
$
122,197
24,475
0.22 %
0.28 %
233,229
343,518
236,940
0.20%
0.33%
245,822
402,893
263,377
0.21 %
0.20 %
314,131
319,869
154,804
0.14 %
0.22 %
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 2015, average core deposits equaled 74.26% of average total assets, compared to 74.85%
in 2014 and 78.35% in 2013. The effective rate of core deposits in 2015 was 0.23%, compared to 0.28% in 2014 and 0.43% in
2013.
Average noninterest bearing core deposits increased 12.08% in 2015 compared to an increase of 10.39% in 2014. These represented
23.03% of total core deposits in 2015, compared to 21.18% in 2014, and 19.12% in 2013.
33 SRCE
2015 Form 10-K
Purchased Funds — We use purchased funds to supplement core deposits, which include certain certificates of deposit over
$250,000, brokered certificates of deposit, over-night 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 2015, our reliance on purchased funds increased to 9.79% of average total
assets from 9.23% in 2014.
Shareholders’ Equity — Average shareholders’ equity equated to 12.72% of average total assets in 2015, compared to 12.52%
in 2014. Shareholders’ equity was 12.41% of total assets at year-end 2015, compared to 12.72% at year-end 2014. 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 $6.56 million and $9.41 million at December 31, 2015 and 2014, 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 $529 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, 2015, 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,
2015 there was none outstanding, we could borrow approximately $265.00 million in additional funds for a short time from these
banks on a collective basis. As of December 31, 2015, we had $128.04 million outstanding in FHLB advances and could borrow
an additional $356.08 million. We also had $424.68 million available to borrow from the FRB with no amounts outstanding as of
December 31, 2015.
34 SRCE
2015 Form 10-K
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, 2015
December 31, 2014
Basis Point Interest Rate Change
12 Months
24 Months
12 Months
24 Months
Up 200
Up 100
Down 100
4.41%
1.55%
(2.60)%
9.59%
3.95%
(6.57)%
1.12%
(0.23)%
(1.94)%
8.15%
3.50%
(6.11)%
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, 2015 and 2014, 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, 2015, 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
— $
2,998,442
$
— $
— $
— $
— $
2,998,442
Certificates of deposit
Long-term debt
Subordinated notes
Operating leases
Purchase obligations
10
11
12
18
—
510,796
6,296
—
3,492
22,373
404,867
27,268
—
5,730
3,969
220,719
1,547
—
4,665
469
4,362
4,880
58,764
2,117
8
—
1,140,744
17,388
—
—
—
57,379
58,764
16,004
26,819
Total contractual obligations
$
3,541,399
$
441,834
$
227,400
$
70,131
$
17,388
$
4,298,152
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, 2015. 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 2015.
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, 2015 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.
35 SRCE
2015 Form 10-K
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, 2015 and 2014.
Three Months Ended (Dollars in thousands, except per share amounts)
March 31
June 30
September 30
December 31
2015
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Gains on investment securities available-for-sale
Income before income taxes
Net income
Diluted net income per common share*
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*
$
43,632
$
46,214
$
46,821
$
4,196
39,436
357
—
20,769
13,511
0.51
4,549
41,665
811
4
24,144
15,630
0.59
4,612
42,209
992
—
21,281
13,928
0.53
$
43,355
$
44,850
$
45,152
$
4,737
38,618
804
963
21,239
13,632
0.50
4,688
40,162
2,543
—
22,416
14,494
0.54
4,442
40,710
1,206
—
21,243
14,947
0.56
48,017
4,806
43,211
—
—
22,369
14,417
0.55
45,196
4,357
40,839
(820)
—
19,544
14,996
0.57
*The computation of diluted net income per common share gives retrospective recognition to a 10% stock dividend declared July 22, 2015
and issued on August 14, 2015.
Net income was $14.42 million for the fourth quarter of 2015, compared to the $15.00 million of net income reported for the fourth
quarter of 2014. Diluted net income per common share for the fourth quarter of 2015 amounted to $0.55, compared to $0.57 per
common share reported in the fourth quarter of 2014.
The net interest margin was 3.61% for the fourth quarter of 2015 and 2014. Tax-equivalent net interest income was $43.67 million
for the fourth quarter of 2015, up 5.76% from 2014’s fourth quarter.
Our provision for loan and lease losses was zero in the fourth quarter of 2015 compared to a recovery of provision for loan and
lease losses of $(0.82) million in the fourth quarter of 2014. Net recoveries were $0.50 million for the fourth quarter 2015, compared
to net charge-offs of $1.51 million a year ago.
Noninterest income for the fourth quarter of 2015 was $20.90 million, compared to $19.88 million for the fourth quarter of 2014.
Noninterest expense for the fourth quarter of 2015 was $41.74 million and was $41.99 million in the fourth quarter 2014.
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.
36 SRCE
2015 Form 10-K
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
1st Source Corporation
South Bend, Indiana
We have audited the accompanying consolidated statement of financial condition of 1st Source Corporation (“the Company”) as
of December 31, 2015, and the related consolidated statement of income, comprehensive income, shareholders' equity and cash
flows for the year then ended. The Company's management is responsible for these financial statements. Our responsibility is to
express an opinion on these financial statements 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 the financial statements
are free of material misstatement. Our audit included examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating
the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of 1st Source Corporation as of December 31, 2015, and the results of its operations and its cash flows for the year ended
December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
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, 2015, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
(2013) and our report dated February 19, 2016 expressed an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ BKD, LLP
Fort Wayne, Indiana
February 19, 2016
37 SRCE
2015 Form 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of 1st Source Corporation
We have audited the accompanying consolidated statements of financial condition of 1st Source Corporation (“the Company”) as
of December 31, 2014, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash
flows for each of the two 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 the consolidated results of its operations and its cash flows for each of the
two years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 20, 2015
except for Note 13 as to which the date is
February 19, 2016
38 SRCE
2015 Form 10-K
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
1st Source Corporation
South Bend, Indiana
We have audited 1st Source Corporation's internal control over financial reporting as of December 31, 2015, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) (2013). The Company'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 and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included 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, 2015, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) (2013).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements of 1st Source Corporation and our report dated February 19, 2016, expressed an unqualified
opinion thereon.
/s/ BKD, LLP
Fort Wayne, Indiana
February 19, 2016
39 SRCE
2015 Form 10-K
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 $781,232 and $776,057 at December 31, 2015, and December 31, 2014, respectively)
Other investments
Trading account securities
Mortgages held for sale
Loans and leases, net of unearned discount:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
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 28,205,674 shares at December 31, 2015 and 28,206,076 shares at
December 31, 2014*
Retained earnings
Cost of common stock in treasury (2,178,090 shares at December 31, 2015 and 1,957,386 shares at December 31, 2014)*
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
2015
2014
$
65,171
$
14,550
791,727
21,973
—
9,825
744,749
425,236
278,254
778,012
455,565
700,268
464,129
148,479
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
3,994,692
3,688,574
(88,112)
(85,068)
3,906,580
3,603,506
110,371
53,191
84,676
129,852
74,143
50,328
85,371
124,692
$
5,187,916
$
4,829,958
$
902,364
$
796,241
3,236,822
4,139,186
3,006,619
3,802,860
130,662
102,567
233,229
57,379
58,764
55,305
138,843
106,979
245,822
56,232
58,764
51,807
4,543,863
4,215,485
—
—
436,538
251,812
(50,852)
6,555
644,053
346,535
302,242
(43,711)
9,407
614,473
$
5,187,916
$
4,829,958
*December 31, 2014 share data gives retrospective recognition to a 10% stock dividend declared on July 22, 2015 and issued on August 14, 2015.
The accompanying notes are a part of the consolidated financial statements.
40 SRCE
2015 Form 10-K
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (Dollars in thousands, except per share amounts)
2015
2014
2013
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 communication
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*
$
168,766
$
161,215
$
161,137
11,929
2,992
997
13,054
3,269
1,016
14,414
3,094
940
184,684
178,554
179,585
11,489
484
4,220
1,970
18,163
166,521
2,160
164,361
19,126
9,313
10,217
4,570
5,465
22,302
4
12,319
83,316
86,133
9,768
18,348
18,280
4,682
6,011
3,412
4,837
667
6,976
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
159,114
150,040
149,314
88,563
31,077
57,486
2.17
2.17
$
$
$
84,443
26,374
58,069
2.17
2.17
$
$
$
83,943
28,985
54,958
2.03
2.03
$
$
$
*The computation of basic and diluted net income per common share gives retrospective recognition to a 10% stock dividend declared on July 22, 2015 and issued
on August 14, 2015.
The accompanying notes are a part of the consolidated financial statements.
41 SRCE
2015 Form 10-K
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31 (Dollars in thousands)
2015
2014
2013
Net income
Other comprehensive (loss) income:
Change in unrealized (depreciation) appreciation of available-for-sale securities
Reclassification adjustment for realized (gains) losses included in net income
Income tax effect
Other comprehensive (loss) income, net of tax
Comprehensive income
$
57,486
$
58,069
$
54,958
(4,562)
(4)
1,714
(2,852)
5,488
(963)
(1,699)
2,826
$
54,634
$
60,895
$
(20,915)
168
7,789
(12,958)
42,000
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, 2013
$
— $
346,535
$
223,715
$
(31,134) $
19,539
$
558,655
Net income
Other comprehensive loss
Issuance of 186,936 common shares under
stock based compensation awards, including
related tax effects*
Cost of 99,064 shares of common stock
acquired for treasury*
Common stock dividend ($0.618 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 91,675 common shares under stock
based compensation awards, including
related tax effects*
Cost of 597,747 shares of common stock
acquired for treasury*
Common stock dividend ($0.645 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
Net income
Other comprehensive loss
Issuance of 118,281 common shares under
stock based compensation awards,
including related tax effects*
Cost of 338,985 shares of common stock
acquired for treasury*
Common stock dividend ($0.671 per share)*
10% common stock dividend ($13 cash paid
in lieu of fractional shares)
—
—
—
—
—
—
—
—
—
—
—
57,486
—
(245)
—
(17,655)
90,003
(90,016)
—
—
2,829
(9,970)
—
—
—
(2,852)
57,486
(2,852)
—
—
—
—
2,584
(9,970)
(17,655)
(13)
Balance at December 31, 2015
$
— $
436,538
$
251,812
$
(50,852) $
6,555
$
644,053
*Share and per share data gives retrospective recognition to a 10% stock dividend declared on July 22, 2015 and issued on August 14, 2015.
The accompanying notes are a part of the consolidated financial statements.
42 SRCE
2015 Form 10-K
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (Dollars in thousands)
2015
2014
2013
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
Stock-based compensation
Amortization of investment securities premiums and accretion of discounts, net
Amortization of mortgage servicing rights
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
Net gain on sale of other real estate and repossessions
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 available-for-sale
Proceeds from maturities and paydowns of investment securities available-for-sale
Purchases of investment securities available-for-sale
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
Proceeds from sales of other real estate and repossessions
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 long-term debt
Stock issued under stock purchase plans
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 repossessions
Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan
Stock dividend paid on common stock
Cash paid for:
Interest
Income taxes
$
57,486
$
58,069
$
54,958
2,160
4,780
18,280
3,843
4,652
1,424
1,620
(4)
(113,029)
120,138
(3,330)
(814)
205
(549)
798
(7,807)
8,010
3,168
101,031
1,299
136,649
3,733
4,748
13,893
3,179
4,351
1,278
4,341
(963)
(121,440)
117,447
(3,532)
(1,624)
(13)
(603)
(917)
(9,278)
(2,481)
2,733
72,921
772
4,727
13,055
2,897
3,499
1,571
(1,947)
168
(102,195)
110,390
(3,395)
(499)
(46)
160
(1,883)
7,846
(3,770)
738
87,046
1,236
190,323
48,888
175,875
(147,771)
(148,841)
(201,029)
(1,172)
1,962
(315,938)
(54,508)
(9,498)
6,941
1,599
16,889
(165,463)
(27,069)
(8,489)
10,418
209
25,054
(255,345)
(21,849)
(6,508)
3,307
(382,036)
(129,397)
(231,398)
173,508
162,818
(12,593)
—
(1,250)
149
(9,970)
(18,126)
294,536
13,531
66,190
102,130
47,080
(68,309)
7,161
(11,660)
197
(16,342)
(17,643)
42,614
(13,862)
80,052
$
$
79,721
$
66,190
$
8,742
$
7,154
$
500
90,003
—
—
$
17,364
$
19,143
$
30,429
29,211
166,683
(137,380)
144,943
6,502
(21,119)
168
(2,273)
(17,054)
140,470
(3,882)
83,934
80,052
7,942
2,801
—
24,651
33,831
The accompanying notes are a part of the consolidated financial statements.
43 SRCE
2015 Form 10-K
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,
2015 and 2014, 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, 2015 and 2014, 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.
44 SRCE
2015 Form 10-K
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, 2015 and 2014, residential real estate portfolio loans included
$5.27 million and $5.20 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.
45 SRCE
2015 Form 10-K
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 homogenous 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 homogenous 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.
46 SRCE
2015 Form 10-K
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. 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, 2015 and 2014, other real estate had carrying values of $0.74 million and $1.74 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 $6.93 million and $5.16 million, as of December 31, 2015 and 2014, 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 twenty-five
years. The Company performed the required annual impairment test of goodwill during the fourth quarter of 2015 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, 2015 and 2014 were $2.38 million and $2.78 million, respectively.
47 SRCE
2015 Form 10-K
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.
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.
48 SRCE
2015 Form 10-K
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
Recognition and Measurement of Financial Instruments: In January 2016, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2016-01 “Financial Instruments - Overall (Subtopic 825-10) - Recognition and
Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 is intended to improve the recognition and measurement
of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net
income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form
of financial asset on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement for
public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be
disclosed for financial instruments measured and amortized at cost on the balance sheet; and requiring a reporting organization
to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from
a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance
with the fair value option for financial instruments. ASU 2016-01 is effective for annual periods and interim periods within those
annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment
to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily
determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as
of the date of adoption. The Company is assessing the impact of ASU 2016-01 on its accounting and disclosures.
Short Duration Contracts: In May 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-09 “Financial Services
- Insurance (Topic 944) - Disclosures about Short Duration Contracts.” ASU 2015-09 includes amendments that require insurance
entities to disclose for annual reporting periods information about the liability for unpaid claims and claim adjustment expenses
as well as significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim
adjustment expenses. In addition, the amendments require a roll-forward of the liability for unpaid claims and claim adjustment
expenses on an annual and interim basis. The amendments are effective for annual periods beginning after December 15, 2015,
and interim periods within annual periods beginning after December 15, 2016 and should be applied retrospectively. Early adoption
is permitted. The Company is assessing the impact of ASU 2015-09 on its accounting and disclosures.
49 SRCE
2015 Form 10-K
Consolidations: In February 2015, the FASB issued ASU No. 2015-02 “Consolidation (Topic 810) - Amendments to the
Consolidation Analysis.” ASU 2015-02 includes amendments that are intended to improve targeted areas of consolidation for
legal entities including reducing the number of consolidation models from four to two and simplifying the FASB Accounting
Standards Codification. ASU 2015-02 is effective for annual and interim periods within those annual periods, beginning after
December 15, 2015. The amendments may be applied retrospectively in previously issued financial statements for one or more
years with a cumulative effect adjustment to retained earnings as of the beginning of the first year restated. Early adoption is
permitted, including adoption in an interim period. The Company adopted ASU 2015-02 on January 1, 2016 and it did not have
an impact on its accounting and disclosures.
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. On July 9, 2015, the FASB approved amendments deferring the effective date by one year.
ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, 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 permitted but
not before the original public entity effective date, i.e., annual periods beginning after December 15, 2016. The Company continues
to assess the impact of ASU 2014-09 on its accounting and disclosures.
Note 3 — Investment Securities
The following table shows investment securities available-for-sale.
(Dollars in thousands)
December 31, 2015
Amortized Cost
Gross
Unrealized Gains
Gross
Unrealized Losses
Fair Value
U.S. Treasury and Federal agencies securities
$
389,457
$
1,718
$
(1,506) $
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, 2014
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
$
$
120,441
234,400
34,241
800
779,339
1,893
781,232
371,878
121,510
248,299
31,677
800
774,164
1,893
$
$
2,692
3,430
199
10
8,049
5,906
13,955
3,593
3,392
5,490
281
11
12,767
5,285
$
$
(143)
(1,533)
(57)
(1)
(3,240)
(220)
(3,460) $
(1,968) $
(214)
(781)
(26)
—
(2,989)
(2)
Total investment securities available-for-sale
$
776,057
$
18,052
$
(2,991) $
389,669
122,990
236,297
34,383
809
784,148
7,579
791,727
373,503
124,688
253,008
31,932
811
783,942
7,176
791,118
At December 31, 2015, 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).
50 SRCE
2015 Form 10-K
The following table shows the contractual maturities of investments in debt securities available-for-sale at December 31, 2015.
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
$
83,635
$
442,622
18,682
—
234,400
$
779,339
$
84,161
444,585
19,105
—
236,297
784,148
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)
2015
2014
2013
$
$
4
—
4
$
$
963
—
963
$
$
903
(1,071)
(168)
The following table summarizes gross unrealized losses and fair value by investment category and age.
(Dollars in thousands)
December 31, 2015
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
$ 151,581
$
(928) $
43,372
$
(578) $ 194,953
$
(1,506)
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
17,040
78,731
9,340
99
256,791
427
Total temporarily impaired available-for-sale securities
$ 257,218
December 31, 2014
U.S. Treasury and Federal agencies securities
$
54,944
$
$
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
—
(79)
(777)
(57)
(1)
(1,842)
(218)
3,795
20,592
—
—
(64)
(756)
—
—
20,835
99,323
9,340
99
67,759
(1,398)
324,550
3
(2)
430
$
$
(2,060) $
67,762
(148) $ 115,195
(112)
(62)
(26)
—
8,333
32,781
—
—
$
$
(1,400) $ 324,980
(1,820) $ 170,139
(102)
(719)
—
—
25,138
54,535
3,072
—
(348)
156,309
(2,641)
252,884
—
3
(2)
3
(143)
(1,533)
(57)
(1)
(3,240)
(220)
(3,460)
(1,968)
(214)
(781)
(26)
—
(2,989)
(2)
Total temporarily impaired available-for-sale securities
$
96,575
$
(348) $ 156,312
$
(2,643) $ 252,887
$
(2,991)
There were no OTTI write-downs in 2015, 2014 or 2013.
At December 31, 2015, 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, 2015 and 2014, investment securities with carrying values of $233.14 million and $231.50 million, respectively,
were pledged as collateral for security repurchase agreements and for other purposes.
51 SRCE
2015 Form 10-K
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, 2015
and 2014, and totaled $3.99 billion and $3.69 billion, respectively. At December 31, 2015 and 2014, net deferred loan and lease
costs were $3.96 million and $4.00 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, 2015 and 2014.
(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
2015
2014
$
206,426
$
234,772
15,756
222,182
(32,499)
13,458
248,230
(37,356)
$
189,683
$
210,874
At December 31, 2015, the direct financing minimum future lease payments receivable for each of the years 2016 through 2020
were $44.53 million, $41.61 million, $36.23 million, $29.36 million, and $25.19 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 $33.36 million and $27.93 million at December 31, 2015 and 2014, respectively.
During 2015, $14.34 million of new loans and other additions were made and repayments and other reductions totaled $8.91
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).
52 SRCE
2015 Form 10-K
The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.
(Dollars in thousands)
December 31, 2015
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Total
December 31, 2014
Commercial and agricultural
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
$
710,030
$
34,719
$
$
$
413,836
275,367
750,264
448,683
680,304
3,278,484
683,169
380,425
243,798
691,018
393,965
592,787
$
$
11,400
2,887
27,748
6,882
19,964
103,600
27,589
17,477
3,355
36,647
5,975
23,800
$
$
744,749
425,236
278,254
778,012
455,565
700,268
3,382,084
710,758
397,902
247,153
727,665
399,940
616,587
$
2,985,162
$
114,843
$
3,100,005
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, 2015
Residential real estate
Consumer
Total
December 31, 2014
Residential real estate
Consumer
Total
Performing
Nonperforming
Total
$
$
$
$
462,236
148,180
610,416
442,918
142,476
585,394
$
$
$
$
1,893
299
2,192
2,841
334
3,175
$
$
$
$
464,129
148,479
612,608
445,759
142,810
588,569
53 SRCE
2015 Form 10-K
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, 2015
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
$
740,335
$
52
$
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total
December 31, 2014
424,997
278,254
764,074
454,993
698,514
460,771
147,419
$ 3,969,357
Commercial and agricultural
$
696,351
170
—
9,442
33
362
1,038
552
$
$
11,649
$
— $
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer
Total
397,815
247,097
699,054
396,821
611,780
441,508
141,577
48
—
541
999
—
1,099
676
79
23
—
108
—
—
427
209
846
123
1
—
15,597
1,369
—
311
223
$
$
$
— $
740,466
$
4,283
$
—
—
—
—
—
71
51
425,190
278,254
773,624
455,026
698,876
462,307
148,231
46
—
4,388
539
1,392
1,822
248
122
$
3,981,974
$
$
12,718
14,284
$
$
38
56
12,473
751
4,807
1,968
225
696,474
397,864
247,097
715,192
399,189
611,780
443,791
142,585
— $
—
—
—
—
—
873
109
982
744,749
425,236
278,254
778,012
455,565
700,268
464,129
148,479
3,994,692
710,758
397,902
247,153
727,665
399,940
616,587
445,759
142,810
$ 3,632,003
$
3,363
$
17,624
$
$
3,653,972
$
34,602
$
3,688,574
Interest income for the years ended December 31, 2015, 2014, and 2013, would have increased by approximately $1.03 million,
$3.03 million, and $2.93 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.
54 SRCE
2015 Form 10-K
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, 2015
With no related reserve recorded:
Commercial and agricultural
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
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, 2014
With no related reserve recorded:
Commercial and agricultural
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
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
$
1,016
$
1,016
$
—
—
4,384
539
8,494
—
—
—
—
4,384
539
8,494
—
—
14,433
14,433
2,884
2,884
—
—
—
—
—
366
—
3,250
—
—
—
—
—
368
—
3,252
$
$
17,683
$
17,685
$
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
$
—
—
—
—
—
—
—
—
—
649
—
—
—
—
—
148
—
797
797
—
—
—
—
—
—
—
—
—
5
—
—
—
—
80
156
—
241
241
55 SRCE
2015 Form 10-K
The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated
by class, for years ending December 31, 2015, 2014 and 2013.
(Dollars in thousands)
2015
2014
2013
Average
Recorded
Investment
Interest
Income
Average
Recorded
Investment
Interest
Income
Average
Recorded
Investment
Interest
Income
Commercial and agricultural
$
5,362
$
Auto and light truck
Medium and heavy duty truck
Aircraft financing
Construction equipment financing
Commercial real estate
Residential real estate
Consumer loans
Total
—
—
7,285
695
10,126
370
—
32
—
—
6
—
518
16
—
$
16,325
$
407
—
4,088
938
13,162
376
—
48
—
—
28
—
588
16
—
$
10,077
$
488
431
9,254
2,799
17,655
32
—
$
23,838
$
572
$
35,296
$
680
$
40,736
$
143
—
—
79
5
610
—
—
837
The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during 2015, 2014 and
2013, 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 no modifications during 2015, three modifications during 2014, and two modifications during
2013 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
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
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
2015
2014
2013
Number of
Modifications
Recorded
Investment
Number of
Modifications
Recorded
Investment
Number of
Modifications
Recorded
Investment
2
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
2
$
218
—
—
—
—
—
—
—
218
—
—
—
—
—
—
—
—
—
$
218
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
$
There were no performing TDRs which had payment defaults within the twelve months following modification during the years
ended December 31, 2015 and 2014 and one commercial and agricultural loan during 2013 with a recorded investment of $0.75
million at December 31, 2013.
There were no nonperforming TDRs which had payment defaults within the twelve months following modification during the
year ended December 31, 2015, one commercial and agricultural loan during 2014 with a recorded investment of $0.26 million
at December 31, 2014 and one commercial real estate loan during 2013 with a recorded investment of zero at December 31, 2013.
56 SRCE
2015 Form 10-K
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.
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
Note 5 — Reserve for Loan and Lease Losses
2015
2014
$
$
7,437
1,926
9,363
$
$
9,118
14,507
23,625
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)
2015
Balance, beginning of year
Charge-offs
Recoveries
Net charge-offs (recoveries)
Provision (recovery of provision)
Balance, end of year
2014
Balance, beginning of year
Charge-offs
Recoveries
Net charge-offs (recoveries)
Provision (recovery of provision)
Balance, end of year
2013
Balance, beginning of year
Charge-offs
Recoveries
Net charge-offs (recoveries)
Provision (recovery of provision)
Balance, end of year
Commercial and
agricultural
Auto and light
truck
Medium and
heavy duty
truck
Aircraft
financing
Construction
equipment
financing
Commercial
real estate
Residential
real estate
Consumer
Total
$
$
$
$
$
$
11,760
$
10,326
$
4,500
$
32,234
$
7,008
$
13,270
$
4,102
$
1,868
$
85,068
3,489
851
2,638
6,334
24
380
(356)
(1,413)
—
28
(28)
171
244
802
(558)
(419)
—
434
(434)
150
—
2,807
(2,807)
(2,315)
141
11
130
(590)
812
281
531
242
4,710
5,594
(884)
2,160
15,456
$
9,269
$
4,699
$
32,373
$
7,592
$
13,762
$
3,382
$
1,579
$
88,112
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
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
11,760
$
10,326
$
4,500
$
32,234
$
7,008
$
13,270
$
4,102
$
1,868
$
85,068
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
$
5,972
$
12,406
$
4,093
$
1,613
$
83,505
57 SRCE
2015 Form 10-K
The following table shows the reserve for loan and lease losses and recorded investment in loans and leases, segregated by class,
separated by individually and collectively evaluated for impairment as of December 31, 2015 and 2014.
(Dollars in thousands)
December 31, 2015
Reserve for loan and lease losses
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
Commercial and
agricultural
Auto and light
truck
Medium and
heavy duty
truck
Aircraft
financing
Construction
equipment
financing
Commercial
real estate
Residential
real estate
Consumer
Total
$
$
$
649
$
— $
— $
— $
— $
— $
148
$
— $
797
14,807
9,269
4,699
32,373
7,592
13,762
3,234
1,579
87,315
15,456
$
9,269
$
4,699
$
32,373
$
7,592
$
13,762
$
3,382
$
1,579
$
88,112
3,900
$
— $
— $
4,384
$
539
$
8,494
$
366
$
— $
17,683
740,849
425,236
278,254
773,628
455,026
691,774
463,763
148,479
3,977,009
Total recorded investment in loans
$
744,749
$
425,236
$
278,254
$
778,012
$
455,565
$
700,268
$
464,129
$
148,479
$ 3,994,692
December 31, 2014
Reserve for loan and lease losses
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
$
$
$
$
Note 6 — Operating Leases
5
$
— $
— $
— $
— $
80
$
156
$
— $
241
11,755
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
Operating lease equipment at December 31, 2015 and 2014 was $110.37 million and $74.14 million, respectively, net of
accumulated depreciation of $33.63 million and $29.62 million, respectively.
The minimum future lease rental payments due from clients on operating lease equipment at December 31, 2015, totaled $81.65
million, of which $22.08 million is due in 2016, $19.35 million in 2017, $16.02 million in 2018, $11.52 million in 2019, $11.01
million in 2020, and $1.67 million thereafter. Depreciation expense related to operating lease equipment for the years ended
December 31, 2015, 2014 and 2013 was $18.28 million, $13.89 million and $13.06 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
2015
2014
$
16,105
$
53,917
38,942
108,964
(55,773)
15,785
51,412
36,737
103,934
(53,606)
$
53,191
$
50,328
Depreciation and amortization of properties and equipment totaled $4.78 million in 2015, $4.75 million in 2014, and $4.73 million
in 2013.
During 2015 and 2014, the Company recorded long-lived asset impairment charges totaling $150,000 and $275,000, respectively.
The impairment charges were recorded as a result of appraisals on buildings and were 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 $798.51 million at December 31, 2015,
compared to $825.17 million at December 31, 2014, and $839.26 million at December 31, 2013.
58 SRCE
2015 Form 10-K
Amortization expense on MSRs is expected to total $0.75 million, $0.63 million, $0.53 million, $0.45 million, and $0.38 million
in 2016, 2017, 2018, 2019 and 2020, 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
2015
2014
$
4,733
$
1,299
(1,424)
—
4,608
—
—
— $
4,608
7,246
$
$
$
$
$
4,844
1,167
(1,278)
—
4,733
—
—
—
4,733
6,979
At December 31, 2015, the fair value of MSRs exceeded the carrying value reported in the Statements of Financial Condition by
$2.64 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 $12.22 million and $14.74 million at December 31, 2015 and December 31, 2014,
respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were $2.84 million, $3.01 million,
and $3.21 million for 2015, 2014, and 2013, respectively. Mortgage loan contractual servicing fees are included in Mortgage
Banking Income on the Statements of Income.
Note 9 — Intangible Assets and Goodwill
At December 31, 2015, intangible assets consisted of goodwill of $83.68 million and other intangible assets of $1.00 million,
which was net of accumulated amortization of $8.57 million. 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. Intangible
asset amortization was $0.69 million, $0.97 million, and $1.16 million for 2015, 2014, and 2013, respectively. Amortization on
other intangible assets is expected to total $0.57 million, $0.36 million, $0.06 million, and $0.01 million in 2016, 2017, 2018, and
2019, 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
2015
2014
$
$
$
$
9,566
(8,569)
997
$
$
— $
—
— $
9,566
(7,888)
1,678
254
(241)
13
59 SRCE
2015 Form 10-K
Note 10 — Deposits
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, 2015 and 2014 was $422.38 million and $295.42 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, 2015, by time remaining until maturity.
(Dollars in thousands)
Under 3 months
4 – 6 months
7 – 12 months
Over 12 months
Total
$
$
66,085
68,413
64,224
223,653
422,375
The following table shows scheduled maturities of time deposits, including both private and public funds, at December 31, 2015.
(Dollars in thousands)
2016
2017
2018
2019
2020
Thereafter
Total
$
510,796
225,880
178,987
145,784
74,935
4,362
$
1,140,744
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, 2015 and 2014.
(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
2015
2014
$
$
38,044
$
17,388
1,947
57,379
$
38,582
15,678
1,972
56,232
Annual maturities of long-term debt outstanding at December 31, 2015, for the next five years and thereafter beginning in 2016,
are as follows (in thousands): $6,296; $26,351; $917; $826; $721; and $22,268.
At December 31, 2015, 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 $47.56 million of certain real estate loans.
Mandatorily redeemable securities as of December 31, 2015 and 2014, of $17.39 million and $15.68 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 2015, 2014, and 2013 was $1.37 million, $1.47 million, and $1.00 million, respectively.
The following table shows the details of short-term borrowings as of December 31, 2015 and 2014.
(Dollars in thousands)
Federal funds purchased
Security repurchase agreements
Commercial paper
Other short-term borrowings
Total short-term borrowings
2015
2014
Amount
Weighted Average
Rate
Amount
Weighted Average
Rate
$
$
—
130,662
7,295
95,272
233,229
—% $
0.29
0.28
0.38
$
10,500
128,343
11,778
95,201
245,822
0.50%
0.10
0.27
0.29
60 SRCE
2015 Form 10-K
Note 12 — Subordinated Notes
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, 2015.
(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 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.
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, 2015, 2014 and 2013.
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*
2015
2014
2013
17,582
$
17,091
$
39,336
56,918
568
40,249
57,340
729
57,486
$
58,069
$
16,563
37,673
54,236
722
54,958
26,173,351
26,434,769
26,779,086
—
—
644
26,173,351
26,434,769
26,779,730
2.17
2.17
$
$
2.17
2.17
$
$
2.03
2.03
$
$
$
$
*Outstanding shares and per common share figures have been adjusted for 10% stock dividend declared July 22, 2015 and issued on August 14, 2015.
61 SRCE
2015 Form 10-K
Note 14 — Accumulated Other Comprehensive Income
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 included in net income
Tax effect
Net of tax
Note 15 — Employee Benefit Plans
2015
2014
Affected Line Item in the Statements of Income
$
$
4
4
(2)
2
$
$
963
963
Gains on investment securities available-for-sale
Income before income taxes
(361)
Income tax expense
602
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, 2015 and 2014, there were 1,356,715 and 1,308,041 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, 2015, 2014, and 2013, amounted to $4.57 million, $4.32 million, and
$4.38 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.
The Company’s net periodic post retirement benefit (recovery) cost recognized in the Statements of Income for the years ended
December 31, 2015, 2014 and 2013, amounted to $(0.02) million, $(0.05) million, and $(0.04) million, respectively. The accrued
post retirement benefit cost was not material at December 31, 2015, 2014, and 2013.
Note 16 — Stock Based Compensation
As of December 31, 2015, 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 Strategic Deployment
Incentive Plan (SDP) - formerly known as the 1998 Performance Compensation Plan; 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, 2015. 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 $4.37 million during 2015, $3.66 million
in 2014, and $1.97 million in 2013.
62 SRCE
2015 Form 10-K
The following table shows the combined summary of activity regarding active stock option and stock award plans.
Balance, January 1, 2013
Shares authorized - 2013 EIP
Shares authorized - Strategic Deployment Incentive Plan
Granted
Stock options exercised
Stock awards vested
Forfeited
Canceled
Balance, December 31, 2013
Shares authorized - 2014 EIP
Granted
Stock awards vested
Forfeited
Canceled
Balance, December 31, 2014
Shares authorized - 2015 EIP
Granted
Stock awards vested
Forfeited
Canceled
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
2,525,382
476,526
$
18.31
8,250
$
10.95
68,167
2,211
(98,197)
—
—
6,206
—
2,503,769
76,230
(123,154)
—
3,363
—
2,460,208
70,202
(81,591)
—
1,980
—
—
—
98,197
—
(94,903)
(11,830)
—
467,990
—
123,154
(144,941)
(6,168)
—
440,035
—
81,591
(159,381)
(3,384)
—
—
—
22.01
—
17.83
18.83
—
19.17
—
23.56
18.57
18.97
—
20.60
—
24.44
19.51
23.85
—
21.93
—
—
—
—
—
—
(8,250)
10.95
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance, December 31, 2015
2,450,799
358,861
$
*Share and per share data gives retrospective recognition to a 10% stock dividend declared on July 22, 2015 and issued on August 14, 2015.
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 2,200,000 shares available for issuance
under the 2011 Plan.
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 stock options exercised during 2015 and 2014 and 8,250 stock options exercised during 2013. 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 2015, 2014 or 2013.
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.
63 SRCE
2015 Form 10-K
Stock Award Plans — Incentive stock award plans include the EIP, the SDP and the RSAP. The EIP is administered by the
Committee. Awards under the EIP and SDP 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, SDP and RSAP totaled $3.84 million in 2015, $3.18 million in 2014, and
$2.90 million in 2013. The total income tax benefit recognized in the accompanying Statements of Income related to stock-based
compensation was $1.45 million in 2015, $1.20 million in 2014, and $1.10 million in 2013. Unrecognized stock-based compensation
expense related to non-vested stock awards (EIP/SDP/RSAP) was $5.04 million at December 31, 2015. At such date, the weighted-
average period over which this unrecognized expense was expected to be recognized was 3.21 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 premium/
(discount) to the actual market closing price on the offering date for the 2015, 2014, and 2013 offerings were $28.80 (0.23%),
$27.63 (-0.88%), and $22.11 (-1.82%), 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 1, 2015 and runs through May 31, 2017, with $172,380 in stock value to be purchased at
$28.80 per share.
All share and per share data in the preceding sections give retrospective recognition to a 10% stock dividend declared July 22,
2015 and issued on August 14, 2015.
Note 17 — Income Taxes
The following table shows the composition of income tax expense.
Year Ended December 31 (Dollars in thousands)
2015
2014
2013
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total provision
$
26,092
$
20,999
$
3,365
29,457
1,577
43
1,620
1,034
22,033
4,022
319
4,341
$
31,077
$
26,374
$
28,634
2,298
30,932
(2,337)
390
(1,947)
28,985
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.
2015
2014
2013
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
64 SRCE
Percent of
Pretax
Income
Amount
Percent of
Pretax
Income
Percent of
Pretax
Income
Amount
35.0% $
29,555
35.0% $
29,380
35.0%
(1.3)
2.5
—
(1.1)
(1,236)
2,300
(3,300)
(945)
(1.5)
2.7
(3.9)
(1.1)
(1,219)
1,747
—
(923)
(1.5)
2.1
—
(1.1)
34.5%
$
31,077
35.1% $
26,374
31.2% $
28,985
Amount
$
30,997
(1,152)
2,215
—
(983)
2015 Form 10-K
The tax expense (benefit) related to gains (losses) on investment securities available-for-sale for the years 2015, 2014, and 2013
was approximately $2,000, $361,000, and $(63,000), respectively.
The following table shows the composition of deferred tax assets and liabilities as of December 31, 2015 and 2014.
(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
2015
2014
$
34,410
$
33,088
3,816
905
39,131
3,346
1,079
37,513
27,274
24,506
3,940
5,738
1,630
1,454
1,055
312
41,403
$
(2,272) $
5,654
5,160
1,644
1,437
1,035
443
39,879
(2,366)
No valuation allowance for deferred tax assets was recorded at December 31, 2015 and 2014 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
2015
2014
2013
$
— $
4,611
$
380
—
—
—
—
66
592
(553)
(1,650)
(3,066)
$
380
$
— $
4,068
484
1,118
—
(1,059)
—
4,611
The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was $0.25 million at December 31,
2015, zero at December 31, 2014, and $2.62 million at December 31, 2013. Interest and penalties are recognized through the
income tax provision. For 2015, the Company recognized zero interest, net of tax effect, and penalties, and for the years 2014 and
2013, the Company recognized approximately $(0.69) million and $0.14 million in interest, net of tax effect, and penalties,
respectively. There were no accrued interest and penalties at December 31, 2015 and December 31, 2014, respectively and interest
and penalties of approximately $0.69 million were accrued at 2013.
Tax years that remain open and subject to audit include the federal 2012-2015 years and the Indiana 2013-2015 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.
65 SRCE
2015 Form 10-K
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 $0.98 million and $1.72 million as of December 31, 2015 and 2014, 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, $3.49 million in 2016, $3.07
million in 2017, $2.66 million in 2018, $2.45 million in 2019, $2.22 million in 2020, and $2.11 million, thereafter. As of
December 31, 2015, future minimum rentals to be received under noncancellable subleases totaled $1.92 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
2015
2014
2013
$
$
3,889
(914)
2,975
$
$
3,799
(878)
2,921
$
$
3,875
(910)
2,965
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.
Financial instruments, whose contract amounts represent credit risk as of December 31, were as follows:
(Dollars in thousands)
Amounts of commitments:
Loan commitments to extend credit
Standby letters of credit
2015
2014
$
$
829,509
37,984
$
$
733,870
26,939
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 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.
66 SRCE
2015 Form 10-K
The Company has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and
liabilities are recorded at fair value on the Statement of Financial Condition and do not take into account the effects of master
netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty
on a net basis, and to offset net derivative positions with related collateral, where applicable. 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, 2015 and 2014.
(Dollars in thousands)
Interest rate swap contracts
Loan commitments
Forward contracts - mortgage loan
Total - December 31, 2015
Interest rate swap contracts
Loan commitments
Forward contracts - mortgage loan
Total - December 31, 2014
Asset derivatives
Liability derivatives
Notional or
contractual
amount
Statement of Financial
Condition
classification
Fair value
Statement of Financial
Condition
classification
Fair value
$
$
$
$
554,083 Other assets
12,440 Mortgages held for sale
16,416 Mortgages held for sale
582,939
459,508 Other assets
11,109 Mortgages held for sale
19,800 N/A
490,417
$
$
$
$
9,859 Other liabilities
47 N/A
13 N/A
9,919
9,125 Other liabilities
2 N/A
— Mortgages held for sale
9,127
$
$
$
$
10,044
—
—
10,044
9,302
—
142
9,444
The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments at
December 31, 2015, 2014 and 2013.
(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)
2015
2014
2013
(8) $
16
$
1,045
45
155
—
357
(10)
(263)
79
1,237
$
179
$
124
716
(208)
154
(7)
779
$
$
The following table shows the offsetting of financial assets and derivative assets at December 31, 2015 and 2014.
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
$
$
10,016
$
157
$
9,859
$
— $
— $
9,859
9,492
$
367
$
9,125
$
— $
— $
9,125
(Dollars in thousands)
December 31, 2015
Interest rate swaps
December 31, 2014
Interest rate swaps
67 SRCE
2015 Form 10-K
The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2015 and 2014.
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
$
$
$
$
10,201
130,662
140,863
9,669
128,343
138,012
$
$
$
$
157
—
157
367
—
367
$
$
$
$
10,044
130,662
140,706
9,302
128,343
137,645
$
$
$
$
— $
130,662
130,662
$
— $
128,343
128,343
$
9,833
—
9,833
9,018
—
9,018
$
$
$
$
211
—
211
284
—
284
(Dollars in thousands)
December 31, 2015
Interest rate swaps
Repurchase agreements
Total
December 31, 2014
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. At December 31, 2015 and December 31, 2014,
repurchase agreements had a remaining contractual maturity of $128.88 million and $107.63 million in overnight and $1.78 million
and $20.71 million in up to 30 days, respectively and were collateralized by U.S. Treasury and Federal agencies securities.
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, Tier 1 capital, and common equity Tier 1 capital to risk-weighted assets and of Tier 1 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 1 risk-based, common equity Tier 1 risk-based, and Tier 1 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.
68 SRCE
2015 Form 10-K
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, 2015 and 2014.
(Dollars in thousands)
2015
Total Capital (to Risk-Weighted Assets):
1st Source Corporation
1st Source Bank
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation
1st Source Bank
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation
1st Source Bank
Tier 1 Capital (to Average Assets):
1st Source Corporation
1st Source Bank
2014
Total Capital (to Risk-Weighted Assets):
1st Source Corporation
1st Source Bank
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation
1st Source Bank
Tier 1 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
$
676,007
14.97% $
361,267
8.00% $
451,584
636,592
14.13%
360,402
8.00%
450,502
616,577
579,833
559,577
579,833
616,577
579,833
13.65%
12.87%
270,951
270,301
12.39%
12.87%
203,213
202,726
12.21%
11.50%
201,921
201,701
6.00%
6.00%
4.50%
4.50%
4.00%
4.00%
361,267
360,402
293,530
292,826
252,401
252,126
$
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 %
12.16 %
11.57 %
158,352
157,943
189,718
189,412
4.00 %
4.00 %
4.00 %
4.00 %
237,528
236,914
237,147
236,765
10.00%
10.00%
8.00%
8.00%
6.50%
6.50%
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, 2015
and 2014.
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, 2015, 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, 2015 and 2014, all mortgages held for sale are carried at fair value.
69 SRCE
2015 Form 10-K
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, 2015
and 2014.
(Dollars in thousands)
December 31, 2015
Mortgages held for sale reported at fair value:
Total Loans
December 31, 2014
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
$
$
9,825
$
9,691
$
134 (1)
13,604
$
13,526
$
78 (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.
70 SRCE
2015 Form 10-K
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, 2015
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
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, 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
Level 1
Level 2
Level 3
Total
$
19,879
$
369,790
$
— $
—
—
—
—
19,879
7,579
27,458
—
—
118,462
236,297
34,383
—
758,932
—
758,932
9,825
9,859
4,528
—
—
809
5,337
—
5,337
—
—
389,669
122,990
236,297
34,383
809
784,148
7,579
791,727
9,825
9,859
$
$
$
27,458
$
778,616
$
5,337
$
811,411
— $
— $
10,044
10,044
$
$
— $
— $
10,044
10,044
$
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
71 SRCE
2015 Form 10-K
The following table shows the changes in Level 3 assets and liabilities measured at fair value on a recurring basis.
(Dollars in thousands)
Beginning balance January 1, 2015
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, 2015
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
U.S. States and
political subdivisions
securities
Foreign government
and other securities
Investment securities
available-for-sale
$
6,466
$
811
$
7,277
$
$
$
$
—
(31)
—
—
—
—
(1,907)
—
—
4,528
5,498
—
(99)
2,635
—
—
—
(1,568)
—
—
—
(2)
200
—
—
—
(200)
—
—
809
$
— $
—
6
—
—
—
—
(100)
905
—
—
(33)
200
—
—
—
(2,107)
—
—
5,337
5,498
—
(93)
2,635
—
—
—
(1,668)
905
—
7,277
Ending balance December 31, 2014
$
6,466
$
811
$
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, 2015 or 2014. No transfers between Level 1 and 2 occurred during 2015 or 2014.
No transfers between Level 2 and 3 occurred during 2015 and one transfer between Level 2 and 3 occurred during 2014. 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, 2015
Investment securities available-for-sale
Direct placement municipal securities
Foreign government
December 31, 2014
Investment securities available-for-sale
Direct placement municipal securities
Foreign government
Fair value
Valuation Methodology
Unobservable Inputs
Range of Inputs
$
$
$
$
4,528 Discounted cash flows
Credit spread assumption
1.27% - 2.03%
809 Discounted cash flows
Market yield assumption
0.88% - 2.00%
6,466 Discounted cash flows
Credit spread assumption
0.99% - 2.08%
811 Discounted cash flows
Market yield assumption
0.25% - 1.31%
72 SRCE
2015 Form 10-K
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, 2015 and 2014, respectively: impaired loans - $0.42 million and $4.49 million;
partnership investments - $(0.03) million and $0.29 million; MSRs - $0.00 million and $0.00 million; repossessions - $1.21 million
and $0.73 million, and other real estate - $0.01 million and $0.17 million.
73 SRCE
2015 Form 10-K
The following table shows the carrying value of assets measured at fair value on a non-recurring basis.
(Dollars in thousands)
December 31, 2015
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, 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
Level 1
Level 2
Level 3
Total
$
$
$
$
— $
— $
220
$
—
—
—
—
—
—
—
—
1,000
4,608
6,927
736
220
1,000
4,608
6,927
736
— $
— $
13,491
$
13,491
— $
— $
1,007
$
—
—
—
—
—
—
—
—
1,343
4,733
5,156
1,735
1,007
1,343
4,733
5,156
1,735
— $
— $
13,974
$
13,974
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, 2015
Impaired loans
Carrying Value
Fair value
Valuation Methodology
Unobservable Inputs
Range of Inputs
$
220
$
220 Collateral based measurements
including appraisals, trade
publications, and auction values
Discount for lack of
marketability and
current conditions
20%
Mortgage servicing rights
4,608
7,246 Discounted cash flows
Constant prepayment
rate (CPR)
9.4% - 15.0%
Discount rate
9.8% - 13.3%
Repossessions
6,927
7,104 Appraisals, trade publications
and auction values
Other real estate
736
851 Appraisals
Discount for lack of
marketability
Discount for lack of
marketability
December 31, 2014
Impaired loans
$
1,007
$
1,007 Collateral based measurements
including appraisals, trade
publications, and auction values
Discount for lack of
marketability and current
conditions
2% - 3%
8% - 35%
20% - 25%
Mortgage servicing rights
4,733
6,979 Discounted cash flows
Repossessions
5,156
5,307 Appraisals, trade publications and
auction values
Other real estate
1,735
1,953 Appraisals
Constant prepayment rate
(CPR)
10.2% - 16.3%
Discount rate
9.5% - 13.0%
Discount for lack of
marketability
Discount for lack of
marketability
0% - 3%
5% - 38%
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.
74 SRCE
2015 Form 10-K
The following table shows the fair values of the Company’s financial instruments.
(Dollars in thousands)
December 31, 2015
Assets:
Carrying or
Contract Value
Fair Value
Level 1
Level 2
Level 3
Cash and due from banks
$
65,171
$
65,171
$
65,171
$
— $
Federal funds sold and interest bearing deposits with other
banks
Investment securities, available-for-sale
Other investments
Mortgages held for sale
14,550
791,727
21,973
9,825
14,550
791,727
21,973
9,825
Loans and leases, net of reserve for loan and lease losses
3,906,580
3,927,967
4,608
9,859
7,246
9,859
14,550
27,458
21,973
—
—
—
—
—
758,932
—
9,825
—
—
9,859
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, 2014
Assets:
Cash and due from banks
$
4,139,186
$
4,139,649
$
2,998,443
$
1,141,206
$
233,229
233,229
134,156
57,379
58,764
10,044
—
57,193
48,304
10,044
375
—
—
—
—
99,073
57,193
48,304
10,044
375
$
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
4,733
9,125
6,979
9,125
1,356
26,984
21,006
—
—
—
—
— $
—
756,857
—
13,604
—
—
9,125
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 *
$
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
* 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, and other investments. 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.
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.
75 SRCE
2015 Form 10-K
—
—
5,337
—
—
3,927,967
7,246
—
—
—
—
—
—
—
—
—
7,277
—
—
3,626,682
6,979
—
—
—
—
—
—
—
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.
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, 2015 and 2014)
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
2015
2014
$
60,429
$
500
6,855
—
—
660,087
1,496
4,668
734,035
8,042
3,841
19,335
58,764
89,982
644,053
$
$
$
$
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
Total liabilities and shareholders’ equity
$
734,035
$
76 SRCE
2015 Form 10-K
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31 (Dollars in thousands)
2015
2014
2013
Income:
Dividends from bank subsidiary
Rental income from subsidiaries
Other
Investment securities and other investment gains (losses)
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 income of subsidiaries
Income tax benefit
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries:
Bank subsidiaries
Non-bank subsidiaries
Net income
Comprehensive income
$
36,064
$
33,810
$
2,342
426
26
38,858
4,220
1,375
30
1,737
351
7,713
31,145
1,721
32,866
24,289
331
57,486
54,634
$
$
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
58,069
60,895
$
$
$
$
30,429
2,165
418
626
33,638
4,220
999
23
1,698
639
7,579
26,059
1,650
27,709
26,995
254
54,958
42,000
77 SRCE
2015 Form 10-K
STATEMENTS OF CASH FLOWS
Year Ended December 31 (Dollars in thousands)
2015
2014
2013
Operating activities:
Net income
$
57,486
$
58,069
$
54,958
Adjustments to reconcile net income to net cash provided by operating activities:
Equity (undistributed) distributed in excess of income of subsidiaries
(24,620)
(29,182)
(27,249)
Depreciation of premises and equipment
Stock-based compensation
Realized/unrealized investment securities and other investment (gains) losses
Change in trading account securities
Other
Net change in operating activities
Investing activities:
Proceeds from sales and maturities of investment securities
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 long-term debt and mandatorily redeemable securities
Stock issued under stock purchase plans
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
9
64
(26)
205
3,008
36,126
1,470
—
1,470
(4,126)
1,520
(712)
149
2,373
(9,970)
(18,126)
(28,892)
8,704
51,725
21
35
370
(13)
(1,759)
27,541
—
1,500
1,500
(183)
1,356
(569)
197
1,520
(16,342)
(17,643)
(31,664)
(2,623)
54,348
$
60,429
$
51,725
$
30
34
(626)
(46)
1,714
28,815
9
1
10
7,692
1,331
(397)
168
3,453
(2,273)
(17,054)
(7,080)
21,745
32,603
54,348
78 SRCE
2015 Form 10-K
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, 2015, 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 2015 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, 2015. 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, 2015, 1st Source’s internal control over financial reporting is effective based on those criteria.
BKD 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 39.
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.
79 SRCE
2015 Form 10-K
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 2016 Proxy Statement is
incorporated herein by reference.
Item 11. Executive Compensation.
The information under the caption “Compensation Discussion & Analysis” of the 2016 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 2016 Proxy Statement is incorporated herein by reference.
The following table shows Equity Compensation Plan Information as of December 31, 2015.
(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
Strategic Deployment Incentive Plan (4)
Total plans approved by shareholders
Equity compensation plans not approved by
shareholders
Director Retainer Stock Plan
Total equity compensation plans
— $
10,961
—
—
—
—
28.25
—
—
—
2,200,000 (1)
130,037 (1)
123,413 (1)(2)(3)
28,741 (1)(2)
98,645 (1)(2)(3)
10,961
$
28.25
2,580,836
—
10,961
$
—
28.25
76,087 (1)
2,656,923
(1) Share and per share data gives retrospective recognition to a 10% stock dividend declared July 22, 2015 and issued on August
14, 2015.
(2) Amount is to be awarded by grants administered by the Executive Compensation and Human Resources Committee of the
1st Source Board of Directors.
(3) Amount includes market value stock only. Book value shares used for annual awards may only be sold to 1st Source.
(4) Formerly known as 1998 Performance Compensation Plan.
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 2016 Proxy Statement is incorporated herein by reference.
The information under the caption “Relationship with Independent Registered Public Accounting Firm” of the 2016 Proxy
Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
80 SRCE
2015 Form 10-K
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, 2015 and 2014
Consolidated Statements of Income — Years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive Income — Years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Shareholders’ Equity — Years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Cash Flows — Years ended December 31, 2015, 2014, and 2013
Notes to Consolidated Financial Statements — December 31, 2015, 2014, and 2013
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 22, 2015, filed herewith.
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 Strategic Deployment Incentive Plan, formerly known as the 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.
81 SRCE
2015 Form 10-K
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(a)
23(b)
31.1
31.2
32.1
32.2
Consent of BKD,LLP, Independent Registered Public Accounting Firm.
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.
82 SRCE
2015 Form 10-K
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 19, 2016
83 SRCE
2015 Form 10-K
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 19, 2016
Christopher J. Murphy III
and Chief Executive Officer
/s/ JAMES R. SEITZ
James R. Seitz
President
February 19, 2016
/s/ ANDREA G. SHORT
Treasurer, Chief Financial Officer
February 19, 2016
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
February 19, 2016
Director
February 19, 2016
/s/ DANIEL B. FITZPATRICK
Director
February 19, 2016
Daniel B. Fitzpatrick
/s/ CRAIG A. KAPSON
Craig A. Kapson
/s/ NAJEEB A. KHAN
Najeeb A. Khan
Director
Director
February 19, 2016
February 19, 2016
/s/ VINOD M. KHILNANI
Director
February 19, 2016
Vinod M. Khilnani
/s/ REX MARTIN
Rex Martin
Director
February 19, 2016
/s/ CHRISTOPHER J. MURPHY IV
Director
February 19, 2016
Christopher J. Murphy IV
/s/ TIMOTHY K. OZARK
Director
February 19, 2016
Timothy K. Ozark
/s/ JOHN T. PHAIR
John T. Phair
Director
February 19, 2016
/s/ MARK D. SCHWABERO
Director
February 19, 2016
Mark D. Schwabero
84 SRCE
2015 Form 10-K
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 19, 2016
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,
2015, 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 19, 2016
By /s/ CHRISTOPHER J. MURPHY III
Christopher J. Murphy III, Chief Executive Officer
85 SRCE
2015 Form 10-K
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 19, 2016
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,
2015, 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 19, 2016
By /s/ ANDREA G. SHORT
Andrea G. Short, Chief Financial Officer
86 SRCE
2015 Form 10-K
Your partners from the first. Jarom T. Abel • Dustin K. Adams • Peggy S. Adams • Terri L. Adams • Jennifer C. Addis • Natasha A. Akers • Ryan P. 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 • Jose N. Alvarez Rodriguez • Marie G. Alvarez • Jill S. Alward • Jeannie M. Amador • Solomon L. Anderson • Melani D. Andres • Mark L. Andrews • Mary E. Andrews •
Gabrielle K. Anglin • Tara A. Antonucci • Jennifer R. Armstrong • Angela M. Arndt • Brenda D. Arrivillaga • Farah N. Arshami • Tiffany M. Arthur • Helen M. Atkinson • Kathryn L. Austin • Pamela J. Austin • Ryan P. Austin • Mario A. Aversa • Sherri M. Bachman • Jeffrey S.
Bachmann • Erik C. Back • Christy M. Bader • Jack G. Bahbah • June L. Bails • Lisa A. Balazsi Williams • Ida M. Balazsi • Christine L. Baldwin • John V. Ball Jr. • David K. Ball • Kathryn A. Ballge • Jamie M. Bankert • Amy M. Barbour • Lydia L. Bard • Alberta M. Barker •
Linsey Barkowski • Pamela J. Barnes • Shanon G. Barnhart • Andrea M. Barrow • Sheri L. Bartoli • Deborah A. Barton • Robert E. Bartos • Debra A. Bass • Terry W. Batchelor • Adam M. Bates • Brett A. Bauer • Laurence R. Bauer • Michelle N. Bauman • Douglas S.
Baumgardner • Emily E. Bay • Aretas O. Bayley • Alice J. Beck • Blaine A. Beckett • Gina L. Beckner • Mariah L. Becraft • Stephanie L. Becvar • John D. Bedient • Madeline I. Beggs • Angela L. Beilman • Angela E. Beison • Terri R. Belcher • Ryan S. Bell • Mark W. Bemenderfer
• Todd M. Bemenderfer • Emily C. Bencsics • Curtis L. Bennett • Kim A. Bennett • Mary A. Benson • David W. Bergevin • Janette Bergstedt • Angela M. Beserra • Susan R. Best • Curtis L. Bethel Jr. • Emily J. Beutter • Carolyn H. Biggs • Barry A. Bilger • Dolores J. Bingham
• Elizabeth M. Birk • Patricia A. Birk • Joshua M. Birky • Jana L. Bishop • Tracy A. Bishop • Brian J. Bittner • Gary C. Blacketor • Sandra K. Blasko • Kristal D. Blosser • Virginia E. Blythe • Amy L. Bobson • Kathryn S. Bohan • Diana J. Bolen • Kathy L. Boles • Jeffery A.
Bomstad • Thomas E. Boone • Morgan C. Boren • Sheila A. Borr • Cheryl L. Borsch • Pamela B. Borton • Barbara M. Botka • Eleanor E. Bottom • Kristy L. Bourdon • Nancy A. Bourlier • Virginia L. Bowen • Sue A. Bowers • Christopher D. Bowman • Thomas L. Bowman •
Melinda S. Bowmar • Victoria M. Boyle • Theresa M. Bradberry • Shawn M. Bradshaw • Sean M. Brady • Brittany A. Brenneman • Jacob R. Brentlinger • Paul J. Brewer • Amber L. Briggs • Patricia J. Brioli • Brittany N. Brockie • Gregory C. Brown • Rachelle L. Brown •
Thomas J. Brown • William C. Brown • Richard L. Brubaker • Kalyn M. Bruce • Emily A. Bruck • Dawn L. Brutout • Douglas A. Bryant • Bradley K. Bucher • Jeffrey A. Buckley • Jeffrey L. Buhr • Lisa M. Burch • Karen S. Burgess • Ellen M. Burke • Amy J. Burnau • Amy L.
Burridge • William B. Burton • Steve M. Bush • Nancy L. Buss • Leonard D. Buszkiewicz • Bryan E. Byers • Rose E. Cabanaw • Christine A. Cable • Stephanie A. Cade • Bradley E. Campbell • Brenda Capps • Amanda Carbiener • Kenneth J. Carbiener • Kathy M. Carlson •
Joseph M. Carlton • Shawn C. Carlton • Sara L. Carranza Villarreal • Douglas R. Carroll • Edwin S. Carter • Kaley D. Carter • Lucas A. Carter • Crystal M. Cartwright • Tara A. Casper • Courtney R. Cassler • Jennifer A. Castaneda • Rachel R. Casto • Stephanie M. Cato •
Christine I. Caudill • Desirae S. Caudill • Judy A. Caudill • Ruben Cavazos • Scott R. Cawthon • Pamela S. Cecchi • Susan K. Ceglarek • Jesus A. Cervera • Mai Y. Chabon • Joseph S. Chamberlin • Melissa M. Chase • Tirang Chaudhary • Leticia Chavez • Heather M. Chimienti
• Chosani S. Chitaya • Bonnie L. Chlebowski • Mary E. Chmiel • Patricia A. Chodzinski • Becky D. Christner • Scott J. Christner • Jonathan W. Cisna • Kimberly L. Clanton • Erik D. Clapsaddle • Amy J. Clark • Jessi L. Clark • Pamela L. Clowers • Jean A. Coby • Austin M. Coffel
• Mindie L. Colanese • Sharon M. Colburn • Sean R. Coleman • Shelly M. Colip • Kimberly S. Connors • Shelley A. Connors • Victoria L. Conrad • Amy E. Conroy • Daniel P. Conroy • Christa L. Cook • Jeffrey A. Cooley • Jason W. Cooper • Jayne E. Cooper • Patricia L. Cooper
• Ashlee S. Coria • Julianna Corr • Nancy M. Coughlin • Jolinda S. Cox • Rhonda L. Cox • Christopher L. Craft • Dustan J. Craig • 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 • Julie Cruz • Ryan T. Culp • Richard J. Curran • Donna J. Curry • Beth A. Curtis • Lori A. Cuson • Susan L. Cybulski • Tara K. Daniel • Jamie S. Darrigan • Catherine V. Davis • Christopher M. Davis • Kimberley K. Davis • Lindsay M. Davis • Ana L. Davison
Hernandez • Terri L. Day • Kimberly D. De Cook • Margaret A. De Craene • JoElla L. De Pra • Debbie L. Dean • Jessica R. Dean • Stephen M. Deck • Faith M. Dejong • Gerardo Del Real Mota • Maribel Delbrey • Amy J. DeLee • Willie L. Deloney Jr. • Nancy M. Deneen •
Rachel A. Denlinger • Cheryl L. Dennis • Roger E. DePoy • Steven Deranek • Michala A. Des Forges • Casey J. DeSmith • Kymberlee M. Diaz • Terry L. Dickerson • Kelton R. Dickey • Kylie M. Dickey • Lisa M. Dieringer • Steven M. Dieringer • Rebecca K. Dietrich • Liberty
F. DiGiacomo • Andrea D. DiGregorio • Charles C. Ditto • Ryan K. Dix • Cynthia K. Dixon • Glenda L. Dixon • Marci L. Dixon • Bethany L. Dobson • Deborah L. Doelling • Erika L. Doke • Diane H. Dolezal • J. D. Dollar • Linda S. Dombrowski • Nancy Dominguez • Diana L.
Domsic • Cimmon N. Dougherty • Mark D. Dougherty • Tina H. Dougherty • Eric D. Drogosch • Emily J. Dubree • Bradley R. Dunlap • Lisa Dutoi • Donna J. Duttlinger • Amy B. Dutton • Angela B. Dvorak • Madison N. Eads • Telesia A. Ealey • Kalin N. Edmonds • Jon K.
Edwards • Tracy Edwards • Andrea M. Ehresman • Hannah J. Eicher • Danielle B. Eigenmann • Jana L. Eldridge • John W. Elliott • Kirk Elliott • Brandy J. Ellis • Jennifer R. Engdahl • Adair I. Engel • Kelly R. Engle • Sarah M. Engler • Constance J. Estep • Cristina Y. Estrada
Kedik • Jennifer L. Eubanks • Amy E. Evans • Bridget D. Evans • Cameron Evans • Leah M. Evans • Matthew P. Evans • Michael J. Evans • Michelle A. Evans • Kimberly A. Evard • Brian E. Exner • Jeanette C. Fage • Jamie J. Fahlsing • Benjamin A. Fanning • Deborah A. Farkas
• Bonita G. Farnsworth • Darla D. Faucett • Daniel R. Fehrenbach • Mickey M. Fell • Ryan J. Fenstermaker • Margaret E. Ferrara • Eduardo Ferreira • Sarah M. Fields Shrewsbury • Carolyn D. Fields • Jose J. Figueroa • Terry W. Fike • Michael M. Filipidis • Caryn M. Fisher •
Kenneth L. Fisher • Sandra K. Fisher • Bonnie L. Fitch • Julie A. Flanigan • Renee N. Fleming • Armando Flores Martinez • Brianna M. Flores • Sarah L. Folk • Laura L. Fonce • Connie L. Fordyce • Tracy A. Foreman • Rebecca M. Fortenberry • John E. Fowler • S. Andrew
Fox • William Fox • Lauren E. Fozo • Eddie A. Fraire • 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 • Victoria K. Fry • 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 • Chad M. Gentry • Wendy L. George • Sara E. Gephart • Lauren M. Gibbons • Marcus D. Giden • Paul
W. Gifford Jr. • Jimmie D. Gilbert • Timothy M. Gilleand • Martha L. Gilmer • Dana K. Giszewski • Ashley N. Glass • Elizabeth V. Goerke • Rachel S. Goings • Stephanie J. Gonzales • Adrienne P. Gonzalez • Shannon J. Gonzalez • Cynthia M. Good • Mary R. Goodhew • Tamara
L. Goodwin • Traci E. Gordon • Jennifer L. Gore • Raven C. Gorman • Jay S. Gosselin • Christine M. Gosztola • Mark D. Gould • Justin E. Graber • Brittany R. Graves • Brian D. Green • Linda M. Green • Pamela B. Green • Amanda J. Grenert • Amy R. Grey • James L. Griest
• John B. Griffith • Barbara K. Guerin • Michelle R. Gulas • Amy S. Gullotta • Samuel Gutierrez Rangel • Rosario M. Gutierrez • Jane E. Guzman • Jaimie C. Hageman • Amanda N. Hall • Nora M. Hall • Steve R. Hall • Megan R. Hamand • Adam C. Hamilton • Lori L. Hammonds
• Deanna M. Hanley • Christopher D. Hanson • Laurie B. Harbison • Gabrielle L. Hardy • Melissa D. Harmon • Rachel L. Harner • Angela J. Harris • Jim Harris • Kathryn L. Harris • Ned J. Hart • Sarah B. Harting • Tracy D. Harvey • Teresa C. Harwood • Amy L. Hase • Erika
L. Hassinger • Erin M. Hathaway • Elizabeth A. Hawkins • Wayne E. Hawn • Melody N. Haxton • Mary E. Hayden • Derek R. Hayes • Jeannette M. Hayes • Juli K. Hayes • Marcia L. Hayes • Patricia L. Hayes • Renee M. Hayes • Jordan M. Haynes • Kelly M. Heatherly • Amy L.
Hechlinski • Andrew P. Heck • Frances J. Hegyi • James T. Heim • Eric H. Heintzelman • Mary H. Hektor • Keith D. Henderson • Melissa A. Henning • Brandy R. Henrich • Caitlin E. Henry • Adam L. Henson • Ronda A. Herbert • John W. Herman Jr. • Meredith S. Herman •
Mariangelica Hernandez Garcia • Julianna D. Herring • Rebecca E. Hess • Cristabel H. Hewitt • Karissa N. Hickey • Kendra L. Hicks • Jodi K. Hill • Michael P. Hinds • Tara D. Hitt • Bonnie L. Hobbs • Carol A. Hochstetler • Judith A. Hodgson • Rachelle E. Hodgson • Sarah P.
Hodum • William A. Hoekzema • 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 •
Anthony G. Holt • Melody A. Hooley • Devin P. Hoover • Samantha L. Hoover • John J. Horan Jr. • Holly R. Horan • Judith L. Horner • Hazel C. Horvath • Michael E. Horvath • Joanna J. Houin • Patricia J. Howard • Peyton O. Howard • Janice L. Howdeshell • Allison B. Howell
• Natalie M. Hoyt • David P. Hudak • Janet G. Hughes • Deana A. Hummel • Timothy M. Hunt • Joseph B. Hunting • Melani J. Huntsman • Anthony T. Hurley • Linda G. Hurst • Robert W. Hyde • Terri L. Hynek • Megan A. Ingram • Jennifer M. Inks • Ashlyn M. Irk • Branko
Isailovic • Timothy E. Isenberg • Patricia A. Jackowiak • Eileen Jackson • John A. James • Robert L. Jamieson • Catherine E. Janowiak • Katherine J. Jaworski • 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 • Loveda R. Jones • Nancy G. Jones • Sara L. Jones • Tracy L. Jones • Lyle V. Juillerat • Carmen M. Jun • Lorra A. Junk • Tina M. Kaczorowski • Sherryl A. Kalk • Karen A. Karason • Kayla R.
Karriman • Mackenzie A. Karst • Garrett T. Kautz • Marissa E. Kay • Noreen A. Kazi • Sean B. Kearns • Robert J. Kedzior • Richard T. Keel • Sabrina Keel • Ashley A. Keldsen • Victoria A. Keldsen • Peggy A. Kelley • Samantha J. Kemp • Shannon R. Kesvormas • Kevin M.
Kettle • Jay W. King • Karen J. King • Kristian P. Kintz • Chree L. Kizer • Lisa M. Kleckner • Jennifer L. Klein • Lori A. Klimek • Kathy I. Kline • JoAnne M. Klowetter • Kirsten A. Klupp • Samuel J. Knepper • Mark A. Knight • Melissa M. Knoll • Shantel R. Knuth • Kevin A. Kobb
• Carey A. Koch • Samantha J. Kochenash • Sarah L. Kolodziej • Kimberly A. Kopinski • Carrie L. Kosac • Charlene A. Koszyk • Jacquelyn M. Kovach • Robin L. Koziczynski • Amishia R. Kreft • Stephen W. Kreis • Alvin W. Kreske III • Susan K. Kreuter • Regina A. Kring •
Jacqueline A. Kronewitter • Daina M. Krueger • Elizabeth A. Kruk • Patricia R. Kruszka • Susan K. Kryski • Marlene A. Kulesia • Stephanie L. Kuruzar • Joseph T. Kuzmitz • Jessica L. Kwiatkowski • Brooke L. La Bere • Tiffany A. Lachmund • Patricia L. Lahey • Lauren Lahndorf
• Debrielle C. Lane • Mark A. Lane • Raeanna L. Lane • Catherine C. Langford • Lisa M. Larkin • Jennifer R. Lash • Candise N. Lassus • Kimberly A. Latson • Judith C. Lauer • Caroline M. Lawrence • Christopher D. Lawrence • Destiney J. Laxton • Renee A. Layton • Donna
H. Leathers • Cheung Wan Lee • Sonya L. Lee • Connie K. Lemler • Virginia M. Lentz • Tracy M. Leopold • Julie A. Leszczynski • Julie L. Lewandowski • Carol L. Lewis • Kimberlee J. Lewis • Richard L. Lewis • Daniel C. Lichty • Choong H. Liew • Dan H. Lifferth • John D.
Linabury • Jennifer M. Lincoln • Greg A. Linder • Jeffrey F. Lindstadt • Constance J. Lipscomb • Kevin A. Little • Sherry L. Little • Tammy L. Litzkow • Pamela K. London • Jessica L. Long • Rhonda L. Longley • Luzmery Y. Lopez Daza • Irene Lopez • Clara F. Lorentzen •
Susan M. Losievski • Theresa F. Lough • Crystal L. Love • Judy K. Love • Ashley E. Lower • Lorena A. Lucas Juarez • Bonnie L. Luczyk • Erica Luna • Amanda J. Lundmark • Aurora Machado • Bela P. Machan • Jacobi F. Mack • Gerald W. Madsen • James D. Magera • Julie
A. Maggio • Amelia M. Mailander • Laurie A. Main • Beth A. Makielski • Joseph S. Malinowski • Nichole M. Mammolenti • Alexia M. Mamouzelos • Mark A. Manering • Andrew J. Manes • Cynthia L. Mann • Kelsey J. Manson • Jason L. Manwarren • Lesley Marben • Alexa K.
Marcus • Sandra S. Marks • Victoria R. Marks • Emily E. Marovich • Sherry I. Martinkowski • Gerald O. Mast • Amy L. Matchett • Robert J. Mater • Charles L. Matheny Jr. • Ingrid E. Mathias Leuthold • Amy K. Mauro • Cindy A. May • Susan E. May • Lawrence J. Mayers •
Paige M. Mayers • Magdalena Z. Mazurek • Thomas M. Mc Carthy • Joseph S. Mc Clintock • Deborah K. Mc Cormick • John A. Mc Creary • Leigh A. Mc Crorey • Kelsie L. Mc Daniel • Kimberly J. Mc Donald • Stephanie C. Mc Donald • Cassandra M. Mc Elroy • 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 • Amy C. Mendoza • Gopinath Menon • Rene L. Mesaros • Jordan K. Messmann • Jason P. Metcalfe • Debra K. Meyer • Richard J.
Michalski • Christine L. Miley • Amanda L. Miller • Amanda L. Miller • Christopher C. Miller • Cynthia L. Miller • Jeffrey C. Miller • Jerry A. Miller • Jessica M. Miller • Kayla A. Miller • Michele A. Miller • Neil H. Miller • Shayna M. Miller • Trina S. Miller • Raychel M. Minasian •
Robyn R. Minix • Jyoti Minocha • Sairah Mirza • Lisa A. Misch • Amy E. Mitchener • Brent A. Mithoefer • Kimberli A. Mock • Christine A. Modlin • Erica L. Molden • Rita D. Molengraft • Aaron J. Monnier • Leila S. Moon • Evan J. Moore • Kiara C. Moore • Steven R. Moore •
George L. Morris • Jann E. Morris • Juliane K. Morris • Ronald F. Morrison • David M. Morrissett • Andrea L. Morton • Debra S. Moser • Teresa A. Moss • Lori D. Moulton • Christopher J. Murphy III • Kevin C. Murphy • Denise S. Myers • April A. Nagy • Diane L. Nally •
Anderson D. Nascimento • Stressca M. Nathaniel • Ayla J. Naugle • Rosalinda M. Navarro • Tamara S. Nees • Sara K. Nelson • Sharon L. Nelson • Linda M. Nelund • Patricia E. Nemeth • Amanda L. Newcomb • Holly K. Nichols • Mary A. Niedbalski • Rebecca A. Niedbalski
• Michael L. Niezgodski • Cynthia R. Nimtz • 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 • Angela M. Nurnberg • Jacqueline J.
O Blenis • Amy M. O Brien • Joseph R. O Dell • Courtney R. Oberholzer • Anthony R. Obringer • Jason M. Olejnik • Diana L. Olivares • Eric L. Olsen • Sarah E. Olsen • Alexus S. Ordones • Janet L. Outman • Jessica E. Overmyer • Melinda M. Overmyer • Diego A. Padilla
Arriaga • Emily N. Paege • Jonathon C. Painter • Karen S. Pal • Bethany M. Panting • Jamie L. Parker • Molly K. Parker • Caren C. Parko • Robert E. Patrick • Rebecca J. Pattillo • Brandon D. Pawloski • Leslie L. Pazdur • Amber A. Pearson • Eric C. Peat • Jeffrey L. Peat •
Monty C. Peden • Lindsey J. Peek • Lacey G. Perkins • Steven J. Perlewitz • Leah H. Personette • Lisa A. Pesaresi • 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 • Melissa S. Podlecki • Deborah A. Pogotis • Krista L. Porman • Jay F. Potts • Allyson E. Powers • Patricia L. Powers • Donnell L. Pressel • Jennifer E. Prestine • Angela R. Price • Frances M. Price • Linda C. Price • Monique Price •
Rebecca J. Pritchard • Lee M. Pritchett • 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 • Sherrie J. Ramer • Jennifer S. Ramirez • Patricia D. Randall • Joyce
M. Rayl • Donna M. Reed-Hamilton • Danielle B. Reist • Linda J. Relos • Karrie Remmo • Caressa J. Retherford • Susan R. Rettig • Courtney E. Rhoades • Lisa A. Ribar • Jennifer L. Rice • Timothy D. Rice • Dawn A. Richards • Jason E. Richardson • Jordan Richardson •
Kimberly A. Richardson • Michelle L. Richardson • Susan J. Richmond • Beth A. Ricksgers • Jacqueline Rico • Diana J. Riddle • Jonah D. Ridenour • Stephen H. Rider • Amber N. Riggs • Katherine A. Riker • Daniel F. Riley • Holly M. Risner • Alishia M. Ritchie • Gina M. Ritter
• Rebecca L. Ritter • Becky S. Rizor • Julie D. Roberts • Guadalupe Robles • Obdulia M. Rodriguez • Kathy A. Rogers • Joseph T. Rogina • William P. Rohwer • Emily Rojas • Wayne R. Roller • Robert E. Romano • Christin R. Romine • Anna L. Roose • Leland L. Rose • Leslee
L. Rose • Christopher M. Ross • Trevor A. Ross • Jonathan B. Rountree • Robert B. Rountree • Tabitha M. Rowe • Richard Rozenboom • Susan M. Rudecki • Janet L. Rumpf • Cara A. Russell • Jessica E. Russell • Mary F. Russo • Debra D. Rykovich • Lori A. Ryman • Brittany
N. Salisbury • Emily J. Sammons • Ellen J. Santa • Maribel Santamaria • Ericka R. Santiesteban • Kathryn M. Sappington • Patricia M. Sarkisian • David M. Satek • Lagena M. Saviano • Patrick T. Sawyer • 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 • 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 • Angela M. Schwenk • Karen R. Scobee • Lanny L. Scoby • Abby L. Scott • Candice M. Scott • Denise L. Scott • Julie M. Scott • Theresa M. Scott • Holly A. Searfoss • Kristy S. Sears-Curtis • Carol M. Sechrist •
Daniel P. Seely • Terry L. Seely • James R. Seitz • Lane C. Sexton • Linda Shafer Wilson • Sandra K. Sharkey • Lisa D. Sharpe • Sarah E. Shaw • Thomas E. Shaw • Karen L. Shearer • 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 • 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 • Barbara H. Sinclair • 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 • Chelsea R. Smith • Claire C. Smith • Darren M. Smith • Debra L. Smith • Elisa Smith • Linda A. Smith • Malorie M. Smith • Steven J. Smith • Graham R. Snyder • Jennifer R. Snyder • Lisa A. Snyder • Patricia A. Snyder • Rachel
L. Solmos • Kathleen D. Solomon • Andrea K. Soule • Gregory R. Spalding • Kanetha K. Speck • Patrick M. Spence • Tricia L. Spevak • Brian S. Spitaels • James A. Spitters • Charles E. Springer • Justin W. Spyker • Luke P. Squires • Pamela K. Stalbaum • Cassie L. Stamper
• Victoria L. Stanley • Pamela L. Staples • Pamela Stearns • Tara M. Steele • Savannah Stein • Amber M. Stephenson • Jessica E. Stephenson • Michelle R. Stesiak • Garry A. Stoll • James A. Story Jr. • Nancy A. Stoutenour • Emily R. Stowe • William C. Strafford • Megan
M. Strainis • Caderia L. Strickland • Sarah J. Stroh • Keith R. Strong • Gregory J. Stroupe • Madelyn M. Strycker • Laura J. Strzelecki • Pamela S. Stump • Brittany L. Stutzman • Dawn M. Sumption • Brandon K. Sutton • Trina Swank • Patricia M. Swihart • Sarah N. Symington
• Jerry D. Szmanda • Michael Szymanski • Kim M. Tagliaferri • Marlene A. Taiclet • Erin N. Talkington • Jeramie J. Tarr • Mark E. Taylor • Dianna S. Teadt • Cory M. Teagno • Darran Teamor • Lawrence M. Tepe • Stephanie L. Termont • Nicole L. Teske • Carri L. Thessin • Julie
L. Thode • Helesha Thomas • Margaret A. Thomas • Mary E. Thomas • Katherine L. Thompson • Kurt B. Thompson • Randall E. Thornton • Jennifer N. Thorson • Michelle A. Thurin • Lori S. Tierce • Jessa F. Tilford • Patricia A. Tillich • Melissa S. Tobias • Kamie A. Tomasek
• Sharon L. Tompkins • Michele J. Torzewski • Cindy B. Trenerry • Danielle C. Trumbull • Kandis M. Tubb • Sharon L. Tucker • Dawn M. Tungate • Steven A. Turcotte • Aasim Turk • Clifford D. Tuttle • Kyle R. Ullery • Jaime L. Unate-Martin • Brittaney D. Unger • Lindsay M.
Utnik • Tammy L. Valdez • Jeannie Valencourt • Steven M. Van Den Driessche • Erin E. Van Dieren • Brian E. Van Duyn • Lynda F. Vandervinne • Maria I. Varela • Itania V. Vargas • Cynthia A. Vasta • Gloria Vaughan McKown • Laura E. Vaughn • Tanya E. Vermande • Georganne
L. Vervaet • Rebecca J. Vervaet • Trisha L. Vervynckt • Matthew D. Vessely • Mercedes L. Vest • Jacqueline S. Vida • Kayla K. Vincent • Kathleen H. Volheim • Margaret M. Voorheis • David A. Voors • Adam E. Wade • Nancy M. Wagenblast • Amy R. Wagoner • Mark E.
Waldron • Craig R. Wales • Kristina J. Walker • Shea L. Wallace • Krista M. Walsh • Emily J. Walton • Ashley J. Ward • Sherrie T. Warner • Darrell M. Warren • Charles D. Waterbury II • Amber M. Watson • Erik G. Watson • Jessica A. Watts • Douglas W. Way • Pamela J.
Weaver • Kimberley A. Webb • Gloria R. Weesner • Pamela K. Weesner • Cecile A. Weir • Valerie C. Weis • Jill C. Weiss • 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 • Miracle F. Wiley • Jan E. Wilhelm • Crystal T. Williams
• Jeffrey A. Williams • Jennie V. Williams • Marshall G. Williams • Michelle A. Williams • Jody L. Wilson • Melody A. Wilson • Tamara L. Wilson • Stacey J. Wing • Katherine F. Winger • Julli B. Wirt • Tracy L. Wise • Anne E. Wiseman • Philip A. Wiseman • Philip A. Witges •
Charlotte D. Witt • Phillip A. Witt • Vincent J. Witte • Andrea S. Wittendorf • Deborah S. Wogoman • Linda S. Wojciechowski • Matthew V. Wold • Renie C. Wolf • Gina M. Wolff • Robin J. Wolkiewicz • Kelly L. Woloszyn • Rebecca L. Womer • Janine E. Wood • Stephen S.
Wood • Christopher T. Woody • Carmen D. Works • Amber L. Wotring • Cherie L. Wright • Megan M. Wroblewski • Dinghong Wu • Kelly J. Wunder • Latoya S. Yarber • Rayfield Yarber • Larisa L. Yates • Casey A. Yerger • Taylor M. Zahrt • Matthew J. Zakrowski • Luis Zapata
• Marcus I. Zarembka • Elizabeth M. Zarzecki • Ronald W. Zeltwanger • Guangwen G. Zhang • Cole J. Ziegler • Seth M. Zimmerman • Barbara J. Ziolkowski • Rochelle N. Zochowski • Sara A. Zolman
1st SOURCE CORPORATION DIRECTORS
Allison N. Egidi _____________________________________ Director of Development, University of Virginia
Daniel B. Fitzpatrick _________________________________ Chairman and Chief Executive Officer, Quality Dining, Inc.
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 _____________________________ Owner and Chief Executive Officer, Catharsis Productions, LLC
Timothy K. Ozark ___________________________________ Chairman and Chief Executive Officer, Aim Financial Corporation
John T. Phair ______________________________________ President, Holladay Properties
Mark D. Schwabero _________________________________ Chairman and Chief Executive Officer, Brunswick Corporation
1st SOURCE CORPORATION 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
1st SOURCE BANK 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 _______________________________ Retired President, 1st Source Bank
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 _____________________________ Owner and Chief Executive Officer, Catharsis Productions, LLC
Timothy K. Ozark ___________________________________ Chairman and Chief Executive Officer, Aim Financial Corporation
John T. Phair ______________________________________ President, Holladay Properties
Mark D. Schwabero _________________________________ Chairman and Chief Executive Officer, Brunswick Corporation
James R. Seitz _____________________________________ President
1st SOURCE BANK EXECUTIVE 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
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P.O. Box 1602, South Bend, Indiana 46634
© 2016 1st Source Corporation all rights reserved.
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