2 0 1 9 A N N U A L R E P O R T
Your partners from the first. Ashley M. Adamczyk • Alexandria M. Adams • Terri L. Adams • Jennifer C. Addis • Damaris A. Alarcon Soliz • Tonia M. Albright • Amanda S. Alburitel • Diana K. Alderman • Amy E. Aldridge
Jamie T. Alexander • Shelli A. Alexander • Debbie P. Alfredo • Brenda A. Allison • Lewis A. Allison • Tracy Alma • Kristina L. Alvarado • Marie G. Alvarez • Amber L. Anderson • Solomon L. Anderson • Melani D. Andres • Mary E. Andrews • Margie S. Anglemyer
Gabrielle K. Anglin • Tara A. Antonucci • John M. Antoon • Avery L. Aragona • Luke M. Armstrong • Angela M. Arndt • Lane C. Arnett • Stephanie A. Arven • Connor D. Asbury • Helen M. Atkinson • Kathryn L. Austin • Erik C. Back • Christy M. Bader
Jack G. Bahbah • June L. Bails • Ida M. Balazsi • Lisa A. Balazsi Williams • Christine L. Baldwin • David K. Ball • John V. Ball • Kathryn A. Ballge • Sarah M. Banicki • Jamie M. Bankert • Debra L. Banks • Amy M. Barbour • Alberta M. Barker • Linsey Barkowski
Shanon G. Barnhart • Robert A. Barron • Deborah A. Barton • Robert E. Bartos • Debra A. Bass • Kiona G. Bass • Kimberly L. Bates • Brett A. Bauer • Laurence R. Bauer • Aretas O. Bayley • Gabrielle L. Bearman • Karen G. Bechinski • Gina L. Beckner
Stephanie L. Becvar • John D. Bedient • Madeline I. Beggs • Seila Begic • Sean A. Behensky • Terri R. Belcher • Ryan S. Bell • Stephanie A. Bell • Tristan A. Bell • Holly M. Bellegante • Mark W. Bemenderfer • Todd M. Bemenderfer • Sarah J. Benavidez
Andrew J. Bencsics • Kim A. Bennett • Crystal L. Benson • Mary A. Benson • David W. Bergevin • Kailey N. Berman • Andrew C. Besemer • Angela M. Beserra • Susan R. Best • Curtis L. Bethel • Kelsey D. Bettcher • Kurt T. Beuchel • Kimberly V. Bicard
Kaitlyn D. Bickford • Jeffery R. Biesen • Carolyn H. Biggs • Barry A. Bilger • Jordin R. Billings • Trina R. Billsborough • Elizabeth M. Birk • Patricia A. Birk • Joshua M. Birky • Sandra K. Birky • Jana L. Bishop • Kayla M. Bishop • Zachary B. Bishop • Brian J. Bittner
Aaron M. Black • Alicia M. Blascovich • Sandra K. Blasko • Nicole L. Blatchford • Kristal D. Blosser • Amy L. Bobson • Kathy L. Boles • Donna S. Bonner • Morgan C. Boren • Cheryl L. Borsch • Danielle J. Borsodi • Pamela B. Borton • Kristy L. Bourdon
Nancy A. Bourlier • Angela M. Bowers • Sue A. Bowers • Katelin N. Bowman • Thomas L. Bowman • Rhonda A. Boyd • Regan S. Boyn • Sean W. Braden • Sean M. Brady • Emily L. Bragg • Thomas W. Brand • Jacob R. Brentlinger • Mikayla N. Bridges
Amber L. Briggs • Patricia J. Brioli • Brittany N. Brockie • Kaley A. Brower • Chase A. Brown • Dustin R. Brown • Lauren N. Brown • Thomas J. Brown • Kirk S. Browning • Elizabeth J. Brumblow • Dawn L. Brutout • Douglas A. Bryant • Bradley K. Bucher
Jeffrey A. Buckley • Kimberly S. Buckley • Jeffrey L. Buhr • Jocelyn R. Bukrajewski • Andrea M. Bullock • Carol L. Burdette • Abigail Burger • Kristine M. Burggraf • Amy J. Burnau • Amy L. Burridge • Theresa M. Burroughs • William B. Burton • Steve M. Bush
Nancy L. Buss • Christine A. Cable • Bradley E. Campbell • Miranda L. Campbell • Mary E. Campos • Brenda Capps • Kenneth J. Carbiener • Joseph M. Carlton • Shawn C. Carlton • Lisa R. Caron • Kenneth B. Carr • Douglas R. Carroll • Edwin S. Carter
Crystal M. Cartwright • Tara A. Casper • Courtney R. Cassler • Latasha A. Castile • Jeffrey A. Caton • Christine I. Caudill • Judy A. Caudill • Jason T. Cavanaugh • Ruben Cavazos • Ana R. Cazares • Jose A. Cazarez • Mai Y. Chabon • Joseph S. Chamberlin
Weijia Chan • Sharna M. Chapman • Tirang Chaudhary • Leticia Chavez • Heather M. Chimienti • Zamiki Chism • Chosani S. Chitaya • Bonnie L. Chlebowski • Daniel K. Cho • Kaitlyn N. Chops • Rebecca J. Cingano • Robert D. Circosta • Jonathan W. Cisna
Abigail N. Claar • Kimberly L. Clanton • Erik D. Clapsaddle • Amy J. Clark • Heather M. Clark • Jefferson P. Clark • Jordan C. Clark • Shawndra R. Clay-Rutledge • Debora S. Cloud • Tiffany R. Clubs • Justin A. Cohee • Mindie L. Colanese • Sharon M. Colburn
Falon B. Cole • Jacob M. Cole • Sean R. Coleman • Shelly M. Colip • Charles A. Cone • Robert M. Congdon • Tina L. Conley • Shelley A. Connors • Victoria L. Conrad • Daniel P. Conroy • Christa L. Cook • Matthew M. Cook • Jeffrey A. Cooley • Ashlee S. Coombes
Jason W. Cooper • Mary K. Corkwell • Nancy M. Coughlin • Jolinda S. Cox • Rhonda L. Cox • Brittany D. Cozzie • Christopher L. Craft • Russell D. Cramer • Scott A. Cramer • Brittany R. Crawford • Jane A. Crim • Larry W. Cripe • Shaneika J. Crockett
Glen H. Crookston • Hannah N. Crumley • Julie Cruz • Ryan T. Culp • Taylor J. Culp • Richard J. Curran • Beth A. Curtis • Lori A. Cuson • Kimberly D. Dance • Tara K. Daniel • Bryce K. Davis • Catherine V. Davis • Christopher M. Davis • John G. Davis
Kimberley K. Davis • Lisa J. Davis • Misti A. Davis • Ana L. Davison Hernandez • Terri L. Day • Kimberly D. De Cook • Julie L. Deak • Margaret A. DeCraene • Faith M. Dejong • Jose E. Del Abra Maya • Amy J. DeLee • Thomas P. Dell • Nancy M. Deneen
Rachel A. Denlinger • Blaine M. Dennis • Cheryl L. Dennis • JoElla L. DePra • Steven Deranek • Louis C. DeTrempe • Taylor M. Deutscher • Kayla P. Dials • Kelton R. Dickey • Lisa M. Dieringer • Steven M. Dieringer • Rebecca K. Dietrich • Julie B. Diffendarfer
Brianna K. Dills • Charles C. Ditto • Cynthia K. Dixon • Glenda L. Dixon • Marci L. Dixon • Zoee P. Dixon • Quentin R. Dodd • Deborah L. Doelling • Diane H. Dolezal • Linda S. Dombrowski • Nancy Dominguez • Amber L. Domsic • Diana L. Domsic
Markea N. Donley • Caleb S. Doonan • Lisa M. Doty • Cimmon N. Dougherty • Mark D. Dougherty • Tina H. Dougherty • Amy L. Dowden • Colleen M. Downard • Amanda N. Drake • Eric D. Drogosch • Glenn W. Drury • Emily J. Dubree • Emily A. Dueweke
Bradley R. Dunlap • Lisa Dutoi • Donna J. Duttlinger • Amy B. Dutton • Telesia A. Ealey • Barbara F. Edwards • Jon K. Edwards • Tracy L. Edwards • Andrea M. Ehresman • Hannah J. Eicher • Gabriel G. Elick • Jennifer R. Engdahl • Michelle F. Engelsen
Amanda L. English • Constance J. Estep • Amy E. Evans • Cameron Evans • Michael J. Evans • Michelle A. Evans • Kimberly A. Evard • Amy J. Everett • Brian E. Exner • Madison R. Fadely • Jamie J. Fahlsing • Benjamin A. Fanning • David L. Farkas
Deborah A. Farkas • Chandra R. Fase • Katherine L. Fashbaugh • Darla D. Faucett • Tyler N. Feece • Ann M. Feltz • Ryan J. Fenstermaker • Marie Fernandes • Adriana Fernandez • Haley N. Fernandez Hernandez • Margaret E. Ferrara • Eduardo Ferreir
Samantha L. Fife • Terry W. Fike • Benjamin J. Finan • Paul A. Finley • Kristina N. First • Kenneth L. Fisher • Sandra K. Fisher • Michael S. Flack • Nicole S. Flack • Julie A. Flanigan • Mary P. Fleece • Renee N. Fleming • Hailey S. Flint • Alicia A. Flores
Kourtnie N. Flores • Roberto Flores • Sondra M. Flores Reyes • Julia C. Flowerday • Brianna T. Foley • Laura L. Fonce • Anderson W. Ford • Tracy A. Foreman • Ian J. Forte • Stefanie J. Fouche-Troupe • Colton C. Fox • Mara S. Fox • S. Andrew Fox
Shannon E. Franko • Debra K. Franks • Todd J. Franks • Lagena M. Frantz • Beth A. Fraser • Katie C. Fraser • Glenn D. Freel • Rodger A. Freeman • Amber N. Freet • Terry M. Freyer • Dee A. Friedman • Ragina N. Fritz • Kathy A. Gaedtke • Danielle N. Gainer
Soyla Gallegos Prieto • Leslie A. Gallup • Marcela Garcia • Gregory A. Gardner • Kailey E. Gardner • Bob W. Garrett • Linda A. Garrison • Anthony C. Gartee • Malorie M. Gasper • Christina M. Gault • Jacqueline S. Gearhart • Scott F. Geik • Chad M. Gentry
David F. George • Wendy L. George • Lucy M. Gerace • Bryant D. Gerber • Donna J. Gerencser • Jason R. German • Stephanie N. Geskey • Marcus D. Giden • Trent J. Gidman • Paul W. Gifford • Jimmie D. Gilbert • Dana K. Giszewski • Jessica A. Gladieux
Kevin J. Gnagey • Ashley J. Goepfrich • Jessica L. Gondell • Stephanie J. Gonzales • Cynthia M. Good • Mary R. Goodhew • Katelin M. Gordon • Richard M. Gordon • Traci E. Gordon • Jennifer L. Gore • Mark D. Gould • DeAsia Graham • Brian D. Green
Linda M. Green • Pamela B. Green • Amanda J. Grenert • Tamara J. Griffin • Amber A. Griffith • John B. Griffith • Alyssa M. Griman • Mackenzie L. Griman • Joseph M. Guardiola • Alisia M. Guffey • Michelle R. Gulas • Rosario M. Gutierrez • Jane E. Guzman
Jaimie C. Hageman • Cynthia J. Hale • Amanda N. Hall • Raquel L. Hall • Steve R. Hall • Amber L. Ham • Megan R. Hamand • Adam C. Hamilton • Ashley N. Hamilton • Lori L. Hammonds • Alex J. Hanba • Douglas P. Hanes • Bradley R. Haney
Deanna M. Hanley • Robert A. Harman • Trina S. Harmon • Jennifer M. Harrington • Angela J. Harris • Jim Harris • Tracy D. Harvey • Amy L. Hase • Todd T. Hatch • Erin M. Hathaway • Elizabeth A. Hawkins • Mary E. Hayden • Angela E. Hayes • Derek R. Hayes
Jeannette M. Hayes • Juli K. Hayes • Matthew J. Hayes • Laura L. Hazlett • Amy L. Hechlinski • Frances J. Hegyi • Matthew R. Heidet • Tammy A. Heidinger • Eric H. Heintzelman • Mary H. Hektor • Keith D. Henderson • Kathleen R. Hennessy
Melissa A. Henning • Alexandria G. Henry • Adam L. Henson • John W. Herman • Yobeth P. Hernandez Carmona • Maria V. Hernandez Estrada • Mariangelica Hernandez Garcia • Yaritza Hernandez Ortiz • Julianna D. Herring • Cristabel H. Hewitt
Grace R. Higbie • Eileen J. Higgins • Zoe D. Hightire • Cheryl Hiner • Amy R. Hines • Mary F. Hines • Arlene V. Hinkle • Tara D. Hitt • Carley A. Hobbs • Carol A. Hochstetler • Judith A. Hodgson • Kathy L. Hoffa • Lee M. Hoffman • Jami J. Holderbaum
Raquel A. Holdgrafer • Jill S. Holleman • Hayden S. Hollenbaugh • Phillip Hollett • Patricia A. Hollis • Jonathan D. Hollister • Debra A. Holloman • Alison M. Holmes • Christine E. Holmes • John D. Holmes • Marcia L. Holmes • Gregory M. Holst • Larry V. Holston
Lisa J. Holt • Geoffroy M. Honnon • Melody A. Hooley • Holly R. Horan • Judith L. Horner • Lindsey M. Horner • Amy L. Horvath • Fallon A. Horvath • Hazel C. Horvath • Kamrie L. Horvath • Sofia E. Horvath • Joanna J. Houin • Teresa K. Houin
Lashanda D. Howard • Allison B. Howell • David P. Hudak • Michael J. Hudson • Janet G. Hughes • Yi Hui Tan • Debra K. Hull • Alisha M. Humbert • Timothy M. Hunt • Joseph B. Hunting • Joy L. Hurd • Anthony T. Hurley • Linda G. Hurst • Ashlyn M. Irk
Rima Ismail • Hannah L. Jackowiak • Patricia A. Jackowiak • Jarius L. Jackson • Briana L. James • Robert L. Jamieson • Catherine E. Janowiak • Amanda M. Jaynes • Lori Jean • Amy D. Jegier • Anthony T. Jegier • Karin J. Jenczalik • Debra K. Jernas
Laura J. Jeter • Brent A. Johnson • Ian M. Johnson • Kimberly D. Johnson • Sarah J. Johnston • Alison S. Jones • Chasity Jones • Gregory A. Jones • Nancy G. Jones • Renee A. Jones • Tracy L. Jones • Michala A. Joseph • Lyle V. Juillerat • Lorra A. Junk
Tina M. Kaczorowski • Sherryl A. Kalk • Ashlyn Kannenberg • Jennifer L. Kaplachinski • Karen A. Karason • Garrett T. Kautz • Danuta E. Kawecki • Marissa E. Kay • Noreen A. Kazi • Sean B. Kearns • Robert J. Kedzior • Sabrina Keel • Ryan A. Keller
Shelly R. Keller • Peggy A. Kelley • Timothy R. Kemp • Shannon R. Kesvormas • Kevin M. Kettle • Shyann A. Kettler • Uliya G. Khailo • Kimberly K. Kimpel • Theresa L. Kinder • Karen J. King • Larry A. King • Molly K. Kinsey • Cindy L. Kirkham • Chree L. Kizer
Nicole S. Klaehn • Daniel P. Kleiman • Caleb A. Kline • Kathy I. Kline • JoAnne M. Klowetter • Kirsten A. Klupp • Jasmine J. Knarr • Mark A. Knight • Courtney L. Knotts • Shantel R. Knuth • Carey A. Koch • Sarah L. Kolodziej • Patricia A. Kondek
Joseph A. Koons • Ashley R. Kopp • David S. Kordesh • Carrie L. Kosac • Jacquelyn M. Kovach • Sarah M. Kovach • Nikole M. Kovalak • Evan M. Kovatch • Robin L. Koziczynski • Amishia R. Kreft • Alvin W. Kreske • Emily G. Krieger • Lucinda L. Krieger
Regina A. Kring • Marianne E. Kroening • Emily R. Kronewitter • Jacqueline A. Kronewitter • Elizabeth A. Kruk • Karri S. Krumnow • Marlene A. Kulesia • Stephanie L. Kuruzar • Jessica L. Kwiatkowski • Celia De La Rosa • Andrea M. Labere • Patricia L. Lahey
Lauren Lahndorf • Debrielle C. Lane • Raeanna L. Lane • Aubrie E. Lares • Lisa M. Larkin • Rachel Larson • Jennifer R. Lash • Candise N. Lassus • Kimberly A. Latson • Judith C. Lauer • Caroline M. Lawrence • Christopher D. Lawrence • Destiney J. Laxton
Maria D. Leanos Mota • Eleanor C. Lee • Sonya L. Lee • Jennifer R. Lehman • Ahrin J. Lemacks • Tiffany A. Lemak • Connie K. Lemler • Lisa D. Lewandowski • Andrew S. Lewis • Anthony J. Lewis • Carol L. Lewis • Daniel C. Lichty • Dan H. Lifferth
John D. Linabury • Jennifer M. Lincoln • Greg A. Linder • Jeffrey F. Lindstadt • Jethra D. Link • Ryan P. Lisenko • Jennifer R. Locke • Sarah E. Lockwood • Pamela K. London • Jessica L. Long • Tricia A. Long • Haleigh A. Longcore • Rhonda L. Longley
Karen S. Lopez Gutierrez • Clara F. Lorentzen • Crystal L. Love • Judy K. Love • Tyler J. Lyons • Alaina E. Maas • Aurora Machado • Bela P. Machan • Aliyah F. Madayag • Julie A. Maggio • Courtney L. Maher • Gavin Maliro • Emily K. Mammolenti
Nichole M. Mammolenti • Mark A. Manering • Haley A. Manges • Cynthia L. Mann • Kelsey J. Manson • Jennifer R. Manthey • Lesley Marben • Alexa K. Marcus • Alyssa J. Mariel • Jessica L. Markin • Victoria R. Marks • Michelle Marosz • Laura D. Marquardt
Sherry I. Martinkowski • Elizabeth G. Masson • Gerald O. Mast • John F. Mater • Robert J. Mater • Charles L. Matheny • Shannon Mathias • Ingrid E. Mathias Leuthold • Thomas Mathis • Dorothy L. Matter • Mercedes L. Matter • Amy K. Mauro • Kelsey A. Maxwell
Cindy A. May • Susan E. May • Lawrence J. Mayers • Magdalena Z. Mazurek • Renee A. McCaffery • Susan E. McClements • Joseph S. McClintock • Courtney M. McClure • Deborah K. McCormick • Andrea L. McCoskey • John A. McCreary • Leigh A. McCrorey
Holly M. McCune • Kimberly J. McDonald • Timothy D. McFeeters • Ricky D. McGee • Luping W. McGinness • Katelyn V. McGriff • Andrew T. McGuire • Sheila J. McKinney • Alonzo Medina • Mitchell J. Meersman • Brooklyn P. Mencias • Salena L. Mencias
Elsy G. Mendoza Matute • Elaine B. Merrick • Benjamin R. Merriman • Rene L. Mesaros • Jordan K. Messmann • Richard J. Michalski • Christine L. Miley • Amanda L. Miller • Christopher C. Miller • Courtney L. Miller • Cynthia L. Miller • Gage M. Miller
Jerry A. Miller • Julie J. Miller • Michele A. Miller • Neil H. Miller • Shayna M. Miller • Kathleen S. Mills • Zachary A. Minesal • Aimee J. Minich • Robyn R. Minix • Crystal Miranda • Lisa A. Misch • Brent A. Mithoefer • Christine A. Modlin • Kayleen N. Mohlke
Erica L. Molden • James A. Mollison • Megan R. Montgomery • Kiara C. Moore • Steven R. Moore • Ivan Morales Cruz • Jann E. Morris • Mackenzie N. Morris • Ronald F. Morrison • Andrea L. Morton • Debra S. Moser • Teresa A. Moss • Lori D. Moulton
Catherine C. Mrozinski • Christopher J. Murphy III • Kevin C. Murphy • Michael H. Murphy • Rebekah D. Murray • Susan M. Muszynski • Denise S. Myers • April A. Nagy • Diana L. Nagy • Anderson D. Nascimento • Amberle L. Nash • Gerik D. Nasstrom
Meredith S. Navarro • John R. Near • Tamara S. Nees • Blair K. Neidlinger • Charles J. Nelson • Melissa M. Nelson • Pamela K. Nelson • Sara K. Nelson • Sharon L. Nelson • Linda M. Nelund • Aubree E. Nettles • Kaylin L. Newcomb • Holly K. Nichols
Mallory M. Niedbalski • Mary A. Niedbalski • Rebecca A. Niedbalski • Kaitlyn G. Nieuwbeerta • Michael L. Niezgodski • Romulo Nobrega • Joe B. Noffsinger • Vanessa P. Noriega • Patrick D. Novitzki • Kenneth R. Nowacki • Suzanne T. Nowicki
Angela M. Nurnberg • Courtney R. Oberholzer • Jacqueline J. O’Blenis • Amy M. O’Brien • Anthony R. Obringer • Michael D. Ochocki • Joseph R. O’Dell • Patrick M. O’Leary • Jason M. Olejnik • Joe E. Ousley • Alyssa D. Overmyer • Melinda M. Overmyer
Brandy J. Owens • Jonathon C. Painter • Karen S. Pal • Leif C. Pallo • Joslyn J. Palmer • Bethany M. Panting • Caren C. Parko • Jennifer M. Parks • Robert E. Patrick • Cassandra N. Patterson • Donesha S. Paul • Kimberly A. Paul • Tamara M. Paulun
Anne M. Pauwels • Michelle N. Payne • Leslie L. Pazdur • Eric C. Peat • Jeffrey L. Peat • Clayton R. Pelfrey • Lacey G. Perkins • Allison J. Perry • Eric M. Person • Lisa A. Pesaresi • Amanda J. Pezan • Chanh Phasouk Lewis • Michael J. Phillips • Andrew D. Piasecki
Robert C. Piechocki • Douglas C. Pierce • Thomas D. Pietrzak • Vickie L. Pinckert • Rene S. Pipp • Shane A. Pippenger • Nathan W. Piwowar • Gerald L. Poffenroth • Deborah A. Pogotis • Annika B. Polinski • Krista L. Porman • Carmen Post • Imani F. Poua
Allyson E. Powers • Thomas S. Powley • Jennifer E. Prestine • Angela R. Price • Frances M. Price • Monique Price • Rebecca J. Pritchard • Lee M. Pritchett • Penney S. Pruett • Rebecca E. Puente • Daniel Puga • Kevin V. Putz • Janelle R. Pyclik • Julie K. Quinn
Chael A. Raica • Joshua T. Rambo • Jennifer S. Ramirez • Nori L. Ramirez • Judie A. Rankin • Monica G. Rarick • Joyce M. Rayl • Rachel A. Rayl • Juan A. Razo Ramirez • Gerardo Del Real • Austin Reas • Donna M. Reed-Hamilton • Thomas R. Reilly
Karrie Remmo • Daniel W. Rensberger • Courtney E. Rhoades • Melonie R. Rhodes • Jennifer L. Rice • Timothy D. Rice • Dawn A. Richards • Jason E. Richardson • Susan J. Richmond • Beth A. Ricksgers • Jacqueline Rico • Stephen H. Rider • Lynndy J. Rigdon
Amber N. Riggs • Linda L. Riggs • Katherine A. Riker • Daniel F. Riley • Gina M. Ritter • Shelby N. Ritter • Becky S. Rizor • Adela N. Robles • Evelyn M. Roderich • Alicia R. Roennow • Analiese K. Rogers • Margaret A. Rogers • Ryan R. Rogers • William P. Rohwer
Melissa Roldan Quintanilla • Wayne R. Roller • Robert E. Romano • Christin R. Romine • Anna L. Roose • Selene Y. Rosales • Leland L. Rose • Leslee L. Rose • Stephanie M. Rosenbaum • Jonathan B. Rountree • Tabitha M. Rowe • Della R. Rozenblit
Richard Rozenboom • Allyson R. Ruder • Milton A. Ruiz Roman • Janet L. Rumpf • Cara A. Russell • Jodie M. Russell • Lynnann Russo • Debra D. Rykovich • Lori A. Ryman • Noe Saldivar • Emily J. Sammons • Janet L. Sammut • Allyson M. Sanchez • Isis B. Sanders
Evelyn V. Santos • Bryson K. Sareen • Jessica I. Sargent • Patricia M. Sarkisian • Aarani Sarveswaran • David M. Satek • Tamika M. Saunders • Ashley M. Scarbrough • Andrea A. Schaefer • Daniel R. Schaub • Jordin N. Scheetz • Matthew C. Schiele
Veronica S. Schimmel • Adam C. Schmeltz • Sarah K. Schmidt • Stacy M. Schmitt • Crystal E. Schnick • Jacob Schoon • Jennifer E. Schrader • Sarah E. Schrader • Beth A. Schultz • Kelly A. Schulz • Teresa K. Schwelnus • Angela M. Schwenk • Lanny L. Scoby
Denise L. Scott • Julie M. Scott • Merideth L. Scott • Deenee M. Searfoss • Holly A. Searfoss • Brad A. Searing • Kristy S. Sears-Curtis • Daniel P. Seely • Terry L. Seely • James R. Seitz • Austin M. Sellers • Sarah E. Shaw • Megan R. Sheets • Sarah S. Sheets
Caitlin T. Sheler • Erin N. Shell • Scott L. Shelly • Shayla K. Shembarger • Rebecca L. Sherman • Shane R. Shidaker • Lee A. Shirley • Pamela J. Shirtz • Andrea G. Short • Kimberly J. Shrewsbury • Laura Shumate • Candy L. Sickels • Lorelei D. Siddall
Thomas J. Siddons • Kristine M. Sieczko • Stephanie L. Siglawski • Tamara Simon • Patricia A. Skaggs • Janice Skok • Suzanne R. Slavinskas • Derek S. Sleman • Charles C. Slomski • Joann L. Small • Brooke A. Smith • Chelsea R. Smith • Claire C. Smith
Darnisha S. Smith • Debra L. Smith • Heather M. Smith • Lindsey N. Smith • Robert D. Smith • Hayley P. Snider • Graham R. Snyder • Melissa A. Snyder • Tangee R. Sobchak • Kathleen D. Solomon • Angela R. Sorg • Jorge L. Soria Foust • Bruno Souza
Rachel R. Spanley • Dominique M. Spears • Kanetha K. Speck • Rebecca L. Spicer • Yi Spindler • Kati J. Spite • Justin W. Spyker • Luke P. Squires • Olivia A. Stair • Pamela K. Stalbaum • Victoria L. Stanley • Pamela L. Staples • Emma E. Steadman
Pamela Stearns • Tara M. Steele • Austin N. Steffen • Jordan A. Stein • Brittny M. Stephan • Amber M. Stephenson • Jessica E. Stephenson • Michelle R. Stesiak • April Stetten • Laura S. Stewart • James A. Story • William C. Strafford
Megan M. Strainis • Keith R. Strong • Gregory J. Stroupe • Andrew J. Strycker • Laura J. Strzelecki • Pamela S. Stump • Brittany L. Stutzman • Savannah J. Sullivan • Dawn M. Sumption • Samuel G. Sweeney • Krystal M. Sweet • Patricia M. Swihart
Ryan M. Swygart • Scott B. Szakonyi • Nataliya Szalay • Jerry D. Szmanda • Michael Szymanski • Kim M. Tagliaferri • Marlene A. Taiclet • Karlee M. Taylor • Mark E. Taylor • Eric E. Teall • Thomas A. Tearney • Sara L. Terrones • Cherry L. Terry
Storm E. Terry • Nicole L. Teske • Carri L. Thessin • Julie L. Thode • Margaret A. Thomas • Kurt B. Thompson • Matthew J. Thompson • Steven A. Thompson • Jennifer N. Thorson • Michelle A. Thurin • Katlin R. Tibbs • Lori S. Tierce • Peter A. Timler
Melissa S. Tobias • Taran N. Tomaszewski • Sharon L. Tompkins • Scott M. Tonkovich • Michele J. Torzewski • Elizabeth M. Tosh • Cindy B. Trenerry • Wade N. Trimmer • Robert A. Troup • David P. Troxell • Cynthia T. Truax • Danielle C. Trumbull
Kandis M. Tubb • Sharon L. Tucker • Dawn M. Tungate • Steven A. Turcotte • Kailee B. Turner • Admira Tursunovic • Alison D. Tusing • Clifford D. Tuttle • Patricia J. Tyl • Johniece A. Tyler • Chalexis J. Tyson Bradley • Courtney J. Uhl • Douglas J. Umbaugh
Jaime L. Unate-Martin • Brittaney D. Unger • Lindsay M. Utnik • Jeannie Valencourt • Carla Valeris • Erin E. Van Dieren • Brian E. Van Duyn • Kellen J. Van Hulle • Jennifer R. Van Leeuwen • Opal K. Vandemark • Maria I. Varela
Daniela D. Vasquez Ramirez • Cynthia A. Vasta • Gloria Vaughan McKown • Laura E. Vaughn • Marilyn Velazquez • Tanya E. Vermande • Georganne L. Vervaet • Rebecca J. Vervaet • Trisha L. Vervynckt • Matthew D. Vessely • Mercedes L. Vest
Jacqueline S. Vida • Gabrielle L. Vires • Margaret M. Voorheis • David A. Voors • Kristin R. Vowles • Mary F. Wageman • Nancy M. Wagenblast • Cassondra R. Wagner • Amy R. Wagoner • Mark E. Waldron • Craig R. Wales • Kristina J. Walker
Sarah J. Walker • Shea L. Wallace • Caleb J. Walma • Jonathan B. Walmer • Julia E. Walsh • Krista M. Walsh • Sarah R. Walsh • Emily J. Walton • Cheung Wan Lee • Darrell M. Warren • Katie R. Wasilewski • Charles D. Waterbury • Amber M. Watson
Erik G. Watson • Brianna A. Watts • Jessica A. Watts • Brandie M. Wawrzynski • Pamela J. Weaver • Kimberley A. Webb • Caleb M. Wedeven • Gloria R. Weesner • Zina B. Weidow • Nicholas S. Weiler • Cecile A. Weir • Valerie C. Weis • Cari R. Wells
Kimberly A. Wenrick • Deborah A. Wentland • Mary K. Wenzel • David A. Wertz • Kayla R. West • Cheryl K. Wetters • Renee M. Whalen • Joshua A. Wheeler • Alan C. Whipps • Amy L. White • Carolyn White • David W. White • Victoria E. White
Jennifer L. Whitmer • Keisha M. Whitt • Jan E. Wilhelm • Crystal T. Williams • Jeffrey A. Williams • Jennie V. Williams • Luke E. Williams • Marshall G. Williams • Michelle A. Williams • Calelia A. Willocks • Jody L. Wilson • Melody A. Wilson • Tamara L. Wilson
Jennifer L. Wilusz • Jeanette M. Win • Brittany M. Winde • Stacey J. Wing • Katherine F. Winger • Julli B. Wirt • Tracy L. Wise • Philip A. Wiseman • Lee M. Wisler • Phillip A. Witt • Andrea S. Wittendorf • Lisa S. Wolf • Renie C. Wolf • April L. Wolford • Kelly L. Woloszyn
Janine E. Wood • Kristen R. Woodrick • Stephanie G. Worm • Rachel A. Worner • Megan M. Wroblewski • Dinghong Wu • Kelly J. Wunder • Jonathon B. Wyatt • Emily K. Wykoff • Latoya S. Yarber • Rayfield Yarber • Casey A. Yerger • Jared N. Yoder
Rachel E. Young • Matthew J. Zakrowski • Luis Zapata • Marcus I. Zarembka • Elizabeth M. Zarzecki • Amanda G. Zehr • Emily Zelaya • Ronald W. Zeltwanger • Megan M. Zettergren • Drew T. Ziesmer • Monsette C. Zimmerman • Seth M. Zimmerman • Ashley J. Zumbrun
Recognized as the Top-Ranked
Bank Headquartered in Indiana
“Best-In-State-Banks” | 2018 Forbes Survey
2019 ANNUAL REPORT
CONTENTS
Corporate Description
2019 in Brief
Financial Highlights
2019 Annual Shareholders’ Letter
Small Business Administration
2013 – 2019 Indiana SBA Community
Lender Gold Level Award
#1 SBA Lender in our
Indiana Footprint
Directors and Officers
Shareholders’ Information
2019 Indiana Rural Lender of the Year
Financial Report
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Services and Locations
Inside Back Cover
Recognized as
‘Best Places to Work: Professional
Development’ — 2018 & 2019
‘Best Investment Firm’ — 2019
KBW Honor Roll
2019
BauerFinancial
5 Star “Superior” Rating
Highest rating possible. Based on capital
ratio, profitability/loss trend, credit quality
and CRA ratings
Ranked #22 | 2019 Top 50
U.S. Bank Finance/Leasing Company
Ranked #37 | 2019 Top 100 Largest
Equipment Finance/Leasing
Companies in the U.S.
STRAIGHT TALK
and
SOUND ADVICE
SINCE 1863
Strong. Stable. Local. Personal. We are 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.
CORPORATE DESCRIPTION
1st Source Corporation is the largest locally controlled financial
institution headquartered in the northern Indiana-southwestern
Michigan area serving the region since 1863. While delivering a
comprehensive range of consumer, commercial and digital banking
services, 1st Source has distinguished itself with highly personalized
services and distinctive convenience. 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.
The Corporation has 80 banking centers in 17 counties in Indiana,
Michigan and one county in Florida, ten 1st Source Insurance
offices, eight Wealth Advisory Services locations, and 15 locations
nationwide for the 1st Source Specialty Finance Group. 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.
Average Deposits
(cid:7)(cid:7)(cid:2)
(cid:9)(cid:9)(cid:14)(cid:8)
(cid:7)(cid:8)(cid:14)
(cid:14)(cid:13)(cid:8)
(cid:14)(cid:7)(cid:9)
(cid:7)(cid:7)(cid:2)
(cid:9)(cid:14)(cid:11)(cid:9)
(cid:8)(cid:13)(cid:5)
(cid:6)(cid:5)(cid:12)(cid:5)
(cid:6)(cid:5)(cid:11)(cid:9)
(cid:7)(cid:7)(cid:2)
(cid:9)(cid:8)(cid:5)(cid:8)
(cid:6)(cid:14)(cid:10)
(cid:14)(cid:9)(cid:9)
(cid:14)(cid:13)(cid:7)
(cid:7)(cid:7)(cid:2)
(cid:8)(cid:14)(cid:11)(cid:6)
(cid:6)(cid:12)(cid:13)
(cid:13)(cid:10)(cid:9)
(cid:13)(cid:11)(cid:5)
(cid:7)(cid:7)(cid:2)
(cid:2)(cid:1)(cid:20)(cid:35)(cid:34)(cid:31)(cid:34)(cid:39)(cid:28)(cid:37)(cid:28)(cid:38)(cid:39)(cid:4)
(cid:25)(cid:28)(cid:24)(cid:37)(cid:31)(cid:34)(cid:29)(cid:1)(cid:26)(cid:30)(cid:28)(cid:26)(cid:32)(cid:31)(cid:34)(cid:29)
(cid:10)(cid:7)(cid:12)(cid:12)
(cid:23)(cid:35)(cid:39)(cid:24)(cid:33)(cid:1)(cid:18)(cid:28)(cid:36)(cid:35)(cid:38)(cid:31)(cid:39)(cid:38)
(cid:9)(cid:10)(cid:9)
(cid:6)(cid:6)(cid:12)(cid:7)
(cid:16)(cid:37)(cid:35)(cid:32)(cid:28)(cid:37)(cid:28)(cid:27)(cid:1)(cid:17)(cid:18)
(cid:20)(cid:35)(cid:34)(cid:31)(cid:34)(cid:39)(cid:28)(cid:37)(cid:28)(cid:38)(cid:39)(cid:4)
(cid:25)(cid:28)(cid:24)(cid:37)(cid:31)(cid:34)(cid:29)(cid:1)
(cid:26)(cid:30)(cid:28)(cid:26)(cid:32)(cid:31)(cid:34)(cid:29)
(cid:6)(cid:6)(cid:14)(cid:6)
(cid:17)(cid:18)(cid:1)(cid:3)(cid:1)(cid:19)(cid:21)(cid:15)
(cid:7)(cid:5)(cid:11)(cid:14)
(cid:7)(cid:6)(cid:13)(cid:7)
(cid:7)(cid:8)(cid:9)(cid:12)
(cid:7)(cid:9)(cid:10)(cid:5)
(cid:7)(cid:9)(cid:11)(cid:5)
(cid:22)(cid:24)(cid:40)(cid:31)(cid:34)(cid:29)(cid:38)(cid:1)(cid:3)(cid:1)
(cid:19)(cid:34)(cid:39)(cid:28)(cid:37)(cid:28)(cid:38)(cid:39)(cid:4)(cid:25)(cid:28)(cid:24)(cid:37)(cid:31)(cid:34)(cid:29)(cid:1)
(cid:26)(cid:30)(cid:28)(cid:26)(cid:32)(cid:31)(cid:34)(cid:29)
(cid:7)(cid:5)(cid:6)(cid:10)
(cid:7)(cid:5)(cid:6)(cid:11)
(cid:7)(cid:5)(cid:6)(cid:12)
(cid:7)(cid:5)(cid:6)(cid:13)
(cid:7)(cid:5)(cid:6)(cid:14)
(cid:20)(cid:26)(cid:38)(cid:1)(cid:18)(cid:29)(cid:24)(cid:36)(cid:28)(cid:26)(cid:6)(cid:21)(cid:27)(cid:27)(cid:37)
(cid:20)(cid:34)(cid:33)(cid:35)(cid:26)(cid:36)(cid:27)(cid:34)(cid:36)(cid:32)(cid:30)(cid:33)(cid:28)(cid:1)(cid:17)(cid:37)(cid:37)(cid:26)(cid:38)(cid:37)
(cid:19)(cid:34)(cid:24)(cid:33)(cid:1)(cid:3)(cid:1)(cid:19)(cid:26)(cid:24)(cid:37)(cid:26)(cid:1)(cid:19)(cid:34)(cid:37)(cid:37)(cid:1)(cid:23)(cid:26)(cid:37)(cid:26)(cid:36)(cid:40)(cid:26)
(cid:10)(cid:7)(cid:10)(cid:9)
(cid:10)(cid:7)(cid:9)(cid:9)
(cid:10)(cid:7)(cid:9)(cid:8)
(cid:10)(cid:7)(cid:8)(cid:15)
(cid:10)(cid:7)(cid:9)(cid:16)
(cid:8)(cid:7)(cid:12)(cid:8)
(cid:4)(cid:8)(cid:7)(cid:8)(cid:10)(cid:5)
(cid:10)(cid:8)(cid:9)(cid:12)
(cid:8)(cid:7)(cid:14)(cid:8)
(cid:8)(cid:7)(cid:9)(cid:11)
(cid:8)(cid:7)(cid:13)(cid:14)
(cid:8)(cid:7)(cid:8)(cid:13)
(cid:8)(cid:7)(cid:14)(cid:9)
(cid:8)(cid:7)(cid:10)(cid:16)
(cid:8)(cid:7)(cid:11)(cid:14)
(cid:8)(cid:7)(cid:9)(cid:8)
(cid:10)(cid:8)(cid:9)(cid:13)
(cid:10)(cid:8)(cid:9)(cid:14)
(cid:10)(cid:8)(cid:9)(cid:15)
(cid:10)(cid:8)(cid:9)(cid:16)
(cid:16)(cid:22)(cid:32)(cid:1)(cid:15)(cid:28)(cid:20)(cid:29)(cid:27)(cid:22)(cid:1)(cid:17)(cid:33)(cid:27)(cid:27)(cid:18)(cid:30)(cid:35)
Net Income Summary
(cid:5)(cid:10)(cid:10)(cid:10)(cid:41)(cid:6)
(cid:8)(cid:6)(cid:7)(cid:13)
(cid:8)(cid:6)(cid:7)(cid:12)
(cid:2)(cid:1)(cid:14)(cid:24)(cid:18)(cid:28)(cid:23)(cid:22) (cid:3)(cid:1)(cid:14)(cid:24)(cid:18)(cid:28)(cid:23)(cid:22)
(cid:24)(cid:30)(cid:42)(cid:1)(cid:33)(cid:36)(cid:42)(cid:30)(cid:40)(cid:30)(cid:41)(cid:42) (cid:33)(cid:36)(cid:28)(cid:37)(cid:35)(cid:30)(cid:1)
(cid:2)(cid:12)(cid:12)(cid:13)(cid:8)(cid:18)(cid:16)(cid:16) (cid:2)(cid:12)(cid:11)(cid:13)(cid:8)(cid:19)(cid:10)(cid:16)
(cid:19)(cid:8)(cid:19)(cid:16)(cid:10)
(cid:14)(cid:9)(cid:17)(cid:1)(cid:3)
(cid:25)(cid:40)(cid:37)(cid:44)(cid:33)(cid:41)(cid:33)(cid:37)(cid:36)(cid:1)(cid:31)(cid:37)(cid:40)(cid:1)(cid:34)(cid:37)(cid:26)(cid:36)(cid:1)(cid:4)(cid:1)(cid:34)(cid:30)(cid:26)(cid:41)(cid:30)(cid:1)(cid:34)(cid:37)(cid:41)(cid:41)(cid:30)(cid:41)
(cid:11)(cid:15)(cid:8)(cid:18)(cid:13)(cid:13)
(cid:11)(cid:19)(cid:8)(cid:14)(cid:16)(cid:12)
(cid:5)(cid:13)(cid:8)(cid:16)(cid:12)(cid:19)(cid:6)
(cid:5)(cid:11)(cid:18)(cid:9)(cid:16)(cid:6)(cid:3)
(cid:24)(cid:30)(cid:42)(cid:1)(cid:33)(cid:36)(cid:42)(cid:30)(cid:40)(cid:30)(cid:41)(cid:42)(cid:1)(cid:33)(cid:36)(cid:28)(cid:37)(cid:35)(cid:30)(cid:1)(cid:26)(cid:31)(cid:42)(cid:30)(cid:40)(cid:1)(cid:38)(cid:40)(cid:37)(cid:44)(cid:33)(cid:41)(cid:33)(cid:37)(cid:36)
(cid:12)(cid:10)(cid:18)(cid:8)(cid:10)(cid:13)(cid:13)
(cid:11)(cid:19)(cid:14)(cid:8)(cid:14)(cid:14)(cid:14)
(cid:11)(cid:13)(cid:8)(cid:15)(cid:18)(cid:19)
(cid:24)(cid:37)(cid:36)(cid:33)(cid:36)(cid:42)(cid:30)(cid:40)(cid:30)(cid:41)(cid:42)(cid:1)(cid:33)(cid:36)(cid:28)(cid:37)(cid:35)(cid:30)(cid:7)
(cid:24)(cid:37)(cid:36)(cid:33)(cid:36)(cid:42)(cid:30)(cid:40)(cid:30)(cid:41)(cid:42)(cid:1)(cid:30)(cid:45)(cid:38)(cid:30)(cid:36)(cid:41)(cid:30)(cid:7)
(cid:17)(cid:16)(cid:8)(cid:10)(cid:10)(cid:12)
(cid:17)(cid:10)(cid:8)(cid:18)(cid:10)(cid:12)
(cid:11)(cid:16)(cid:13)(cid:8)(cid:18)(cid:18)(cid:11)
(cid:11)(cid:16)(cid:10)(cid:8)(cid:12)(cid:11)(cid:19)
(cid:15)(cid:8)(cid:12)(cid:10)(cid:10)
(cid:13)(cid:8)(cid:16)(cid:16)(cid:12)
(cid:17)(cid:9)(cid:10)(cid:1)(cid:3)
(cid:17)(cid:9)(cid:13)(cid:1)(cid:3)
(cid:12)(cid:9)(cid:13)(cid:1)(cid:3)
(cid:22)(cid:36)(cid:28)(cid:37)(cid:35)(cid:30)(cid:1)(cid:27)(cid:30)(cid:31)(cid:37)(cid:40)(cid:30)(cid:1)(cid:33)(cid:36)(cid:28)(cid:37)(cid:35)(cid:30)(cid:1)(cid:42)(cid:26)(cid:45)(cid:30)(cid:41)
(cid:11)(cid:12)(cid:10)(cid:8)(cid:11)(cid:15)(cid:14)
(cid:11)(cid:10)(cid:15)(cid:8)(cid:10)(cid:12)(cid:17)
(cid:11)(cid:15)(cid:8)(cid:11)(cid:12)(cid:17)
(cid:11)(cid:14)(cid:9)(cid:14)(cid:1)(cid:3)
(cid:22)(cid:36)(cid:28)(cid:37)(cid:35)(cid:30)(cid:1)(cid:42)(cid:26)(cid:45)(cid:1)(cid:30)(cid:45)(cid:38)(cid:30)(cid:36)(cid:41)(cid:30)
(cid:12)(cid:18)(cid:8)(cid:11)(cid:13)(cid:19)
(cid:12)(cid:12)(cid:8)(cid:16)(cid:11)(cid:13)
(cid:15)(cid:8)(cid:15)(cid:12)(cid:16)
(cid:12)(cid:14)(cid:9)(cid:14)(cid:1)(cid:3)
(cid:16)(cid:22)(cid:32)(cid:1)(cid:25)(cid:28)(cid:20)(cid:29)(cid:27)(cid:22)
(cid:13)(cid:8)(cid:4)(cid:6)(cid:7)(cid:10)
(cid:12)(cid:8)(cid:4)(cid:9)(cid:7)(cid:9)
(cid:13)(cid:4)(cid:11)(cid:6)(cid:7)
(cid:7)(cid:7)(cid:5)(cid:11) (cid:3)
(cid:24)(cid:30)(cid:42)(cid:1)(cid:33)(cid:36)(cid:28)(cid:37)(cid:35)(cid:30)(cid:1)(cid:26)(cid:42)(cid:42)(cid:40)(cid:33)(cid:27)(cid:43)(cid:42)(cid:26)(cid:27)(cid:34)(cid:30)(cid:1)(cid:42)(cid:37)(cid:1)(cid:36)(cid:37)(cid:36)(cid:28)(cid:37)(cid:36)(cid:42)(cid:40)(cid:37)(cid:34)(cid:34)(cid:33)(cid:36)(cid:32)(cid:1)
(cid:33)(cid:36)(cid:42)(cid:30)(cid:40)(cid:30)(cid:41)(cid:42)(cid:41)
(cid:16)(cid:22)(cid:32)(cid:1)(cid:25)(cid:28)(cid:20)(cid:29)(cid:27)(cid:22)(cid:1)(cid:18)(cid:34)(cid:18)(cid:25)(cid:26)(cid:18)(cid:19)(cid:26)(cid:22)(cid:1)(cid:32)(cid:29)(cid:1)(cid:20)(cid:29)(cid:27)(cid:27)(cid:29)(cid:28)(cid:1)
(cid:31)(cid:24)(cid:18)(cid:30)(cid:22)(cid:24)(cid:29)(cid:26)(cid:21)(cid:22)(cid:30)(cid:31)
* Excludes leased equipment depreciation
(cid:7)(cid:1)(cid:21)(cid:45)(cid:28)(cid:34)(cid:43)(cid:29)(cid:30)(cid:41)(cid:1)(cid:34)(cid:30)(cid:26)(cid:41)(cid:30)(cid:29)(cid:1)(cid:30)(cid:39)(cid:43)(cid:33)(cid:38)(cid:35)(cid:30)(cid:36)(cid:42)(cid:1)(cid:29)(cid:30)(cid:38)(cid:40)(cid:30)(cid:28)(cid:33)(cid:26)(cid:42)(cid:33)(cid:37)(cid:36)
(cid:5)(cid:15)(cid:15)(cid:6)
(cid:46)
(cid:5)(cid:15)(cid:15)(cid:6)
(cid:24)(cid:23)
(cid:2)(cid:1)(cid:13)(cid:7)(cid:4)(cid:13)(cid:11)(cid:6)
(cid:2)(cid:1)(cid:12)(cid:8)(cid:4)(cid:9)(cid:7)(cid:9)
(cid:13)(cid:4)(cid:10)(cid:9)(cid:11)
(cid:7)(cid:7)(cid:5)(cid:11)(cid:3)
(cid:2)(cid:1)(cid:4)(cid:4)(cid:3)
(cid:10)(cid:10)(cid:5)(cid:5)
(cid:9)(cid:10)(cid:5)(cid:5)
(cid:8)(cid:10)(cid:5)(cid:5)
(cid:7)(cid:10)(cid:5)(cid:5)
(cid:6)(cid:10)(cid:5)(cid:5)
(cid:10)(cid:5)(cid:5)
(cid:11)(cid:7)(cid:8)(cid:8)
(cid:10)(cid:7)(cid:12)(cid:8)
(cid:10)(cid:7)(cid:8)(cid:8)
(cid:9)(cid:7)(cid:12)(cid:8)
(cid:9)(cid:7)(cid:8)(cid:8)
(cid:8)(cid:7)(cid:12)(cid:8)
(cid:8)(cid:7)(cid:8)(cid:8)
(cid:4)(cid:8)(cid:7)(cid:12)(cid:8)(cid:5)
2019 In Brief:
2019 net income was $91.96 million compared to $82.41 million
earned in 2018. Diluted net income per common share for 2019
was $3.57, up from $3.16 the previous year.
Return on average total assets was 1.41% compared to 1.34% a year
ago. Return on average common shareholders’ equity was 11.50%
for 2019, compared to 11.09% for 2018. The average common
shareholders’ equity-to-average assets ratio for 2019 was 12.25%
compared to 12.08% last year.
At year-end, total assets were $6.62 billion, up 5.23% from a year
earlier. Loans and leases were $5.09 billion, up 5.17%, deposits were
$5.36 billion, up 4.59% from 2018 and common shareholders’
equity was $828.28 million, an increase of 8.69% from a year earlier.
The reserve for loan and lease losses at year-end was 2.19% of
total loans and leases, compared to 2.08% the prior year. The ratio
of nonperforming assets to loans and leases was 0.37% for 2019,
compared to 0.71% for 2018.
Average Loans and Leases
(cid:7)(cid:4)(cid:4)(cid:7)
(cid:7)(cid:10)(cid:10)
(cid:11)(cid:3)(cid:11)
(cid:5)(cid:10)(cid:8)
(cid:7)(cid:6)(cid:3)
(cid:9)(cid:5)(cid:12)
(cid:7)(cid:6)(cid:6)(cid:6)
(cid:8)(cid:5)(cid:4)
(cid:11)(cid:3)(cid:5)
(cid:5)(cid:11)(cid:11)
(cid:7)(cid:10)(cid:5)
(cid:9)(cid:8)(cid:6)
(cid:7)(cid:10)(cid:8)(cid:8)
(cid:9)(cid:5)(cid:10)
(cid:11)(cid:7)(cid:11)
(cid:5)(cid:10)(cid:11)
(cid:8)(cid:7)(cid:6)
(cid:9)(cid:8)(cid:7)
(cid:8)(cid:3)(cid:3)(cid:3)
(cid:19)(cid:32)(cid:35)(cid:20)(cid:29)(cid:1)(cid:17)(cid:32)(cid:20)(cid:31)(cid:34)(cid:1)(cid:20)(cid:31)(cid:22)(cid:1)
(cid:17)(cid:23)(cid:20)(cid:34)(cid:23)(cid:34)
(cid:9)(cid:9)(cid:12)
(cid:11)(cid:3)(cid:6)
(cid:5)(cid:11)(cid:12)
(cid:8)(cid:12)(cid:10)
(cid:9)(cid:9)(cid:6)
(cid:14)(cid:32)(cid:31)(cid:34)(cid:35)(cid:33)(cid:36)(cid:21)(cid:35)(cid:27)(cid:32)(cid:31)(cid:1)
(cid:13)(cid:27)(cid:33)(cid:21)(cid:33)(cid:20)(cid:24)(cid:35)
(cid:18)(cid:23)(cid:22)(cid:27)(cid:36)(cid:30)(cid:1)(cid:2)(cid:1)(cid:16)(cid:23)(cid:20)(cid:37)(cid:38)(cid:1)
(cid:15)(cid:36)(cid:35)(cid:38)(cid:1)(cid:19)(cid:33)(cid:36)(cid:21)(cid:28)
(cid:13)(cid:36)(cid:35)(cid:32)(cid:1)(cid:2)(cid:1)(cid:17)(cid:27)(cid:25)(cid:26)(cid:35)(cid:1)(cid:19)(cid:33)(cid:36)(cid:21)(cid:28)
(cid:14)(cid:32)(cid:31)(cid:34)(cid:36)(cid:30)(cid:23)(cid:33)(cid:1)(cid:17)(cid:32)(cid:20)(cid:31)(cid:34)(cid:1)
(cid:20)(cid:31)(cid:22)(cid:1)(cid:18)(cid:32)(cid:33)(cid:35)(cid:25)(cid:20)(cid:25)(cid:23)(cid:34)
(cid:4)(cid:6)(cid:9)(cid:10)
(cid:4)(cid:7)(cid:12)(cid:8)
(cid:4)(cid:8)(cid:12)(cid:10)
(cid:4)(cid:11)(cid:3)(cid:8)
(cid:4)(cid:12)(cid:10)(cid:12)
(cid:14)(cid:32)(cid:30)(cid:30)(cid:23)(cid:33)(cid:21)(cid:27)(cid:20)(cid:29)(cid:1)(cid:17)(cid:32)(cid:20)(cid:31)(cid:34)(cid:1)
(cid:20)(cid:31)(cid:22)(cid:1)(cid:18)(cid:32)(cid:33)(cid:35)(cid:25)(cid:20)(cid:25)(cid:23)(cid:34)
(cid:2)(cid:1)(cid:4)(cid:4)(cid:3)
(cid:8)(cid:4)(cid:3)(cid:3)
(cid:7)(cid:4)(cid:3)(cid:3)
(cid:6)(cid:11)(cid:6)(cid:10)
(cid:7)(cid:6)(cid:8)
(cid:10)(cid:8)(cid:10)
(cid:5)(cid:8)(cid:7)
(cid:7)(cid:5)(cid:5)
(cid:9)(cid:3)(cid:5)
(cid:6)(cid:4)(cid:3)(cid:3)
(cid:5)(cid:4)(cid:3)(cid:3)
(cid:4)(cid:4)(cid:3)(cid:3)
(cid:4)(cid:3)(cid:3)
Net Income (in millions)
(cid:11)(cid:5)(cid:2)(cid:3)
(cid:10)(cid:5)(cid:2)(cid:6)
(cid:7)(cid:9)(cid:2)(cid:7)
(cid:7)(cid:9)(cid:2)(cid:10)
(cid:8)(cid:10)(cid:2)(cid:4)
(cid:5)(cid:3)(cid:4)(cid:7)
(cid:5)(cid:3)(cid:4)(cid:8)
(cid:5)(cid:3)(cid:4)(cid:9)
(cid:5)(cid:3)(cid:4)(cid:10)
(cid:5)(cid:3)(cid:4)(cid:11)
Return on Average Assets (as a percent)
(cid:4)(cid:2)(cid:4)(cid:8)
(cid:4)(cid:2)(cid:3)(cid:11)
(cid:4)(cid:2)(cid:5)(cid:4)
(cid:4)(cid:2)(cid:6)(cid:7)
(cid:4)(cid:2)(cid:7)(cid:4)
(cid:4)(cid:3)(cid:3)
(cid:10)(cid:3)
(cid:8)(cid:3)
(cid:6)(cid:3)
(cid:5)(cid:3)
(cid:3)
(cid:4)(cid:2)(cid:8)(cid:3)
(cid:4)(cid:2)(cid:6)(cid:3)
(cid:4)(cid:2)(cid:4)(cid:3)
(cid:3)(cid:2)(cid:12)(cid:3)
(cid:3)(cid:2)(cid:10)(cid:3)
(cid:3)(cid:2)(cid:8)(cid:3)
(cid:3)(cid:2)(cid:6)(cid:3)
(cid:3)(cid:2)(cid:4)(cid:3)
Loan and Lease Quality (% of Loans and Leases)
(cid:5)(cid:3)(cid:4)(cid:8)
(cid:5)(cid:3)(cid:4)(cid:9)
(cid:5)(cid:3)(cid:4)(cid:10)
(cid:5)(cid:3)(cid:4)(cid:11)
(cid:5)(cid:3)(cid:4)(cid:12)
(cid:24)(cid:23)(cid:1)(cid:20)(cid:1)(cid:24)(cid:37)(cid:42)(cid:1)(cid:23)(cid:30)(cid:26)(cid:36)(cid:33)(cid:36)(cid:32)(cid:31)(cid:43)(cid:34)
(cid:5)(cid:3)(cid:4)(cid:8)
(cid:5)(cid:3)(cid:4)(cid:9)
(cid:5)(cid:3)(cid:4)(cid:10)
(cid:5)(cid:3)(cid:4)(cid:11)
(cid:5)(cid:3)(cid:4)(cid:12)
i
FINANCIAL HIGHLIGHTS
Earnings and Dividends
(Dollars in thousands, except per share amounts)
2019
2018
2017
2016
2015
Net interest income
$ 223,866
$ 213,906
$ 185,631
$ 169,659
$ 166,521
Provision for loan and lease losses
Noninterest income
Noninterest expense
15,833
101,130
19,462
97,050
8,980
98,706
5,833
88,945
2,160
83,316
189,009
186,467
173,997
163,645
159,114
Net income available to common shareholders
91,960
Common cash dividends
29,021
82,414
25,686
68,051
20,431
57,786
19,416
57,486
18,126
Per common share
Diluted net income
Cash dividends
Book value
$
3.57
$
3.16
$
2.60
$
2.22
$
2.17
Return on average common shareholders’ equity
11.50 %
11.09 %
Return on average assets
1.41 %
1.34 %
1.100
32.47
0.960
29.56
0.760
27.70
9.69 %
1.21 %
0.720
26.00
8.71 %
1.08 %
0.671
24.75
9.05 %
1.15 %
Statement of Condition
Average Balances: (Dollars in thousands)
Assets
Earning assets
Investments
Loans and leases
$ 6,528,274
$ 6,151,439
$ 5,638,322
$ 5,360,685
$ 4,994,208
6,104,673
5,761,761
5,251,094
5,003,922
4,668,811
1,014,659
951,812
854,879
812,501
786,980
5,000,161
4,755,256
4,333,375
4,113,508
3,837,149
Reserve for loan and lease losses
105,340
99,258
92,187
90,206
87,208
Deposits
5,276,736
4,963,663
4,493,247
4,302,701
3,961,060
Interest bearing liabilities
4,440,905
4,288,617
3,889,169
3,695,309
3,459,939
Shareholders’ equity
799,736
743,173
702,419
663,703
635,497
(cid:19)(cid:39)(cid:26)(cid:35)(cid:24)(cid:27)(cid:26)(cid:1)(cid:20)(cid:33)(cid:31)(cid:31)(cid:33)(cid:32)(cid:1)(cid:23)(cid:28)(cid:24)(cid:35)(cid:26)(cid:28)(cid:33)(cid:30)(cid:25)(cid:26)(cid:35)(cid:36)(cid:41)(cid:1)(cid:21)(cid:34)(cid:38)(cid:29)(cid:37)(cid:40)
Average Common Shareholders’ Equity
Diluted Net Income Per Common Share
(cid:19)(cid:39)(cid:27)(cid:7)(cid:1)(cid:20)(cid:33)(cid:31)(cid:31)(cid:33)(cid:32)(cid:1)(cid:21)(cid:34)(cid:38)(cid:29)(cid:37)(cid:40)(cid:1)(cid:4)(cid:2)(cid:22)(cid:22)(cid:5)
(cid:19)(cid:39)(cid:27)(cid:7)(cid:1)(cid:20)(cid:33)(cid:31)(cid:31)(cid:33)(cid:32)(cid:1)(cid:21)(cid:34)(cid:38)(cid:29)(cid:37)(cid:40)(cid:8)(cid:19)(cid:36)(cid:36)(cid:26)(cid:37)(cid:36)(cid:1)(cid:4)(cid:3)(cid:5)
(cid:15)(cid:12)(cid:14)(cid:7)(cid:14)
(cid:10)(cid:11)(cid:7)(cid:16)(cid:11)
(cid:17)(cid:11)(cid:9)
(cid:16)(cid:11)(cid:9)
(cid:15)(cid:11)(cid:9)
(cid:14)(cid:11)(cid:9)
(cid:13)(cid:11)(cid:9)
(cid:12)(cid:11)(cid:9)
(cid:11)(cid:11)(cid:9)
(cid:16)(cid:18)(cid:18)(cid:7)(cid:16)
(cid:16)(cid:13)(cid:12)(cid:7)(cid:11)
(cid:15)(cid:15)(cid:12)(cid:7)(cid:16)
(cid:16)(cid:9)(cid:11)(cid:7)(cid:13)
(cid:10)(cid:11)(cid:7)(cid:12)(cid:17)
(cid:10)(cid:11)(cid:7)(cid:13)(cid:15)
(cid:10)(cid:11)(cid:7)(cid:9)(cid:17)
(cid:10)(cid:11)(cid:7)(cid:11)(cid:14)
(cid:10)(cid:14)(cid:7)(cid:9)
(cid:10)(cid:13)(cid:7)(cid:9)
(cid:10)(cid:12)(cid:7)(cid:9)
(cid:10)(cid:11)(cid:7)(cid:9)
(cid:10)(cid:10)(cid:7)(cid:9)
(cid:10)(cid:9)(cid:7)(cid:9)
(cid:2)(cid:8)(cid:3)(cid:6)(cid:4)
(cid:2)(cid:7)(cid:3)(cid:9)(cid:4)
(cid:2)(cid:6)(cid:3)(cid:12)(cid:4)
(cid:2)(cid:6)(cid:3)(cid:5)(cid:4)
(cid:2)(cid:5)(cid:3)(cid:8)(cid:4)
(cid:2)(cid:4)(cid:3)(cid:11)(cid:4)
(cid:2)(cid:4)(cid:3)(cid:4)(cid:4)
(cid:11)(cid:9)(cid:10)(cid:14)
(cid:11)(cid:9)(cid:10)(cid:15)
(cid:11)(cid:9)(cid:10)(cid:16)
(cid:11)(cid:9)(cid:10)(cid:17)
(cid:11)(cid:9)(cid:10)(cid:18)
Return on Average Common Shareholders’ Equity (as a percent)
(cid:7)(cid:3)(cid:9)(cid:11)
(cid:7)(cid:3)(cid:5)(cid:10)
(cid:6)(cid:3)(cid:5)(cid:11)
(cid:6)(cid:3)(cid:6)(cid:6)
(cid:6)(cid:3)(cid:10)(cid:4)
(cid:6)(cid:4)(cid:5)(cid:9)
(cid:6)(cid:4)(cid:5)(cid:10)
(cid:6)(cid:4)(cid:5)(cid:11)
(cid:6)(cid:4)(cid:5)(cid:12)
(cid:6)(cid:4)(cid:5)(cid:13)
(cid:12)(cid:3)(cid:4)(cid:8)
(cid:11)(cid:3)(cid:10)(cid:5)
(cid:12)(cid:3)(cid:9)(cid:12)
(cid:5)(cid:5)(cid:3)(cid:4)(cid:12)
(cid:5)(cid:5)(cid:3)(cid:8)(cid:4)
(cid:5)(cid:6)(cid:3)(cid:4)(cid:4)
(cid:5)(cid:4)(cid:3)(cid:4)(cid:4)
(cid:11)(cid:3)(cid:4)(cid:4)
(cid:9)(cid:3)(cid:4)(cid:4)
(cid:7)(cid:3)(cid:4)(cid:4)
(cid:6)(cid:3)(cid:4)(cid:4)
(cid:4)(cid:3)(cid:4)(cid:4)
(cid:6)(cid:4)(cid:5)(cid:8)
(cid:6)(cid:4)(cid:5)(cid:9)
(cid:6)(cid:4)(cid:5)(cid:10)
(cid:6)(cid:4)(cid:5)(cid:11)
(cid:6)(cid:4)(cid:5)(cid:12)
ii
2019 ANNUAL SHAREHOLDERS’ LETTER
to $5.3 billion and funded average loan and lease growth of
5.15% to $5.0 billion. In spite of the Federal Reserve lowering
rates three times in 2019, we were able to sustain a reasonable
net interest margin of 3.67% for the year. Further rate decreases
will lead to further margin pressure.
Growth in earnings for 2019 was fueled mostly by an increase
of loan and lease interest income of 10.19% to $258.3 million
compared to $234.5 million the prior year. Much of this
increase occurred from growth in loan and lease outstandings
primarily in commercial mortgages, construction equipment,
and solar financings. These areas were up $98.3 million, $60.2
million, and $67.6 million over the prior year. During the year,
interest rates charged on loans and leases dropped in a number
of our business lines, but the lower rates accelerated our home
mortgage lending. Our mortgage volume for the year was
over $250 million and exceeded recent years of production.
Deposit costs did not drop as fast as we might have liked due
to increasing competition for funding in our local markets and
nationally. This had the effect of keeping our deposit costs
higher for longer, creating a squeeze on net interest margins.
We were careful in managing our funding throughout the year
and were able to minimize the impact of loan and lease rates
dropping faster than deposit costs. By the close of the year, our
margin dropped to 3.67% from 3.71% the year before but ended
the fourth quarter of 2019 at 3.51%, down a full 26 basis points
from the 3.77% achieved in the fourth quarter of 2018.
Noninterest income grew by 4.20% in 2019 to $101.1 million.
Higher mortgage volumes (up 70.62% in 2019), increased
debit card income, swap fees on business and specialty finance
loans, and nonrecurring income from a repossessed asset all
contributed to the increase. This was offset by lower wealth
advisory fees and reduced equipment rental income from a
smaller rental portfolio.
With tighter noninterest income, it was important to control
costs. Noninterest expenses were held to a 1.36% increase for
the year. Normal merit increases, slightly higher benefit costs,
an increase in the number of full time equivalent employees,
and increased equipment and software maintenance costs all
contributed to the rise in operating costs.
CREDIT
INTRODUCTION
2019 was another record year for 1st Source! Record earnings,
good growth in loans and deposits, stable credit quality, and
investments made for the future.
Last year I started my letter with a string of negative comments
about things going on in the markets, the economy, and
politically. We ended 2018 with a stagnant or depressed stock
market which seemed to reflect the sentiments of investors and
people in general. Many were forecasting a recession as they
anticipated further increases in rates by the Federal Reserve.
However, instead of continuing to increase rates after nine rate
increases over the prior three years, the Federal Reserve started
a series of rate reductions which breathed life into the markets
and strength into the economy. The nation’s already record-
breaking annual string of improving economies continued
throughout the year. The Federal Reserve’s actions have led to
the lowest unemployment rates recorded, a stable inflationary
environment, and growing earnings for large segments of the
population. So, 2019 was a good year.
This is not so on the political front. As Congress approved a
revised NAFTA agreement, and the President seems ready
to sign it, the future is clouded by an impeachment trial,
contentious national elections, and international turmoil.
Despite this, and increasing tensions in the Middle East, the
economy and markets are doing well. Consumer confidence
and strong employment lead the way; nevertheless, the political
environment,
terrorism, and global
diplomacy continue to present strong headwinds.
international
trade,
FINANCIALS
The numbers for 1st Source are included in this Annual Report,
so I will not dwell on them except to point out that our net
income of $92.0 million is a record for us as is our earnings per
share of $3.57. These represent increases over the prior year of
11.58% and 12.97% respectively. Average deposits grew 6.31%
Credit costs for the year were down from the prior year due
to a large charge-off in 2018. By managing and maintaining
good credit quality and by working with challenged borrowers
through their problems, net charge-offs for the year were $5.1
million, down from the $13.9 million experienced in 2018. This
represented a net charge-off to average loan and lease ratio of
only 0.10%, down from 0.29% in 2018. For the year, the major
charge-offs were limited to the Aircraft and the Medium and
Heavy Duty Truck Divisions. The provision for loan and lease
iii
losses was $15.8 million for the year, down from $19.5 million
the prior year. The reserve for loan and lease losses at the end of
the year stood at $111.3 million compared to $100.5 million in
2018. This compared favorably to total non-performing assets
of $19.2 million at year end 2019 versus $35.3 million at the
close of 2018.
INVESTMENTS AND GROWTH
In 2019, we continued our efforts to improve our facilities and
add new locations to better serve our clients. We completed
the final upgrades of our Martin’s Super Market locations,
converting them to our side-by-side personal service model.
We completely refurbished our Willowcreek banking facility
in northwest Indiana, also converting it to our side-by-side
format. We built a new facility in Middlebury and announced
a new location in Auburn, in northeast Indiana. While other
banks seem to be leaving smaller markets, we are reinvesting
in them.
We installed solar energy systems in two of our branches,
testing the effectiveness of a plan to move to more sustainable
forms of energy in the years ahead. These banking centers have
supplemented approximately 20% of their total electrical usage
with renewable solar power. We continue to develop business
practices that protect and conserve natural resources — we
use responsible, reputable, and monitored e-recyclers for our
electronic assets. All computers, including desktops, laptops,
and monitors, are properly recycled.
We are conscious of our paper usage, recognizing that we
depend on printed materials for important day-to-day office
work, client communications, and acquiring new clients. The
majority of the paper used in our facilities is recycled through
our secure shred program, and in 2019 we recycled 186,000
pounds of paper. In recent years, we have also transitioned
away from the traditional proxy model and have utilized the
notice and access or “e-proxy” model for supplying shareholder
materials for our Annual Meeting. This has resulted in a
reduction in the amount of paper consumed by us each year
during this process.
Additionally, we are utilizing various sustainable practices in
some of our facilities such as LED lights, daylight harvesting
sensors, programmable thermostats, 95% or higher efficiency
furnace systems, drip irrigation, 90% recycled mats, and
sustainable landscaping and irrigation systems.
Lastly, we sold our former bank building to refocus our resources
in more productive areas and to get us out of the office leasing
business. We did renew our space in that building through 2022,
and we also renewed spaces in our present home office to 2027,
fixing the cost of that occupancy for the foreseeable future.
We are a distinctly local company, and as a community bank,
believe it is our responsibility to help make the communities
we serve better places to live, to work, to worship, to build
iv
businesses, and to raise families. This is why the Bank and 1st
Source Foundation contributed over $2 million in 2019 to
community organizations that enhance education, health care,
arts and culture and provide a safety net of other services to the
communities we serve. And as can be seen in the accompanying
photo to this letter, sometimes we even have fun doing so! The
1st Source Zamboni is a gift to the city of South Bend for use in
a new $18 million park which includes a skating ribbon. Even
more important than our monetary contributions is the over
22,000 hours all of us at 1st Source have volunteered helping
others across our home communities in the last year.
Over a year ago, we installed a more robust client information
system which we call InSight. 2019 was devoted to learning
how to use it, capture and record information that would help
us serve clients better, and continue to modify and simplify
the features of the system necessary to optimize its use. I am
pleased with my colleagues’ adoption of this system, and it is
being widely used in our branches, business banking, wealth
management, and our specialty finance units. We are in the
process of installing a more robust loan processing system which
will tie to InSight. These are both efforts to digitize more of
our work processes, taking steps out and getting information to
where it can best be used to serve our clients.
Larry Mayers, Group Head of Business Banking with Kevin Murphy, Chief
Information Officer and Ron Zeltwanger, Group Head of Community &
Electronic Banking at the off-site data management facility.
CLIENT SUCCESS
These investments in client service and in our operations areas
are complemented by digital initiatives for our clients. We
continue to make improvements in our online banking services.
Understanding that clients need more financial education,
planning and advice, we have partnered with EverFi to bring
more sophisticated financial tools to them. We have increased
our financial literacy offerings, partnering with our business
customers to make sure their employees get the opportunity
to improve their personal financial management. We enhanced
our mobile offerings by adding Zelle® as a fast, easy payment
alternative and increased the alerts available to our clients.
It is our focus on the client that led to our success this year.
Using InSight, we had better information, better knowledge,
and better coverage of our clients whether they were consumers,
businesses, not-for-profits, or governments. We more
aggressively called on clients and prospects, and as a result, grew
in many areas. Deposit and loan growth was strong for the year.
We received statewide recognition for our leadership in small
business lending for the seventh year in a row as both a Gold
Level Award winner and as the inaugural Indiana Rural Lender
of the Year. Our special focus on solar has helped businesses
from Montana to Virginia and Colorado to Massachusetts
reduce carbon emissions. To date we have invested $53 million
and provided debt financing in 22 solar projects across 11 states
with current loan and lease outstandings of $164 million. The
facilities have a current operating capacity of 196,274 MWh
per year, which is equivalent to avoiding 138,774 metric tons of
carbon greenhouse emissions or 152.9 million pounds of coal
burned. We continue to be committed to helping our clients
(be they individuals or businesses) achieve security, build
wealth, and realize their dreams.
THANK YOU
During the year, we also welcomed Dr. John Affleck-Graves
PhD, a finance professor at the University of Notre Dame
and its former Executive Vice President responsible for the
non-academic side of the university. He brings exceptional
knowledge and experience to our Board in not only the
financial functions but in community development as well. He
served as the first head of our Regional Development Authority
which applied for, received and successfully dispersed $42
million in development funding throughout our home region
of St. Joseph, Elkhart, and Marshall counties.
This was a good year for 1st Source, and it is because of the
dedication and commitment of my colleagues across the
company. Their focus, their efforts, their caring attitude, and
their love of our clients was inspiring. By living our values
and delivering on our mission, they collectively assured us of a
successful year. To all of them, whose names are printed on the
inside of this report’s cover, a great big THANK YOU.
And to all of you, thank you for being shareholders of 1st
Source and supporting our efforts to serve well our markets,
our clients, and you.
As we close the year, we want to thank one of our Board
members, Lisa Hershman, who was required to leave the Board
as she has been appointed by the President and confirmed by the
United States Senate as the Chief Management Officer of the
Department of Defense. We will miss her advice and counsel
and thank her for her insights.
Yours,
v
DIRECTORS AND OFFICERS
From left to right; Tracy D. Graham, Rex Martin, John F. Affleck-Graves, Melody Birmingham, Mark D. Schwabero, James R. Seitz,
Christopher J. Murphy III, Timothy K. Ozark, John T. Phair, Christopher J. Murphy IV, Daniel B. Fitzpatrick and Vinod M. Khilnani
1st SOURCE DIRECTORS
John F. Affleck-Graves
Melody Birmingham
Daniel B. Fitzpatrick
Tracy D. Graham
Vinod M. Khilnani
Rex Martin
Christopher J. Murphy III
Christopher J. Murphy IV
Timothy K. Ozark
John T. Phair
Mark D. Schwabero
James R. Seitz
Professor of Finance, University of Notre Dame
Senior Vice President and Chief Procurement Officer, Duke Energy
Chairman and Chief Executive Officer, Quality Dining, Inc.
Managing Principal, Graham Allen Partners
Chairman of the Board, Materion Corporation
Chairman of the Board, NIBCO, Inc.
Chairman and Chief Executive Officer
Chief Executive Officer, Catharsis Productions, LLC
Chairman and Chief Executive Officer, Aim Financial Corporation
Chairman of the Board, Holladay Properties
Retired Chairman, Chief Executive Officer and Director, Brunswick Corporation
President
1st SOURCE EXECUTIVE OFFICERS
Christopher J. Murphy III
James R. Seitz
Andrea G. Short
Jeffrey L. Buhr
John B. Griffith
Chairman of the Board and Chief Executive Officer
President
Executive Vice President, Treasurer and Chief Financial Officer
Executive Vice President, Chief Credit Officer
Executive Vice President, Chief Administration Officer, Secretary and General Counsel
CORP.
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BANK
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vi
SHAREHOLDERS’ INFORMATION
2019 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 2019 and book value were:
Quarter Ended
High
Low
Cash Dividends
Paid
March 31
June 30
September 30
December 31
$ 50.15
$ 39.11
$ 0.27
48.66
48.31
53.42
43.34
42.31
44.12
0.27
0.27
0.29
Book value per common share at December 31, 2019: $32.47
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders has been called for 10:00 a.m. EDT, April 23, 2020, 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 14, 2020,
the record date.
COMMON STOCK LISTING
The NASDAQ Global Select Market
Market Symbol: “SRCE”
CUSIP #336901 10 3
1stsource.com
For the latest shareholder information, log on to www.1stsource.com.
Click on the “About Us” link and then “Investor Relations.”
If you would like to help us reduce printing costs by receiving reports electronically,
please e-mail us at shareholder(cid:2)1stsource.com.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
American Stock Transfer and Trust Company
6201 15th Avenue
Brooklyn, NY 11219
INDEPENDENT AUDITORS
SHAREHOLDER INQUIRIES
BKD, LLP
200 East Main Street
Suite 700
Fort Wayne, IN 46802
1st Source Corporation
Andrea G. Short, Chief Financial Officer
Post Office Box 1602
South Bend, IN 46634
(574) 235-2000
vii
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, 2019
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)
Indiana
(State or other jurisdiction of incorporation or organization)
35-1068133
(I.R.S. Employer Identification No.)
100 North Michigan Street
South Bend,
IN
(Address of principal executive offices)
46601
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s telephone number, including area code: (574) 235-2000
Title of each class
Common Stock — without par value
Trading Symbol(s)
SRCE
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 every Interactive Data File required to be submitted 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 such
files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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, 2019 was $921,284,157
The number of shares outstanding of each of the registrant’s classes of stock as of February 14, 2020: Common Stock, without par value — 25,525,562
shares
Portions of the 2020 Proxy Statement for the 2020 annual meeting of shareholders to be held April 23, 2020, are incorporated by reference into Part
III.
DOCUMENTS INCORPORATED BY REFERENCE
1 SRCE
2019 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
38
39
39
42
43
44
44
45
46
86
86
86
87
87
87
87
87
88
90
91
2 SRCE
2019 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 wealth advisory services, and insurance to individual and business clients through most of our 80 banking center locations in
17 counties in Indiana and Michigan and Sarasota County in Florida. 1st Source Bank’s Specialty Finance Group, with 15 locations
nationwide, offers specialized financing services for construction equipment, new and used private and cargo aircraft, and various
vehicle types (cars, trucks, vans) for fleet purposes. 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, 2019, we had consolidated
total assets of $6.62 billion, total loans and leases of $5.09 billion, total deposits of $5.36 billion, and total shareholders’ equity
of $828.28 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). The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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, renewable energy financing, 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 person-to-person payments, outside
account aggregation, money management budgeting solution and 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 and Wealth Advisory 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 products addressing the financing needs of a broad array of companies. This group can
be broken down into four areas: construction equipment; new and used aircraft; auto and light trucks; and medium and heavy duty
trucks.
Construction equipment financing includes financing of equipment (i.e., asphalt and concrete plants, bulldozers,
excavators, cranes and loaders, etc.) to the construction industry. Construction equipment finance receivables generally
range from $50,000 to $25 million with fixed or variable interest rates and terms of one to ten years.
Aircraft financing consists of financings for new and used general aviation aircraft (including helicopters) for private
and corporate aircraft users, aircraft distributors and dealers, air charter operators, air cargo carriers, and other aircraft
operators. For many years, on a limited and selective basis, 1st Source Bank has provided international aircraft financing,
primarily in Mexico and Brazil. Aircraft finance receivables generally range from $500,000 to $15 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 motor coaches, shuttle buses, step vans, work
trucks and funeral cars) consists of fleet financings to automobile and light truck rental companies, commercial leasing
companies, and single unit to fleet financing for users of specialty vehicles. The auto and light truck finance receivables
generally range from $50,000 to $25 million with fixed or variable interest rates and terms of one to eight years.
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2019 Form 10-K
The medium and heavy duty truck division provides fleet financing for highway tractors, medium duty trucks (including
environmental vehicles) and trailers to the commercial trucking industry. Medium and heavy duty truck finance receivables
generally range from $50,000 to $20 million with fixed or variable interest rates and terms of three to seven years.
The group also generates equipment rental income through the leasing of construction equipment, various types of trucks, vans,
automobiles, motor coaches, shuttle buses and other equipment through operating leases to clients.
In addition to loan and lease financings during 2019, the group had average total deposit account balances of approximately $196
million.
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. Investment Advisors is registered as
an investment advisor with the SEC under the Investment Advisors Act of 1940. Investment Advisors serves strictly in an advisory
capacity and as such, does not hold any client securities.
CONSOLIDATED VARIABLE INTEREST SUBSIDIARIES
1st Source Bank is the managing general partner in the following subsidiaries that have interests in tax-advantaged investments
with third parties: 1st Source Solar 2, LLC, 1st Source Solar 3, LLC, 1st Source Solar 4, LLC, 1st Source Solar 5, LLC and 1st
Source Solar 6, LLC.
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 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.
4 SRCE
2019 Form 10-K
EMPLOYEES
At December 31, 2019, we had approximately 1,175 employees on a full-time equivalent basis. We provide a wide range of
employee benefits and consider employee relations to be good.
ENVIRONMENTAL SUSTAINABILITY
1st Source endeavors to be a good steward of the environment. We have an approach that protects and conserves our natural
resources through methods such as:
Developing business practices that protect and conserve natural resources — We use responsible, reputable, and monitored
e-recyclers for our electronic assets. All computers, including desktops, laptops, and monitors, are properly recycled.
We are conscious of our paper usage, recognizing that we depend on printed materials for important day-to-day office work, client
communications, and acquiring new clients. Increasingly, consumers demand more environmentally sustainable options and prefer
online statements and correspondence rather that printed materials. The majority of the paper used in our facilities is recycled
through our secure shred program and in 2019 we recycled 186,000 pounds of paper. In recent years, we have also transitioned
away from the traditional proxy model and have utilized the notice and access or “e-proxy” model for supplying shareholder
materials for our Annual Meeting. This has resulted in a reduction in the amount of paper consumed by us each year during this
process.
Additionally, we are utilizing various sustainable practices in some of our facilities such as LED lights, daylight harvesting sensors,
programmable thermostats, 95% or higher efficiency furnace systems, drip irrigation, 90% recycled mats, and sustainable
landscaping and irrigation systems. In an effort to reduce our carbon footprint, we have utilized solar panels in two of our banking
centers for supplemental sustainable power. These banking centers have supplemented approximately 20% of their total electrical
usage with renewable solar power.
Embracing opportunities for new products, services and partnerships — In 2019, we continued our focus on renewable energy
sources through lending and investment partnerships with renewable energy providers. We recognize the opportunities and
complexities associated with energy financing and understand the value of innovative technology that leverages the wind and sun,
which are sustainable from an environmental and financial perspective. To date, we have invested $53 million and provided debt
financing in 22 solar projects across 11 states with current loan and lease outstandings of $164 million. The 22 solar projects have
a current operating capacity of 196,274 MWh per year, which is equivalent to avoiding 138,774 metric tons of carbon greenhouse
emissions or 152.9 million pounds of coal burned. We will continue to finance and invest in sustainable opportunities, and we will
explore new opportunities to develop products and solutions that support our clients and advance sustainability.
Adopting new technologies — We encourage our clients to take advantage of our online and mobile banking tools. Our ATM
devices allow clients to make deposits without the need for an envelope. This reduces the use of paper, which again reduces
emissions throughout our supply chain.
To help reduce emissions associated with travel, we have tools that help clients choose the banking center and ATMs closest to
them. In addition, mobile deposit features are available to our clients, enabling them to deposit checks into their accounts using
their mobile devices.
Many of these approaches can create long-term value for our clients and shareholders through increased revenues, reduced costs
and improved convenience.
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).
5 SRCE
2019 Form 10-K
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 distinct type of bank holding company known as a
“financial holding company” that has powers that are not otherwise available to bank holding companies.
Capital Standards — 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 must submit an acceptable plan for achieving compliance with the capital guidelines and, until its capital
sufficiently improves, 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.
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, which was phased in over a three-year period beginning in 2016 and is
now fully phased in, effectively raised 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%.
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 became fully phased in on January 1, 2019.
As of December 31, 2019, we were in compliance with all applicable regulatory capital requirements.
In September 2019, the FRB and other federal banking agencies adopted a final rule, effective January 1, 2020, creating a community
bank leverage ratio (“CBLR”) for institutions with total consolidated assets of less than $10 billion and that meet other qualifying
criteria. The CBLR provides for a simple measure of capital adequacy for qualifying institutions. Qualifying institutions that elect
to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally
applicable risk-based and leverage capital requirements in the regulatory agencies’ capital rules and to have met the well-capitalized
ratio requirements. Management is still reviewing the CBLR framework and has not yet determined whether 1st Source and the
Bank will elect to use the CBLR framework.
Prompt Corrective Action Regulations — The FDIC’s prompt corrective action regulations establish five capital levels for
financial institutions (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and
“critically undercapitalized”), and impose mandatory regulatory scrutiny and limitations on institutions that are less than adequately
capitalized. At December 31, 2019, 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.
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2019 Form 10-K
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, changed 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.
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 — The Dodd-Frank Act expanded 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 a state where the bank does not already operate a branch 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 provision
removed restrictions under prior law that restricted a state or national bank from expanding into another state unless the laws of
the bank’s home state and the laws of the other state both permitted out-of-state banks to open de novo branches.
Gramm-Leach-Bliley Act of 1999 — The GLBA removed barriers to affiliations among banks, insurance companies, the securities
industry, and other financial service providers, and provides greater flexibility to these organizations in structuring such affiliations.
The GLBA also expanded the types of financial activities a bank may conduct through a financial subsidiary and established a
distinct 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.” These activities include securities and insurance brokerage, securities underwriting, insurance
underwriting, and merchant banking. A bank holding company may become a financial holding company only if all of its subsidiary
financial institutions are well-capitalized and well-managed and have at least a satisfactory Community Reinvestment Act (CRA)
rating. While we meet these standards, we do not currently intend to file notice with the Federal Reserve to become a financial
holding company or to engage in expanded financial activities through a financial subsidiary of the Bank. The GLBA also includes
privacy protections for nonpublic personal information held by financial institutions regarding their customers, and establishes a
system of functional regulation that makes the Federal Reserve the “umbrella supervisor” for holding companies, and other federal
and state agencies the supervisor of the holding company’s subsidiaries.
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) 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 controls
to combat money laundering activities, perform due diligence of private banking and correspondent accounts, establish standards
for verifying customer identity, and provide records related to suspected anti-money laundering activities upon request from federal
authorities. A financial institution’s failure to comply with these regulations could result in fines or sanctions, including restrictions
on conducting acquisitions or establishing new branches, and could also have other serious legal and reputational consequences
for the institution. We have established policies, procedures and systems designed to comply with these regulations.
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.
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2019 Form 10-K
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 2020, the Bank must maintain reserves of 3.00% against net transaction accounts greater than $16.90 million
and up to $127.50 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 $127.50 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.
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.
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2019 Form 10-K
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.
Dodd-Frank Wall Street Reform and Consumer Protection Act — The Dodd-Frank Act, which was signed into law in 2010,
significantly changed 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 profoundly affected the regulation
of community banks, thrifts, and small bank and thrift holding companies. Among other things, these provisions relaxed rules on
interstate branching, allow financial institutions to pay interest on business checking accounts, and impose heightened 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 and transferred to the CFPB primary responsibility for administering substantially all of the consumer compliance
protection laws formerly administered by other federal agencies. The Dodd-Frank Act also authorizes the CFPB to promulgate
consumer protection regulations that will apply to all entities, including banks, that offer consumer financial services or products.
It also 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 provision of the statute imposing these restrictions is commonly
called the “Volcker Rule.” The regulations implementing the Volcker Rule 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.
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.
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2019 Form 10-K
2018 Regulatory Reform — In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (Regulatory
Relief Act), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented
under the Dodd-Frank Act. While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-
Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10
billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory
changes for the Bank and 1st Source.
The Regulatory Relief Act, among other things, expands the definition of qualified mortgages a financial institution may hold and
simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less
than $10 billion by instructing the federal banking regulators to establish a single “community bank leverage ratio” of between
8% and 10%. Any qualifying depository institution or its holding company that exceeds this community bank leverage ratio will
be considered to have met generally applicable leverage and risk-based capital requirements. Further, any qualifying depository
institution that exceeds the new ratio will be considered to be “well capitalized” for purposes of the prompt corrective action rules.
In addition, the Regulatory Relief Act includes regulatory relief for community banks regarding regulatory examination cycles,
call reports, the proprietary trading prohibitions in the Volcker Rule, mortgage disclosures, and risk weights for certain high-risk
commercial real estate loans.
It is difficult at this time to predict when or how any new standards under the Regulatory Relief Act will ultimately be applied to
the Bank or 1st Source or what specific impact the Regulatory Relief Act and the yet-to-be-written implementing rules and
regulations will have on the Bank or 1st Source.
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 in 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.
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2019 Form 10-K
We offer both fixed-rate and adjustable-rate consumer mortgage loans secured by properties, substantially all of which are located
in our primary market area. Adjustable-rate mortgage loans help reduce our exposure to changes in interest rates; however, during
periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase as a result of repricing and the
increased payments required from the borrower. Additionally, some residential mortgages are sold into the secondary market and
serviced by our principal banking subsidiary, 1st Source Bank.
Consumer loans are primarily all other non-real estate loans to individuals in our regional market area. Consumer loans can entail
risk, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets. In these cases, any repossessed
collateral may not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer
loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected
by job loss, divorce, illness, or personal bankruptcy.
The 1st Source Specialty Finance Group loan and lease portfolio consists of commercial loans and leases secured by construction
and transportation equipment, including aircraft, autos, trucks, and vans. Finance receivables for this Group generally provide for
monthly payments and may include prepayment penalty provisions.
Our construction and transportation related businesses could be adversely affected by slowdowns in the economy. Clients who
rely on the use of assets financed through the Specialty Finance Group to produce income could be negatively affected, and we
could experience substantial loan and lease losses. By the nature of the businesses these clients operate in, we could be adversely
affected by rapid increases or decreases in 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. Also, since some of the relationships in this portfolio are large, a slowdown in these markets could have a significant
adverse impact on our performance.
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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2019 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. 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. Additionally, changes
in levels of market interest rates could cause our debt securities available-for-sale to move into unrealized loss positions which is
a negative component of total shareholders’ equity.
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, infectious disease epidemics or outbreaks 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 trust and wealth advisory business —
Trust and wealth advisory 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
trust and wealth management business and could have an adverse effect on our business, financial condition and results of operations.
We may be adversely impacted by the transition away from LIBOR as a reference interest rate — The London Interbank
Offered Rate (“LIBOR”) is a short-term interest rate used as a pricing reference for loans, derivatives and other financial instruments.
In July 2017, the United Kingdom Financial Conduct Authority, which regulates the process for establishing LIBOR, announced
that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. This announcement
indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. The exact impact this
will have on financial markets and their individual participants is not currently known. Various substitute benchmarks are being
considered in the marketplace but at this time it is not feasible to predict which of these will emerge as acceptable substitutes after
2021.
We have a significant number of loans and other financial instruments with attributes that are either directly or indirectly influenced
by LIBOR. The transitional impact away from LIBOR may adversely affect revenues, expenses and the value of those financial
instruments. Such transition may also result in litigation with counterparties impacted by the transition as well as increased
regulatory scrutiny and other adverse consequences. Any replacement benchmark ultimately adopted as a substitute for LIBOR
may behave differently than LIBOR in a manner detrimental to our financial performance. We are actively monitoring market
developments and implementing a transition plan. Although we are currently unable to assess what the ultimate impact of the
transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business,
financial condition and results of operations.
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2019 Form 10-K
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, which could
adversely affect our liquidity depending on the amount of collateral we may be required to pledge.
We rely on dividends from our subsidiaries — We receive substantially all of our revenue from dividends from our subsidiaries,
including, primarily, the Bank. These dividends are the principal source of funds we use to pay dividends on our common stock
and interest and principal on our debt. Various federal and state laws and regulations limit the amount of dividends our subsidiaries
may pay to us. In the event our subsidiaries are unable to pay dividends to us, we may not be able to service debt, pay other
obligations, or pay dividends on our common stock. Our inability to receive dividends from our subsidiaries could have a material
adverse effect on our business, financial condition and results of operations.
Operational Risks
Our risk management framework could be ineffective and could have a material adverse effect on our ability to mitigate
risks and/or losses — We have established a risk management framework to identify and manage our risk exposure. This framework
is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject,
including, credit, market, liquidity, operational, legal/compliance, and reputational risks. Our framework also includes financial,
analytical and forecasting modeling methodologies which involve significant management assumptions and judgment that may
not be accurate, particularly in times of market stress or other unforeseen circumstances. Additionally, our Board of Directors has
adopted a risk appetite statement in consultation with management which sets forth certain thresholds and limits to govern our
overall risk profile. There can be no assurance that our risk management framework will be effective under all circumstances or
that it will adequately identify, manage or limit any risk of loss to us. Any such failure in our risk management framework could
have a material adverse effect on our business, financial condition, and results of operations.
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.
We also confront the risk of being compromised by emails sent by perpetrators posing as company executives or vendors in order
to dupe company personnel into sending large sums of money to accounts controlled by the perpetrators. We require all our
employees to complete annual information security awareness training to increase their awareness of these risks and to engage
them in our mitigation efforts. If these precautions are not sufficient to protect our systems from data breaches or compromises,
our reputation and business could be adversely affected.
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2019 Form 10-K
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 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, depend 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. Any such failure in our analytical or forecasting models could have a material
adverse effect on our business, financial condition and results of operations.
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 directly impacted 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.
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.
Our investments and/or financings in certain tax-advantaged projects may not generate returns as anticipated and may
have an adverse impact on our financial results — We invest and/or finance certain tax-advantaged projects promoting affordable
housing, community redevelopment and renewable energy sources. Our investments in these projects are designed to generate a
return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods.
We are subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on
compliance features required to be met at the project level, will fail to meet certain government compliance requirements and will
not be able to be fully realized. The possible inability to realize these tax credits and other tax benefits can have a negative impact
on our financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside
of our control, including changes in the applicable tax code and the ability of the projects to be completed and properly managed.
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2019 Form 10-K
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 shareholders.
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 certain trusts established for the benefit of the extended families of two of the children of Ernestine Raclin. 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 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 wealth advisory, 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.
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 September 2019, we extended the lease on this property through September 2027.
As of December 31, 2019, 1st Source leases approximately 71% of the office space in this complex.
At December 31, 2019, we owned or leased property and/or buildings where 1st Source Bank’s 80 banking centers were located.
Our facilities are located in Allen, Elkhart, Fulton, Huntington, Kosciusko, LaPorte, Marshall, Porter, Pulaski, St. Joseph, Starke,
Tippecanoe, Wells, and Whitley Counties in the State of Indiana, Berrien, Cass, and Kalamazoo Counties in the State of Michigan,
and Sarasota County in the state of Florida. Additionally, we utilize an operations center for business operations. The Bank leases
additional property and/or buildings to and from third parties under lease agreements negotiated at arms-length.
Item 3. Legal Proceedings.
1st Source and our subsidiaries are involved in various other legal proceedings incidental to the conduct of our businesses. Our
management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated
financial position or results of operations.
None
Item 4. Mine Safety Disclosures.
Part II
15 SRCE
2019 Form 10-K
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.” As of February 14, 2020, there
were 1,544 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, 2014, 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 34 banking companies in Illinois, Indiana, Michigan, Ohio, and Wisconsin. The following
companies included in this peer group in last year’s annual report have not been included this year, all due to being acquired during 2019: Chemical Financial
Corporation, MB Financial Corporation and MBT Financial Corporation.
NOTE: Total return assumes reinvestment of dividends.
16 SRCE
2019 Form 10-K
The following table shows our share repurchase activity during the three months ended December 31, 2019.
Period
October 01 - 31, 2019
November 01 - 30, 2019
December 01 - 31, 2019
Total Number of
Shares Purchased
Average Price
Paid Per Share
— $
—
—
—
—
—
Total Number of
Shares Purchased as
Part of Publicly Announced
Plans or Programs*
Maximum Number (or Approximate
Dollar Value) of Shares that
may yet be Purchased Under
the Plans or Programs
—
—
—
859,374
859,374
859,374
*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 1,140,626 shares.
Federal laws and regulations contain restrictions on the ability of 1st Source and the Bank to pay dividends. For information regarding restrictions on dividends,
see Part I, Item 1, Business - Regulation and Supervision - Dividends and Part II, Item 8, Financial Statements and Supplementary Data - Note 20 of the Notes to
Consolidated Financial Statements.
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.
Item 6. Selected Financial Data.
(Dollars in thousands, except per share amounts)
2019
2018
2017
2016
2015
$
282,877
$
257,316
$
212,385
$
191,760
$
184,684
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Net income available to common shareholders
Assets at year-end
Long-term debt and mandatorily redeemable securities at
year-end
$
$
Shareholders’ equity at year-end
Basic net income per common share
Diluted net income per common share
Cash dividends per common share
Dividend payout ratio
Return on average assets
Return on average common shareholders’ equity
Average common shareholders’ equity to average assets
59,011
223,866
15,833
208,033
101,130
189,009
120,154
28,139
92,015
91,960
6,622,776
71,639
828,277
3.57
3.57
1.100
30.81%
1.41%
11.50%
12.25%
$
$
43,410
213,906
19,462
194,444
97,050
186,467
105,027
22,613
82,414
82,414
6,293,745
71,123
762,082
3.16
3.16
0.960
30.48%
1.34%
11.09%
12.08%
$
$
26,754
185,631
8,980
176,651
98,706
173,997
101,360
33,309
68,051
68,051
5,887,284
70,060
718,537
2.60
2.60
0.760
29.23%
1.21%
9.69%
12.46%
$
$
22,101
169,659
5,833
163,826
88,945
163,645
89,126
31,340
57,786
57,786
5,486,268
74,308
672,650
2.22
2.22
0.720
32.45%
1.08%
8.71%
12.38%
$
$
18,163
166,521
2,160
164,361
83,316
159,114
88,563
31,077
57,486
57,486
5,187,916
57,379
644,053
2.17
2.17
0.671
30.85%
1.15%
9.05%
12.72%
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 you are encouraged to review the consolidated financial statements and statistical data presented in this document.
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.
17 SRCE
2019 Form 10-K
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
2019 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 of the Notes to Consolidated Financial Statements (Note 1), should be reviewed for
a greater understanding of how our financial performance is recorded and reported.
We have identified the following two 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 and fair value measurements. 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.”
EARNINGS SUMMARY
Net income available to common shareholders in 2019 was $91.96 million, up from $82.41 million in 2018 and up from $68.05
million in 2017. Diluted net income per common share was $3.57 in 2019, $3.16 in 2018, and $2.60 in 2017. Return on average
total assets was 1.41% in 2019 compared to 1.34% in 2018, and 1.21% in 2017. Return on average common shareholders’ equity
was 11.50% in 2019 versus 11.09% in 2018, and 9.69% in 2017.
Net income in 2019, as compared to 2018, was positively impacted by a $9.96 million or 4.66% increase in net interest income,
a $4.08 million or 4.20% increase in noninterest income, and a $3.63 million or 18.65% decrease in provision for loan and lease
losses which was offset by a $5.53 million or 24.44% increase in income tax expense and a $2.54 million or 1.36% increase in
noninterest expense. Net income in 2018 was positively impacted by a $28.28 million or 15.23% increase in net interest income
and a $10.70 million or 32.11% decrease in income tax expense, which was offset by a $10.48 million or 116.73% increase in
provision for loan and lease losses and a $12.47 million or 7.17% increase in noninterest expense over 2017.
19 SRCE
2019 Form 10-K
Dividends paid on common stock in 2019 amounted to $1.10 per share, compared to $0.96 per share in 2018, and $0.76 per share
in 2017. 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 3.68% in 2019, compared to 3.73% in 2018 and 3.57% in 2017. Net interest income was $223.87 million for
2019, compared to $213.91 million for 2018 and $185.63 million for 2017. Tax-equivalent net interest income totaled $224.55
million for 2019, up $9.84 million from the $214.71 million reported in 2018. Tax-equivalent net interest income for 2018 was
up $27.28 million from the $187.43 reported for 2017.
During 2019, average earning assets increased $342.91 million or 5.95% while average interest-bearing liabilities increased $152.29
million or 3.55% over the comparable period in 2018. The yield on average earning assets increased 17 basis points to 4.65% for
2019 from 4.48% for 2018 primarily due to higher rates on loans and leases. Total cost of average interest-bearing liabilities
increased 32 basis points to 1.33% during 2019 from 1.01% in 2018 as a result of the rising interest rate environment during 2018
and competitive pressure on deposit rates. The result to the fully taxable-equivalent net interest margin was a decrease of five
basis points.
The largest contributor to the increase in the yield on average earning assets in 2019 was the 23 basis point improvement in the
loan and lease portfolio yield primarily due to market conditions as a result of 2018 Federal interest rate increases. Average net
loans and leases increased $244.91 million or 5.15% in 2019 from 2018 while the yield increased to 5.16%.
During 2019, the tax-equivalent yield on investment securities available-for-sale decreased five basis points to 2.23% while the
average balance grew $62.85 million. Average mortgages held for sale increased $7.41 million during 2019 while the yield decreased
63 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 increased $27.75
million during 2019 while the yield decreased 53 basis points. The decrease in yield for mortgages held for sale and other investments
was primarily a result of higher outstanding balances at lower rates.
Average interest-bearing deposits increased $211.10 million or 5.42% during 2019 while the effective rate paid on those deposits
increased 34 basis points. The increase in the average cost of interest-bearing deposits was primarily the result of higher rates,
competitive pressure on rates and a slight shift in the deposit mix. Average noninterest-bearing demand deposits increased $101.98
million or 9.53% during 2019.
Average short-term borrowings decreased $59.13 million during 2019 while the effective rate paid decreased 13 basis points. The
decrease in short-term borrowings was primarily the result of decreased borrowings with the Federal Home Loan Bank. Average
long-term debt and mandatorily redeemable securities balances increased $0.32 million during 2019 as the effective rate increased
81 basis points primarily due to higher rates on mandatorily redeemable securities.
20 SRCE
2019 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 21% rate (35% for periods prior to 2018). Nonaccrual loans and leases are included in the average loan and lease
balance outstanding.
(Dollars in thousands)
ASSETS
Investment securities available-for-sale:
Taxable
Tax-exempt(1)
Mortgages held for sale
Loans and leases, net of unearned discount(1)
Other investments
Total earning assets(1)
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
Noncontrolling interests
Total liabilities and equity
Less: Fully tax-equivalent adjustments
Net interest income/margin (GAAP-derived)(1)
Fully tax-equivalent adjustments
Net interest income/margin - FTE(1)
2019
Interest
Income/
Expense
Average
Balance
Yield/
Rate
Average
Balance
2018
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2017
Interest
Income/
Expense
Yield/
Rate
$
945,396
$ 20,946
2.22% $
861,733
$ 19,356
2.25% $
734,291
$ 13,853
69,263
15,601
1,662
610
2.40%
3.91%
90,079
8,190
2,293
372
5,000,161
258,113
5.16% 4,755,256
234,450
74,252
2,232
3.01%
46,503
1,648
6,104,673
283,563
4.65% 5,761,761
258,119
2.55%
4.54%
4.93%
3.54%
4.48%
120,588
10,754
3,587
429
4,333,375
194,918
52,086
1,393
5,251,094
214,180
67,726
(105,340)
461,215
$ 6,528,274
64,853
(99,258)
424,083
62,137
(92,187)
417,278
$ 6,151,439
$ 5,638,322
$ 4,105,097
$ 50,495
1.23% $ 3,893,999
$ 34,631
0.89% $ 3,510,197
$ 19,202
205,911
58,764
71,133
1,934
3,677
2,905
0.94%
6.26%
4.08%
265,041
58,764
70,813
2,838
3,625
2,316
4,440,905
59,011
1.33% 4,288,617
43,410
1.07%
6.17%
3.27%
1.01%
245,235
58,764
74,973
1,115
4,002
2,435
3,889,169
26,754
1,171,639
106,945
799,736
9,049
$ 6,528,274
1,069,664
49,791
743,173
194
$ 6,151,439
983,050
63,684
702,419
—
$ 5,638,322
1.89%
2.97%
3.99%
4.50%
2.67%
4.08%
0.55%
0.45%
6.81%
3.25%
0.69%
(686)
(803)
(1,795)
$ 223,866
3.67%
$ 213,906
3.71%
$ 185,631
3.54%
686
803
1,795
$ 224,552
3.68%
$ 214,709
3.73%
$ 187,426
3.57%
(1) See “Reconciliation of Non-GAAP Financial Measures” for more information on this performance measure/ratio.
21 SRCE
2019 Form 10-K
Reconciliation of Non-GAAP Financial Measures — Our accounting and reporting policies conform to GAAP in the United States
and prevailing practices in the banking industry. However, certain non-GAAP performance measures are used by management to
evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual
components) and net interest margin (including its individual components). Management believes that these measures provide
users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-
bearing liabilities.
Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries
on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt
interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both
taxable and tax-exempt sources. The following table shows the reconciliation of non-GAAP financial measures for the most recent
three years ended December 31.
(Dollars in thousands)
Calculation of Net Interest Margin
(A)
Interest income (GAAP)
Fully tax-equivalent adjustments:
- Loans and leases
- Tax-exempt investment securities
Interest income - FTE (A+B+C)
Interest expense (GAAP)
(B)
(C)
(D)
(E)
(F) Net interest income (GAAP) (A-E)
(G)
Net interest income - FTE (D-E)
(H) Total earning assets
Net interest margin (GAAP-derived) (F/H)
Net interest margin - FTE (G/H)
2019
2018
2017
$
282,877
$
257,316
$
212,385
375
311
283,563
59,011
223,866
224,552
367
436
258,119
43,410
213,906
214,709
621
1,174
214,180
26,754
185,631
187,426
$ 6,104,673
$
5,761,761
$
5,251,094
3.67%
3.68%
3.71%
3.73%
3.54%
3.57%
22 SRCE
2019 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)
2019 compared to 2018
Interest earned on:
Investment securities available-for-sale:
Taxable
Tax-exempt
Mortgages held for sale
Loans and leases, net of unearned discount
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 - FTE
2018 compared to 2017
Interest earned on:
Investment securities available-for-sale:
Taxable
Tax-exempt
Mortgages held for sale
Loans and leases, net of unearned discount
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 - FTE
Increase (Decrease) due to
Rate
Volume
Net
$
$
$
$
$
$
$
$
$
$
1,857
$
(267) $
(506)
296
12,371
864
14,882
1,967
(583)
—
11
1,395
13,487
$
$
$
$
(125)
(58)
11,292
(280)
10,562
13,897
(321)
52
578
$
$
14,206
$
(3,644) $
2,623
$
2,880
$
(824)
(111)
19,894
(161)
21,421
2,295
97
—
(136)
2,256
19,165
$
$
$
$
(470)
54
19,638
416
22,518
13,134
1,626
(377)
17
14,400
8,118
$
$
$
$
1,590
(631)
238
23,663
584
25,444
15,864
(904)
52
589
15,601
9,843
5,503
(1,294)
(57)
39,532
255
43,939
15,429
1,723
(377)
(119)
16,656
27,283
23 SRCE
2019 Form 10-K
Noninterest Income — Noninterest income increased $4.08 million or 4.20% in 2019 from 2018 following a $1.66 million or
1.68% decrease in 2018 over 2017. The following table shows noninterest income for the most recent three years ended
December 31.
(Dollars in thousands)
Noninterest income:
Trust and wealth advisory
Service charges on deposit accounts
Debit card
Mortgage banking
Insurance commissions
Equipment rental
(Losses) gains on investment securities available-for-sale
Other
Total noninterest income
2019
2018
2017
$
20,692
$
21,071
$
11,010
14,209
4,698
6,761
30,741
—
13,019
10,454
13,369
3,844
6,502
31,793
(345)
10,362
$
101,130
$
97,050
$
20,980
10,589
11,809
4,796
5,889
30,381
4,340
9,922
98,706
Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity
fees, and fiduciary fees) decreased $0.38 million or 1.80% in 2019 from 2018 compared to a slight increase in 2018 over 2017.
Trust and wealth advisory fees are largely based on the number and size of client relationships and the market value of assets under
management. The market value of trust assets under management at December 31, 2019 and 2018 was $4.48 billion and $3.94
billion, respectively. Stock market recoveries during the fourth quarter of 2019 helped improve the market value of trust assets
under management at December 31, 2019, however the decrease in trust and wealth advisory fees during 2019 was due to a lower
average market value of trust assets under management during 2019 compared to 2018. At December 31, 2019, these trust assets
were comprised of $3.02 billion of personal and agency trusts and estate administration assets, $926.61 million of employee benefit
plan assets, $426.91 million of individual retirement accounts, and $105.35 million of custody assets.
Service charges on deposit accounts increased by $0.56 million or 5.32% in 2019 from 2018 compared to a decrease of $0.14
million or 1.27% in 2018 from 2017. The increase in service charges on deposit accounts in 2019 was primarily due to a higher
volume of nonsufficient fund transactions. The decrease in service charges on deposit accounts in 2018 primarily reflects a one-
time adjustment to business account fees.
Debit card income improved $0.84 million or 6.28% in 2019 from 2018 compared to an increase of $1.56 million or 13.21% in
2018 from 2017. The increase in 2019 and 2018 was mainly the result of an increased volume of debit card transactions.
Mortgage banking income increased $0.85 million or 22.22% in 2019 over 2018, compared to a $0.95 million or 19.85% decrease
in 2018 from 2017. We had no MSR impairment in 2019, 2018 or 2017. During 2019, 2018 and 2017, we determined that no
permanent write-down was necessary for previously recorded impairment on MSRs. During 2019, mortgage banking income
increased primarily due to improved gains on a higher volume of loans sold as a result of more loans originated for the secondary
market. During 2018, mortgage banking income decreased due to reduced gains on loan sales and a lower volume of loans originated
for the secondary market.
Insurance commissions grew $0.26 million or 3.98% in 2019 compared to 2018 and improved $0.61 million or 10.41% in 2018
compared to 2017. The increase in insurance commissions during 2019 and 2018 was mainly due to an increase in the book of
business and higher contingent commissions received resulting from increased sales and lower client claims.
Equipment rental income generated from operating leases decreased by $1.05 million or 3.31% during 2019 from 2018 compared
to an increase of $1.41 million or 4.65% during 2018 from 2017. The average equipment rental portfolio decreased 3.48% in 2019
over 2018 as a result of reduced leasing volume primarily in the construction and medium and heavy duty truck portfolios offset
by a slight increase in the specialty vehicle portfolio and increased 1.41% in 2018 over 2017 as the result of growth in specialty
vehicles and solar financing during 2018. In 2019, the decrease in rental income was offset by a similar decrease in depreciation
on equipment owned under operating leases. In 2018, the increase in equipment rental income was offset by a similar increase in
depreciation on equipment owned under operating leases.
There were no sales of investment securities available-for-sale for the year ended 2019. Sales of investment securities available-
for-sale resulted in net losses of $0.35 million for the year ended 2018 and gains of $4.34 million for the year ended 2017. During
2018, losses on the sale of investment securities available-for-sale were primarily the result of repositioning the investment portfolio
during the first quarter in response to tax reform.
24 SRCE
2019 Form 10-K
Other income increased $2.66 million or 25.64% in 2019 from 2018 compared to an increase of $0.44 million or 4.43% in 2018
from 2017. The improvement in 2019 was mainly a result of nonrecurring rental income on a repossessed asset of $0.96 million,
higher claim proceeds from bank owned life insurance, and an increase in customer swap fees. The increase was also helped by
personal property tax reimbursements on leased equipment from lessees of $0.73 million that were reported gross as required by
the new leasing standard effective January 1, 2019. These personal property tax reimbursements were offset by a similar increase
in other expense resulting from the payment of personal property taxes to the taxing jurisdictions. The improvement in 2018 was
mainly a result of increased net partnership investment gains, higher loan servicing fees, a rise in brokerage fees and commissions,
and higher claim proceeds from bank owned life insurance offset by lower customer swap fees and reduced fees on standby letters
of credit.
Noninterest Expense — Noninterest expense increased $2.54 million or 1.36% in 2019 over 2018 following a $12.47 million or
7.17% increase in 2018 from 2017. The following table shows noninterest expense for the most recent three years ended
December 31.
(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits
Net occupancy
Furniture and equipment
Depreciation — leased equipment
Professional fees
Supplies and communications
FDIC and other insurance
Business development and marketing
Loan and lease collection and repossession
Other
Total noninterest expense
2019
2018
2017
$
97,098
$
93,857
$
10,528
24,815
25,128
6,952
6,454
1,795
6,303
3,402
6,534
10,041
23,433
26,248
7,680
6,320
2,923
6,112
3,375
6,478
86,912
10,624
20,769
25,215
6,810
5,355
2,537
7,477
2,724
5,574
$
189,009
$
186,467
$
173,997
Total salaries and employee benefits increased $3.24 million or 3.45% in 2019 from 2018, following a $6.95 million or 7.99%
increase in 2018 from 2017.
Employee salaries increased $1.00 million or 1.29% in 2019 from 2018 compared to an increase of $6.30 million or 8.91% in
2018 from 2017. The increase in 2019 was mainly a result of higher base salaries due to normal merit increases and a slight increase
in full-time equivalent employees offset by a decrease in incentive compensation due to fewer vestings of share-based compensation
arrangements. The increase in 2018 was mainly a result of higher base salaries and incentive compensation. Higher base salary
expense was primarily due to normal merit increases and a slight increase in full-time equivalent employees.
Employee benefits increased $2.25 million or 13.38% in 2019 from 2018, compared to a $0.65 million or 3.98% increase in 2018
from 2017. During 2019, group insurance costs increased as a result of overall higher health insurance claims experience,
administrative expenses and stop loss premiums and higher company contributions to employee retirement accounts. In 2018,
group insurance costs increased as a result of overall higher health insurance claims experience.
Occupancy expense increased $0.49 million or 4.85% in 2019 from 2018, compared to a decrease of $0.58 million or 5.49% in
2018 from 2017. The higher expense in 2019 was primarily the result of the Company leasing office space in its former headquarters
building which sold during the first quarter of 2019 offset by reduced snow removal costs and lower utility expenses compared
to 2018. The lower expense in 2018 was primarily attributed to a true-up of operating rent expense on a lease.
Furniture and equipment expense, including depreciation, grew by $1.38 million or 5.90% in 2019 from 2018 compared to an
increase of $2.66 million or 12.83% in 2018 from 2017. The higher expense in 2019 was primarily due to increased software
maintenance costs. The higher expense in 2018 was primarily due to increased software maintenance costs and higher computer
processing charges.
Depreciation on equipment owned under operating leases decreased $1.12 million or 4.27% in 2019 from 2018, following a $1.03
million or 4.10% increase in 2018 from 2017. In 2019 and 2018, depreciation on equipment owned under operating leases correlated
with the change in equipment rental income.
Professional fees declined $0.73 million or 9.48% in 2019 from 2018, compared to a $0.87 million or 12.78% increase in 2018
from 2017. The lower expense in 2019 was primarily due to reduced utilization of consulting services as 2018 projects were
completed. The higher expense in 2018 compared to 2017 was primarily due to increased utilization of consulting services related
to a customer relationship management project, information technology projects as well as a regulatory compliance project.
25 SRCE
2019 Form 10-K
Supplies and communications expense increased $0.13 million or 2.12% in 2019 from 2018, and increased $0.97 million or 18.02%
in 2018 from 2017. During 2019, higher printing costs were offset by lower telephone service expenses. The increase in 2018
resulted primarily from higher data communication line charges as bandwidth was improved and a one-time reduction in postage
costs in 2017.
FDIC and other insurance expense decreased $1.13 million or 38.59% in 2019 from 2018 and increased $0.39 million or 15.21%
in 2018 from 2017. The decrease in 2019 was mainly due to $0.88 million in FDIC insurance premium credits received. The
increase in 2018 was mainly due to higher assessments for FDIC premiums in conjunction with overall asset growth and a rise in
other insurance costs.
Business development and marketing expenses grew $0.19 million or 3.13% in 2019 from 2018 and decreased $1.37 million or
18.26% in 2018 from 2017. The higher expense in 2019 was mainly the result of additional marketing promotions. The lower
expense in 2018 was mainly the result of reduced charitable contributions offset by additional business development efforts.
Loan and lease collection and repossession expenses increased $0.03 million or 0.80% in 2019 from 2018 compared to an increase
of $0.65 million or 23.90% in 2018 from 2017. Loan and lease collection and repossession expense was higher in 2019 primarily
due to increased valuation adjustments on repossessed assets and fewer gains on the sale of repossessed assets offset by less legal
fees on collection and repossession activity. The increase in 2018 was mainly due to increased valuation adjustments on repossessed
assets offset by higher gains on the sale of repossessed assets.
Other expenses were higher by $0.06 million or 0.86% in 2019 as compared to 2018 and increased $0.90 million or 16.22% in
2018 as compared to 2017. The increase in 2019 was primarily the result of higher credit report and appraisal fees on greater loan
volume, an increase in the interest rate swap valuation provision and higher professional membership dues and subscriptions offset
by a $1.31 million gain on the sale of a fixed asset. Additionally, other expense during 2019 included personal property taxes on
leased equipment of $0.73 million that are reported gross as required by the new leasing standard effective January 1, 2019. These
personal property taxes on leased equipment were offset by a similar increase in other income from the reimbursement of personal
property taxes by lessees. The increase in 2018 was mainly the result of one-time trust losses and reduced gains on the sale of
leased equipment offset by a decrease in the provision for unfunded loan commitments and lower intangible asset amortization
as items fully amortize and impairment writedowns on branches in 2017 not present in 2018.
Income Taxes — 1st Source recognized income tax expense in 2019 of $28.14 million, compared to $22.61 million in 2018, and
$33.31 million in 2017. The effective tax rate in 2019 was 23.42% compared to 21.53% in 2018, and 32.86% in 2017. The change
in effective tax rate from 2017 was due primarily to the decrease in the federal tax rate from 35% in 2017 to 21% in 2018.
Additionally, the 2018 provision for income taxes included a $0.80 million benefit from a state tax settlement and a $0.88 million
benefit from finalization of the provisional amounts recorded at December 31, 2017 related to the impact of the federal tax rate
change. The impact of those items resulted in an effective rate decrease from 23.13% to 21.53% during 2018.
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
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total loans and leases
2019
2018
2017
2016
2015
$
1,132,791
$
1,073,205
$
929,997
$
812,264
$
588,807
294,824
784,040
705,451
908,177
532,003
139,434
559,987
283,544
803,111
645,239
809,886
523,855
136,637
496,816
296,935
844,657
563,437
741,568
526,122
128,146
411,764
294,790
802,414
495,925
719,170
521,931
129,813
744,749
425,236
278,254
778,012
455,565
700,268
490,468
122,140
$
5,085,527
$
4,835,464
$
4,527,678
$
4,188,071
$
3,994,692
At December 31, 2019, 10.5% of total loans and leases were concentrated with non-owner occupied commercial real estate.
Loans and leases, net of unearned discount, at December 31, 2019, were $5.09 billion and were 76.79% of total assets, compared
to $4.84 billion and 76.83% of total assets at December 31, 2018. Average loans and leases, net of unearned discount, increased
$244.91 million or 5.15% and increased $421.88 million or 9.74% in 2019 and 2018, respectively.
26 SRCE
2019 Form 10-K
Commercial and agricultural lending, excluding those loans secured by real estate, increased $59.59 million or 5.55% in 2019
over 2018. Commercial and agricultural lending outstandings were $1.13 billion and $1.07 billion at December 31, 2019 and
December 31, 2018, respectively. During 2019, we experienced somewhat lower growth in this sector driven, in part, by our
decision to exit our participation in several syndicated credit facilities due to interest rate spreads being lower than our targets.
These reductions were offset by increases within our solar loan and lease portfolio, which grew by $67.60 million or 70.42% to
$163.60 million as that business line has continued to have positive momentum.
Auto and light truck loans increased $28.82 million or 5.15% in 2019 over 2018. At December 31, 2019, auto and light truck loans
had outstandings of $588.81 million and $559.99 million at December 31, 2018. This increase was primarily attributable to growth
in the commercial lessor, auto rental and the step van segments offset by decreases in the bus financing portfolio due to prudent
underwriting considerations.
Medium and heavy duty truck loans and leases increased $11.28 million or 3.98% in 2019. Medium and heavy duty truck financing
at December 31, 2019 and 2018 had outstandings of $294.82 million and $283.54 million, respectively. The increase at
December 31, 2019 from December 31, 2018 can be mainly attributed to customers continued replacement of aging equipment
and increased organic growth with existing client relationships.
Aircraft financing at year-end 2019 decreased $19.07 million or 2.37% from year-end 2018. Aircraft financing at December 31,
2019 and 2018 had outstandings of $784.04 million and $803.11 million, respectively. The reduction during 2019 was due to lower
foreign outstandings of $40.20 million offset by increased domestic outstandings of $21.13 million. In 2019, originations were
affected by economic and political uncertainties coupled with increased competition for fewer deals. While we experienced growth
domestically, our foreign outstandings decreased due largely to significantly lower in-country lending rates that were competitive
against our pricing. Also, several of our watch accounts were voluntarily liquidated by borrowers which added to the reduction
in foreign outstandings. Our foreign loan and lease outstandings, all denominated in U.S. dollars were $184.24 million and $224.44
million as of December 31, 2019 and 2018, respectively. Loan and lease outstandings to borrowers in Brazil and Mexico were
$58.29 million and $111.91 million as of December 31, 2019, respectively, compared to $83.90 million and $127.16 million as
of December 31, 2018, respectively. Outstanding balances to other borrowers in other countries were insignificant.
Construction equipment financing increased $60.21 million or 9.33% in 2019 compared to 2018. Construction equipment financing
at December 31, 2019 had outstandings of $705.45 million, compared to outstandings of $645.24 million at December 31, 2018.
The growth in this category was primarily due to new client relationships and continued replacement of aged equipment.
Commercial loans secured by real estate, of which approximately 55% is owner occupied, increased $98.29 million or 12.14% in
2019 over 2018. Commercial loans secured by real estate outstanding at December 31, 2019 were $908.18 million and $809.89
million at December 31, 2018. The increase in 2019 was driven by general improvements in the business economy within our
markets related to our owner occupied financing. Our non-owner occupied real estate portfolio also experienced growth due to
funding several projects to existing clients that had been in our pipeline.
Residential real estate and home equity loans were $532.00 million at December 31, 2019 and $523.86 million at December 31,
2018. Residential real estate and home equity loans increased $8.15 million in 2019 from 2018. Residential mortgage and home
equity outstandings were higher in 2019 due to a favorable rate environment during the year as well as internal staffing increases
which allowed us to capture a greater market share within our footprint. Additionally, a stronger economy with low unemployment
resulted in improved customer confidence. Median home values rose during 2019 which led to slightly larger average loan amounts.
Refinance activity also improved and new construction loans increased by 5% over 2018.
Consumer loans increased $2.80 million or 2.05% in 2019 over 2018. Consumer loans outstanding at December 31, 2019, were
$139.43 million and $136.64 million at December 31, 2018. The increase during 2019 was primarily due to higher demand for
auto and personal loans as a result of the stabilized economy with low unemployment, reduced interest rates and increased consumer
confidence.
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, 2019.
(Dollars in thousands)
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Total
0-1 Year
1-5 Years
Over 5 Years
Total
$
519,459
$
491,359
$
121,973
$
1,132,791
218,900
99,054
198,796
227,773
361,295
187,127
525,132
457,769
8,612
8,643
60,112
19,909
588,807
294,824
784,040
705,451
$
1,263,982
$
2,022,682
$
219,249
$
3,505,913
27 SRCE
2019 Form 10-K
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
$
$
1,456,088
54,572
1,510,660
$
$
566,594
164,677
731,271
$
$
2,022,682
219,249
2,241,931
During 2019, approximately 56% of the Bank’s residential mortgage originations were sold into the secondary market. Mortgage
loans held for sale were $20.28 million at December 31, 2019 and were $11.29 million at December 31, 2018.
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
the past. 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 have decreased during recent years. We believe the loans we have
underwritten and sold to these entities have met or exceeded applicable transaction parameters. Our exposure risk for repurchases
started 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 prior to implementation of such changes lapse.
Our liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was
$0.29 million as of December 31, 2019 and 2018. Our expense (recovery) for repurchase losses, included in Loan and Lease
Collection and Repossession expense on the Statements of Income, was $0.01 million in 2019 compared to $(0.10) million in
2018 and $(0.03) million in 2017. 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.
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.
28 SRCE
2019 Form 10-K
During 2019, the medium-term portion of the look-back period was eleven years given that 2009 through 2019 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 eleven-year period in our calculation.
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, collateral 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. The economy has been strong and is forecast to remain robust as we
begin 2020, but there is considerable downside risk. The political stalemates in the U.S. Congress, impeachment concerns and
intensified strife in the Middle East, cause increased uncertainty. Collateral values are significant to our underwriting in our
specialty finance portfolios and volatility or declining values pose a threat. Concentration risk is impacted primarily by geographic
concentration in Northern Indiana and Southwestern Michigan in our business banking and commercial real estate portfolios and
by collateral concentration in our specialty finance portfolios.
The world economy has slowed and challenges persist. Current concerns include ongoing tariff wars, heightened concerns in the
Middle East, corruption scandals and political uncertainty in Latin American countries, the improving economic conditions in
Brazil tempered by pressure from broader regional instability, stagnation in Mexico with prospects for modest improvement in
2020, the continued slowdown in China, the geopolitical tensions with Russia, and the persistent threats 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 2019.
There are several industries represented in the commercial and agricultural portfolio. The outlook for the business banking portfolio
is guardedly optimistic, generally a continuation of 2019 trends. Consumer and small business confidence remains strong and
unemployment is slightly lower than the national average in many of the markets we serve. Our recent foray into solar financing
looks promising in terms of performance of existing projects financed, loan growth opportunities and overall credit quality. An
area of concern remains with our agricultural portfolio, which has exposure of approximately $157 million. Farm incomes declined
sharply from 2015 through 2019 and no improvement is anticipated in 2020, as commodity prices, particularly corn and soybeans,
remain low. Our customers have had favorable growing conditions which have resulted in strong crop yields. We will continue to
have a few borrowers who will be unable to repay their lines of credit in full, resulting in carry-over debt. For the commercial and
agricultural portfolio as a whole, we have experienced strong credit quality trends with low delinquencies and minimal charge-
offs. We have reviewed the calculated loss ratios and assessed the environmental factors and concentration issues affecting these
portfolios and we made a slight upward adjustment to the ratio primarily due to the slowing manufacturing sector. We believe the
adjustment to our reserve ratio is appropriate and the ratio is adequate.
The core businesses in our auto and light truck portfolio performed well in 2019. The losses in the portfolio were principally
attributable to specialty vehicles which is a relatively new venture and where we had aggressive growth. We sustained small losses
on a handful of accounts, the vast majority of which were identified as special mention accounts in 2018. We reviewed our processes,
assessed our underwriting and have implemented improvements. We also reviewed the reserve ratio for this segment of the portfolio,
increasing it for the pass loans as we continue to have greater movement from pass to special mention for our specialty vehicle
credits and decreasing it for the special attention pool as the size of the individual losses is declining as a result of our enhanced
monitoring of collateral types and condition. The auto rental portion of the portfolio continues to be threatened by ongoing
consolidation in the rental car industry which remains a threat to portfolio growth. On the other hand, collateral values have been
relatively stable throughout the latter half of 2019 and are significantly stronger than this time a year ago. We believe the reserve
ratio for the auto and light truck portfolio remains appropriate.
We experienced ongoing stability 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 only two charge-offs, one small account in 2018 and a mid-sized credit in
2019. Our credit quality is strongest when industry conditions are favorable. Reasonably stable gas prices, low unemployment,
and growth in GDP and the construction sector, which leads to higher demand for trucking bode well for the industry as does the
strong growth in online sales which drive freight volumes. Industry concerns include a persistent driver shortage which is
exacerbated in today’s tight labor market. Furthermore, truck chassis sales are expected to experience a cyclical decline in 2020
resulting in greater competition for new loan transactions, potentially placing additional pressure on interest rates in this portfolio.
Nevertheless, the underlying industry fundamentals are expected to remain relatively stable and the industry is poised to have a
good year again in 2020. We believe our reserve ratio for this portfolio remains appropriate without adjustment.
29 SRCE
2019 Form 10-K
Another area of concern continues to be our aircraft portfolio, which was among the sectors affected most by the sluggish economy.
In this portfolio we have collateral concentration and $184 million of foreign exposure, primarily in Mexico and Brazil. Mexico’s
economic growth is expected to increase moderately but continues to be threatened by drug trafficking and related violence, the
solution to which may entail additional public expenditures, further increasing already high and growing government debt. Brazil’s
economic recovery has continued to progress; however, improved interest rates in Brazil have made domestic borrowing more
attractive for some of our customers. The U.S. economic growth has bolstered the business aviation industry, with stabilized to
somewhat improving private jet markets. New business jet markets experienced growth in 2019 and the short to medium term
outlook is favorable. We reassessed our ratios, which were established based on the high and volatile loss histories, and believe
they remain appropriate particularly given the downside economic risks.
Our construction equipment portfolio is characterized by increasing outstanding loan balances and continued strong credit quality
in 2019; however we did experience an uptick in our special attention credits during the most recent three quarters. 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. Nonetheless, certain sectors are experiencing stress and we continue to monitor for credit
weaknesses. 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. A solid U.S. market and potential continued
infrastructure spending could have a positive impact for the used equipment markets. The industry’s greatest challenge is hiring
and retaining qualified workers. The underlying risk has not changed significantly for this portfolio; our reserve factors are similar
to last year.
Similar to the commercial portfolio, our commercial real estate loans are concentrated in our local market with local customers,
with approximately fifty-five 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 in these categories from 2009 through 2011. From 2012 through
2019, we have experienced small recoveries in the portfolio with exception of 2018 when we realized a small loss. We reviewed
our reserve factors and believe the ratio remains appropriate and adequate this year-end.
The reserve for loan and lease losses at December 31, 2019, totaled $111.25 million and was 2.19% of loans and leases, compared
to $100.47 million or 2.08% of loans and leases at December 31, 2018 and $94.88 million or 2.10% of loans and leases at
December 31, 2017. 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, 2019.
Charge-offs for loan and lease losses were $7.59 million for 2019, compared to $17.11 million for 2018 and $6.53 million for
2017. We had one large loss in the aircraft portfolio in 2019 contributing to charge-offs. The provision for loan and lease losses
was $15.83 million for 2019, compared to $19.46 million for 2018 and $8.98 million for 2017 to accommodate net charge-offs
and loan and lease growth.
30 SRCE
2019 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)
Amounts of loans and leases outstanding at end of period
Average amount of net loans and leases outstanding during
period
Balance of reserve for loan and lease losses at beginning of
period
Charge-offs:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total charge-offs
Recoveries:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total recoveries
Net charge-offs (recoveries)
Provision for loan and lease losses
Balance at end of period
2019
5,085,527
5,000,161
100,469
$
$
$
$
$
$
1,040
991
1,132
3,066
238
5
53
1,066
7,591
664
97
32
1,143
160
75
85
287
2,543
5,048
15,833
2018
4,835,464
4,755,256
94,883
229
3,308
23
12,222
288
70
63
909
17,112
222
68
—
2,499
100
53
23
271
3,236
13,876
19,462
2017
4,527,678
4,333,375
88,543
$
$
$
$
$
$
2016
2015
4,188,071
$ 3,994,692
4,113,508
$ 3,837,149
88,112
$
85,068
2,415
774
—
1,872
164
344
124
836
6,529
984
1,153
—
227
298
851
109
267
3,889
2,640
8,980
547
4
—
6,123
128
32
219
888
3,489
24
—
244
—
—
295
658
7,941
4,710
509
253
10
528
461
469
31
278
2,539
5,402
5,833
851
380
28
802
434
2,807
34
258
5,594
(884)
2,160
$
111,254
$
100,469
$
94,883
$
88,543
$
88,112
Ratio of net charge-offs (recoveries) 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
0.10%
2.19%
0.29%
2.08%
0.06%
2.10%
0.13%
(0.02)%
2.11%
2.21 %
1,101.74%
355.96%
477.66%
435.68%
686.23 %
The following table shows net charge-offs (recoveries) as a percentage of average loans and leases by portfolio type:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
2019
2018
2017
2016
2015
0.03%
—%
0.15
0.38
0.24
0.01
(0.01)
(0.01)
0.57
0.60
0.01
1.15
0.03
—
0.01
0.48
0.16%
(0.08)
—
0.21
(0.03)
(0.07)
—
0.44
—%
0.36 %
(0.06)
—
0.69
(0.07)
(0.06)
0.04
0.49
(0.08)
(0.01)
(0.07)
(0.10)
(0.44)
0.05
0.33
Total net charge-offs (recoveries) to average portfolio loans and leases
0.10%
0.29%
0.06%
0.13%
(0.02)%
31 SRCE
2019 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.
2019
2018
2017
2016
2015
Percentage
of Loans
and Leases
in Each
Category
to Total
Loans and
Leases
Percentage
of Loans
and Leases
in Each
Category to
Total
Loans and
Leases
Reserve
Amount
Percentage
of Loans
and Leases
in Each
Category to
Total
Loans and
Leases
Percentage
of Loans
and Leases
in Each
Category to
Total
Loans and
Leases
Reserve
Amount
Reserve
Amount
Percentage
of Loans
and Leases
in Each
Category to
Total
Loans and
Leases
Reserve
Amount
(Dollars in thousands)
Reserve
Amount
Commercial and agricultural
$ 23,671
22.27% $ 17,063
22.20% $ 16,228
20.54% $ 14,668
19.40% $ 15,456
18.64%
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home
equity
Consumer
Total
14,400
4,612
31,058
14,120
18,350
3,609
1,434
11.58
5.80
15.42
13.87
17.86
10.46
2.74
14,689
4,303
33,047
10,922
15,705
3,425
1,315
11.58
5.86
16.61
13.34
16.75
10.83
2.83
10,103
4,844
34,619
9,343
14,792
3,666
1,288
10.97
6.56
18.66
12.44
16.38
11.62
2.83
8,064
4,740
34,352
8,207
13,677
3,550
1,285
9.83
7.04
19.16
11.84
17.17
12.46
3.10
9,269
4,699
32,373
7,592
13,762
3,662
1,299
10.64
6.97
19.48
11.40
17.53
12.28
3.06
$ 111,254
100.00% $ 100,469
100.00% $ 94,883
100.00% $ 88,543
100.00% $ 88,112
100.00%
Nonperforming Assets — Nonperforming assets include loans past due over 90 days, nonaccrual loans and leases, 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 real estate and home equity
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 $19.24 million at December 31, 2019, compared to $35.32 million at December 31, 2018, and
$31.30 million at December 31, 2017. During 2019, interest income on nonaccrual loans and leases would have increased by
approximately $0.69 million compared to $2.18 million in 2018 if these loans and leases had earned interest at their full contractual
rate.
Nonperforming assets at December 31, 2019 decreased from December 31, 2018, mainly due to decreases in nonaccrual loans
and leases. Repossessions consisted mainly of aircraft largely represented by one airplane and one helicopter with a combined
carrying value of $6.71 million at December 31, 2019. Other real estate increased due to foreclosures outpacing sales of existing
properties.
32 SRCE
2019 Form 10-K
Nonperforming assets at December 31 (Dollars in thousands)
2019
2018
2017
2016
2015
Loans past due over 90 days
Nonaccrual loans and leases:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total nonaccrual loans and leases
Total nonperforming loans and leases
Other real estate
Repossessions:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Consumer
Total repossessions
Operating leases
$
309
$
366
$
459
$
416
$
122
969
1,250
1,074
875
1,351
1,652
2,189
429
9,789
10,098
522
—
1,865
—
6,707
35
16
8,623
—
2,653
11,374
106
7,561
2,326
1,984
1,714
141
27,859
28,225
299
—
440
15
6,209
—
2
6,666
126
2,603
8,041
371
1,957
991
3,418
1,890
134
19,405
19,864
1,312
—
165
—
9,335
582
32
10,114
9
3,981
166
—
6,110
1,248
5,555
2,641
206
19,907
20,323
704
—
32
—
4,283
46
—
4,388
539
1,392
1,961
109
12,718
12,840
736
—
10
—
9,335
6,916
—
6
9,373
34
—
1
6,927
121
Total nonperforming assets
$
19,243
$
35,316
$
31,299
$
30,434
$
20,624
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
0.20%
0.58%
0.44%
0.49%
0.32%
0.37%
0.71%
0.67%
0.70%
0.50%
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, 2019 and 2018, we had $17.74 million and $4.24 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, 2019, potential problem loans consisted of three
credit relationships from various portfolios without any commonalities with regard to industry or collateral. Weakness in these
companies’ operating performance and payment patterns have caused us to heighten attention given to these credits.
INVESTMENT PORTFOLIO
The amortized cost of securities at year-end 2019 increased 2.95% from 2018, following a 10.43% increase from year-end 2017
to year-end 2018. The amortized cost of securities at December 31, 2019 was $1.03 billion or 15.61% of total assets, compared
to $1.00 billion or 15.96% of total assets at December 31, 2018.
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
Total investment securities available-for-sale
2019
2018
2017
$
524,896
$
537,913
$
83,566
372,458
52,151
700
95,346
324,390
45,843
700
471,508
116,260
289,327
31,573
700
$
1,033,771
$
1,004,192
$
909,368
33 SRCE
2019 Form 10-K
Yields on tax-exempt obligations are calculated on a fully tax-equivalent basis assuming a 21% tax rate. The following table shows
the maturities of securities available-for-sale at December 31, 2019, 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
Total investment securities available-for-sale
Amount
Yield
$
121,828
381,966
21,102
—
524,896
19,488
53,291
10,107
680
83,566
5,990
46,161
—
—
52,151
—
700
—
—
700
372,458
2.06 %
1.94
1.67
—
1.96
2.22
2.43
2.27
2.76
2.36
2.62
2.56
—
—
2.57
—
2.66
—
—
2.66
2.48
$
1,033,771
2.21%
At December 31, 2019, 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, 2019, the vintage (years originated) of the underlying loans comprising our securities are: 28% in the year
2019; 39% in the years 2017 and 2018; 12% in the years 2015 and 2016; 6% in the years 2013 and 2014; and 15% in years 2012
and prior.
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
2019
2018
2017
Amount
Rate
Amount
Rate
Amount
Rate
$
1,171,639
—% $
1,069,664
—% $
983,050
—%
1,635,209
825,292
1,644,596
0.82
0.20
2.16
1,610,022
839,652
1,444,325
0.62
0.14
1.63
1,517,859
828,993
1,163,345
0.31
0.09
1.18
$
5,276,736
$
4,963,663
$
4,493,247
See Part II, Item 8, Financial Statements and Supplementary Data — Note 10 of the Notes to Consolidated Financial Statements
for additional information on deposits.
34 SRCE
2019 Form 10-K
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)
2019
Federal Funds
Purchased and
Securities
Repurchase
Agreements
Commercial
Paper
Federal Home
Loan Bank
Advances
Other
Short-Term
Borrowings
Total
Borrowings
Balance at December 31, 2019
$
120,459
$
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, 2019
2018
187,848
143,625
0.33%
0.23%
Balance at December 31, 2018
$
113,627
$
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, 2018
148,002
135,670
0.30 %
0.47 %
2017
Balance at December 31, 2017
$
205,834
$
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, 2017
205,834
166,114
0.21 %
0.59 %
LIQUIDITY
3,993
4,820
4,547
0.28%
0.29%
4,325
5,590
4,805
0.29 %
0.29 %
6,115
6,542
6,327
0.27 %
0.27 %
$
20,000
$
168,000
56,326
2.56%
1.61%
$
80,000
$
225,000
122,592
1.97 %
2.57 %
$
— $
160,000
70,293
1.06 %
— %
$
$
$
1,441
1,762
1,413
—%
—%
1,392
2,740
1,974
— %
— %
2,646
2,402
2,501
— %
— %
145,893
362,430
205,911
0.94%
0.42%
199,344
381,332
265,041
1.07 %
1.30 %
214,595
374,778
245,235
0.45 %
0.57 %
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, listing services certificates of deposit and certain certificates
of deposit over $250,000 based on established FDIC insured deposits. In 2019, average core deposits equaled 71.48% of average
total assets, compared to 72.53% in 2018 and 73.71% in 2017. The effective rate of core deposits in 2019 was 0.77%, compared
to 0.56% in 2018 and 0.35% in 2017.
Average noninterest bearing core deposits increased 9.53% in 2019 compared to an increase of 8.81% in 2018. These represented
25.11% of total core deposits in 2019, compared to 23.97% in 2018, and 23.65% in 2017.
Purchased Funds — We use purchased funds to supplement core deposits, which include certain certificates of deposit over
$250,000, brokered certificates of deposit, listing services 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 2019, our reliance on purchased funds
increased to 12.51% of average total assets from 12.47% in 2018.
Shareholders’ Equity — Average shareholders’ equity equated to 12.25% of average total assets in 2019, compared to 12.08%
in 2018. Shareholders’ equity was 12.51% of total assets at year-end 2019, compared to 12.11% at year-end 2018. 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 $5.17 million and $(10.68) million at December 31, 2019 and 2018, 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 $783 million.
35 SRCE
2019 Form 10-K
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, 2019, 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. At December 31, 2019,
we borrowed zero in the federal funds market. We could borrow $265.00 million in additional funds for a short time from these
banks on a collective basis. As of December 31, 2019, we had $65.82 million outstanding in FHLB advances and could borrow
an additional $520.13 million contingent on the FHLB activity-based stock ownership requirement. We also had no outstandings
with the FRB and could borrow $551.99 million as of December 31, 2019.
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, 2019
December 31, 2018
Basis Point Interest Rate Change
12 Months
24 Months
12 Months
24 Months
Up 200
Up 100
Down 100
1.88%
0.95%
(4.06)%
5.57%
2.89%
(7.64)%
3.12%
1.58%
(4.33)%
6.92%
3.49%
(6.78)%
36 SRCE
2019 Form 10-K
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, 2019 and 2018, 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, 2019, 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
— $
3,708,828
$
— $
— $
— $
— $
3,708,828
Certificates of deposit
Long-term debt
Subordinated notes
Operating leases
Purchase obligations
10
11
12
18
—
1,256,577
332,333
2,759
—
3,477
34,768
7,756
—
7,514
10,531
57,495
12,993
—
5,205
1,368
2,093
30,159
58,764
11,508
—
—
1,648,498
17,972
—
—
—
71,639
58,764
27,704
46,667
Total contractual obligations
$
5,006,409
$
358,134
$
77,061
$
102,524
$
17,972
$
5,562,100
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, 2019. Our management has used the best information available to make the estimates 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 2019.
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, 2019 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.
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.
37 SRCE
2019 Form 10-K
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated selected quarterly statement of operations data for the years ended
December 31, 2019 and 2018.
Three Months Ended (Dollars in thousands, except per share amounts)
March 31
June 30
September 30
December 31
2019
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
Net income available to common shareholders
Diluted net income per common share
2018
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
(Losses) gains on investment securities available-for-sale
Income before income taxes
Net income
Net income available to common shareholders
Diluted net income per common share
$
69,021
$
71,637
$
72,676
$
14,073
54,948
4,918
—
28,950
22,196
22,196
0.86
15,210
56,427
4,247
—
30,491
23,417
23,385
0.91
15,481
57,195
3,717
—
32,137
24,448
24,438
0.95
$
59,238
$
63,865
$
65,696
$
8,706
50,532
3,786
(345)
24,996
19,116
19,116
0.73
10,696
53,169
4,817
—
27,498
21,964
21,964
0.84
11,334
54,362
6,157
—
24,923
19,888
19,888
0.76
69,543
14,247
55,296
2,951
—
28,576
21,954
21,941
0.86
68,517
12,674
55,843
4,702
—
27,610
21,446
21,446
0.82
Net income available to common shareholders was $21.94 million for the fourth quarter of 2019, compared to the $21.45 million
of net income available to common shareholders reported for the fourth quarter of 2018. Diluted net income per common share
for the fourth quarter of 2019 amounted to $0.86, compared to $0.82 per common share reported in the fourth quarter of 2018.
Net interest margin was 3.51% for the fourth quarter of 2019 and 3.77% for the fourth quarter of 2018. Net interest income was
$55.30 million for the fourth quarter of 2019 down 0.98% from 2018’s fourth quarter. Net interest margin on a fully taxable-
equivalent basis was 3.52% for the fourth quarter of 2019 and 3.78% for the fourth quarter of 2018. Tax-equivalent net interest
income was $55.46 million for the fourth quarter of 2019, down 1.03% from 2018’s fourth quarter.
Our provision for loan and lease losses was $2.95 million in the fourth quarter of 2019 compared to $4.70 million in the fourth
quarter of 2018. Net charge-offs were $0.64 million for the fourth quarter 2019, compared to net charge-offs of $2.53 million a
year ago.
Noninterest income for the fourth quarter of 2019 was $25.58 million, compared to $24.16 million for the fourth quarter of 2018.
Noninterest expense for the fourth quarter of 2019 was $49.35 million and was $47.69 million in the fourth quarter 2018.
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.
38 SRCE
2019 Form 10-K
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
1st Source Corporation
South Bend, Indiana
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of 1st Source Corporation (Company) as of
December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity and
cash flows for each of the years in the three-year period ended December 31, 2019 and the related notes (collectively referred to
as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2019, 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)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated February 20, 2020, expressed an unqualified opinion of the effectiveness of the Company’s internal
control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Allowance for Loan and Lease Losses
As described in Note 5 to the consolidated financial statements, the Company’s consolidated allowance for loan and lease losses
(ALLL) was $111.25 million at December 31, 2019. The Company also describes in Note 1 of the consolidated financial statements
the “Reserve for Loan and Lease Losses” accounting policy around this estimate. The ALLL is an estimate of 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. The estimate 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.
39 SRCE
2019 Form 10-K
The primary reason for our determination that the allowance for loan losses is a critical audit matter is that auditing the estimated
allowance for loan losses involved significant judgment and complex review. There is a high degree of subjectivity in evaluating
management’s estimate, such as evaluating management's assessment of economic conditions and other environmental factors,
evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades.
Our audit procedures related to the estimated allowance for loan losses included:
• Testing the design and operating effectiveness of internal controls, including those related to technology, over the ALLL
including data completeness and accuracy, classifications of loans by loan segment, historical loss data, the calculation
of a loss rate, the establishment of qualitative adjustments, grading and risk classification of loans and establishment of
specific reserves on impaired loans and management’s review controls over the ALLL balance as a whole including
attending internal Company Credit Policy Committee meetings and Audit Committee discussions and analysis;
• Testing clerical/computational accuracy of the formulas within the calculation spreadsheet;
• Testing of completeness and accuracy of the information/reports utilized in the ALLL, including reports used in
management review controls over the ALLL;
• Computing an independent calculation of an acceptable range and comparing it to the Company’s estimate;
• Evaluating the qualitative adjustment to the historical loss rates, including assessing the basis for the adjustments and
the reasonableness of the significant assumptions; and
• Testing of the loan review function and the accuracy of loan grades determined. Specifically, utilizing internal specialists
to assist us in evaluating the appropriateness of loan grades and to assess the reasonableness of specific impairments on
loans.
Evaluating the overall reasonableness of qualitative factors and the appropriateness of their direction and magnitude and the
Company’s support for the direction and magnitude compared to previous years.
/s/ BKD, LLP
We have served as the Company’s auditor since 2015
Fort Wayne, Indiana
February 20, 2020
40 SRCE
2019 Form 10-K
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
1st Source Corporation
South Bend, Indiana
Opinion on the Internal Control over Financial Reporting
We have audited 1st Source Corporation’s (“Company”) internal control over financial reporting as of December 31, 2019, based
on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements of the Company and our report dated February 20, 2020, expressed an
unqualified opinion thereon.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definitions and Limitations of Internal Control over Financial Reporting
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.
/s/ BKD, LLP
Fort Wayne, Indiana
February 20, 2020
41 SRCE
2019 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
Other investments
Mortgages held for sale
Loans and leases, net of unearned discount:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
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 demand
Interest-bearing deposits:
Interest-bearing demand
Savings
Time
Total interest-bearing deposits
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 31,2019 and 2018
Retained earnings
Cost of common stock in treasury (2,696,200 shares at December 31, 2019 and 2,421,946 shares at December 31, 2018
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
The accompanying notes are a part of the consolidated financial statements.
2019
2018
$
$
67,215
16,150
1,040,583
28,414
20,277
94,907
4,172
990,129
28,404
11,290
1,132,791
1,073,205
588,807
294,824
784,040
705,451
908,177
532,003
139,434
5,085,527
(111,254)
4,974,273
111,684
52,219
83,971
227,990
559,987
283,544
803,111
645,239
809,886
523,855
136,637
4,835,464
(100,469)
4,734,995
134,440
52,139
83,998
159,271
$
6,622,776
$
6,293,745
$
1,216,834
$
1,217,120
1,677,200
814,794
1,648,498
4,140,492
5,357,326
120,459
25,434
145,893
71,639
58,764
140,518
1,614,959
822,477
1,467,766
3,905,202
5,122,322
113,627
85,717
199,344
71,123
58,764
78,602
5,774,140
5,530,155
—
—
436,538
463,269
(76,702)
5,172
828,277
20,359
848,636
436,538
398,980
(62,760)
(10,676)
762,082
1,508
763,590
$
6,622,776
$
6,293,745
42 SRCE
2019 Form 10-K
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (Dollars in thousands, except per share amounts)
2019
2018
2017
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 and wealth advisory
Service charges on deposit accounts
Debit card
Mortgage banking
Insurance commissions
Equipment rental
(Losses) gains on investment securities available-for-sale
Other
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Net occupancy
Furniture and equipment
Depreciation — leased equipment
Professional fees
Supplies and communication
FDIC and other insurance
Business development and marketing
Loan and lease collection and repossession
Other
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Net (income) loss attributable to noncontrolling interests
Net income available to common shareholders
Basic net income per common share
Diluted net income per common share
The accompanying notes are a part of the consolidated financial statements.
$
258,348
$
234,455
$
194,726
20,946
1,351
2,232
19,356
1,857
1,648
13,853
2,413
1,393
282,877
257,316
212,385
50,495
1,934
3,677
2,905
59,011
223,866
15,833
208,033
20,692
11,010
14,209
4,698
6,761
30,741
—
13,019
101,130
97,098
10,528
24,815
25,128
6,952
6,454
1,795
6,303
3,402
6,534
189,009
120,154
28,139
92,015
(55)
91,960
3.57
3.57
$
$
$
$
$
$
34,631
2,838
3,625
2,316
43,410
213,906
19,462
194,444
21,071
10,454
13,369
3,844
6,502
31,793
(345)
10,362
97,050
93,857
10,041
23,433
26,248
7,680
6,320
2,923
6,112
3,375
6,478
186,467
105,027
22,613
82,414
—
82,414
3.16
3.16
$
$
$
19,202
1,115
4,002
2,435
26,754
185,631
8,980
176,651
20,980
10,589
11,809
4,796
5,889
30,381
4,340
9,922
98,706
86,912
10,624
20,769
25,215
6,810
5,355
2,537
7,477
2,724
5,574
173,997
101,360
33,309
68,051
—
68,051
2.60
2.60
43 SRCE
2019 Form 10-K
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31 (Dollars in thousands)
Net income
Other comprehensive income (loss):
Unrealized appreciation (depreciation) of investment securities available-for-sale
Reclassification adjustment for realized losses (gains) included in net income
Income tax effect
Other comprehensive income (loss), net of tax
Comprehensive income
Comprehensive (income) loss attributable to noncontrolling interests
2019
2018
2017
$
92,015
$
82,414
$
68,051
20,875
—
(5,027)
15,848
107,863
(55)
(9,073)
345
2,102
(6,626)
75,788
—
(3,147)
(4,340)
2,811
(4,676)
63,375
—
Comprehensive income available to common shareholders
$
107,808
$
75,788
$
63,375
The accompanying notes are a part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
1st Source Corporation Shareholders
(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
Shareholders’
Equity
Noncontrolling
Interests
Total
Equity
Balance at January 1, 2017
Cumulative-effect adjustment
Balance at January 1, 2017, adjusted
Net income
Other comprehensive loss
Issuance of 61,899 common shares under
stock based compensation awards
Cost of 900 shares of common stock
acquired for treasury
Common stock dividend ($0.76 per share)
$
— $ 436,538
$ 290,824
$
(56,056)
$
1,344
$
672,650
$
— $ 672,650
—
—
—
—
—
—
—
—
(65)
—
436,538
290,759
(56,056)
—
—
—
—
—
68,051
—
908
—
(19,759)
—
—
1,469
(41)
—
—
1,344
—
(4,676)
—
—
—
(65)
672,585
68,051
(4,676)
2,377
(41)
(19,759)
—
—
—
—
—
—
—
(65)
672,585
68,051
(4,676)
2,377
(41)
(19,759)
Balance at December 31, 2017
$
— $ 436,538
$ 339,959
$
(54,628)
$
(3,332)
$
718,537
$
— $ 718,537
Cumulative-effect adjustment
Balance at January 1, 2018, adjusted
Net income
Other comprehensive loss
Issuance of 47,977 common shares under
stock based compensation awards
Cost of 201,013 shares of common stock
acquired for treasury
Common stock dividend ($0.96 per share)
Contributions from noncontrolling interests
—
—
—
—
—
—
—
—
—
718
—
436,538
340,677
(54,628)
—
—
—
—
—
—
82,414
—
841
—
(24,952)
—
—
—
1,139
(9,271)
—
—
(718)
(4,050)
—
(6,626)
—
—
—
—
—
718,537
82,414
(6,626)
1,980
(9,271)
(24,952)
—
—
—
—
—
—
—
—
—
718,537
82,414
(6,626)
1,980
(9,271)
(24,952)
1,508
1,508
Balance at December 31, 2018
$
— $ 436,538
$ 398,980
$
(62,760)
$
(10,676)
$
762,082
$
1,508
$ 763,590
Cumulative-effect adjustment
Balance at January 1, 2019, adjusted
Net income
Other comprehensive income
Issuance of 51,533 common shares under
stock based compensation awards
Cost of 325,787 shares of common stock
acquired for treasury
Common stock dividend ($1.10 per share)
Contributions from noncontrolling interests
Distributions to noncontrolling interests
—
—
—
—
—
—
—
—
—
—
(301)
—
436,538
398,679
(62,760)
—
—
—
—
—
—
—
91,960
—
862
—
(28,232)
—
—
—
—
1,143
(15,085)
—
—
—
—
(10,676)
—
15,848
—
—
—
—
—
(301)
761,781
91,960
15,848
2,005
(15,085)
(28,232)
—
—
—
(301)
1,508
763,289
55
—
—
—
—
92,015
15,848
2,005
(15,085)
(28,232)
18,934
18,934
(138)
(138)
Balance at December 31, 2019
$
— $ 436,538
$ 463,269
$
(76,702)
$
5,172
$
828,277
$
20,359
$ 848,636
The accompanying notes are a part of the consolidated financial statements.
44 SRCE
2019 Form 10-K
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (Dollars in thousands)
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
Amortization of right of use assets
Deferred income taxes
Losses (gains) 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 gains on sale of loans held for sale
Net gains on sale of other real estate and repossessions
Net gain on sale of premises and equipment
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 partnership investments
Net change in other investments
Loans sold or participated to others
Proceeds from principal payments on direct finance leases
Net change in loans and leases
Net change in equipment owned under operating leases
Purchases of premises and equipment
Proceeds from disposal 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
Net change in noncontrolling interests
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
Right of use assets obtained in exchange for lease obligation
Cash paid for:
Interest
Income taxes
The accompanying notes are a part of the consolidated financial statements.
2019
2018
2017
$
92,015
$
82,414
$
68,051
15,833
5,786
25,128
2,765
4,014
1,312
3,046
(5,730)
—
(145,097)
139,050
(2,940)
(487)
(1,251)
(245)
4,968
11,213
13,492
1,734
164,606
—
317,295
(351,189)
(33,840)
(10)
53,369
69,188
(392,475)
(2,495)
(8,033)
3,418
10,855
(333,917)
54,272
180,732
(53,451)
—
(2,695)
49
(15,085)
18,796
(29,021)
153,597
(15,714)
99,079
83,365
14,807
300
17,064
54,043
5,585
$
$
$
19,462
5,620
26,248
3,553
3,477
956
—
(550)
345
(78,450)
82,127
(1,844)
(561)
(128)
(1,747)
2,997
(7,048)
21,884
940
159,695
11,392
145,167
(255,205)
(13,669)
(2,451)
22,835
50,457
(405,961)
(21,107)
(3,058)
216
13,433
(457,951)
171,799
197,793
(15,251)
—
(1,735)
145
(9,271)
1,508
(25,686)
319,302
21,046
78,033
99,079
11,007
583
—
40,413
8,272
$
$
$
8,980
5,658
25,215
2,963
5,449
1,092
—
2,767
(4,340)
(101,104)
106,811
(2,981)
(251)
(300)
(2,119)
1,222
551
19,364
2,670
139,698
228,715
177,466
(469,385)
(24,489)
(3,495)
32,004
75,268
(457,654)
(46,003)
(5,444)
2,180
6,194
(484,643)
205,649
213,321
(77,348)
19,999
(26,628)
153
(41)
—
(20,431)
314,674
(30,271)
108,304
78,033
8,135
1,426
—
25,531
10,567
$
$
$
45 SRCE
2019 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 wealth advisory services, and
insurance to individual and business clients in Indiana, Michigan and Florida. 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, its subsidiaries (principally the Bank) and any variable
interest entities (“VIEs”) for which the Company has concluded it has significant involvement in and the ability to direct the
activities that impact the entity’s economic performance. 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,
2019 and 2018, 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 debt securities are reported, net of applicable taxes, as a separate component
of accumulated other comprehensive income (loss) in shareholders’ equity. Unrealized gains and losses on equity securities are
reflected, net of applicable taxes, in earnings.
The initial indication of potential other-than-temporary impairment (OTTI) for debt 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, 2019 and 2018, 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.
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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. As part of the leasing standard that became effective
January 1, 2019, only those costs incurred as a direct result of closing a lease transaction are capitalized. 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.
All existing deferrals will continue to be amortized over the estimated life of the lease while all new incremental direct costs are
expensed immediately.
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 collectability
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 where the internal credit quality grade is at or below a predetermined classification
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, 2019 and 2018, residential real estate portfolio loans included
$1.44 million and $1.39 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.
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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.
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 or obtaining corresponding best-efforts forward
sales commitments with an investor to sell the loans at an agreed-upon price at the time the interest rate locks are issued to the
customers. 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.
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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.
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 — As a lessor, 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, on the Consolidated 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 years to seven years. Revenue consists of the contractual lease payments and is recognized on
a straight-line basis over the lease term and reported in Noninterest Income on the Consolidated Statements of Income. Leased
assets are 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 in Noninterest Expense
on the Consolidated 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 annually 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. The Company is responsible for the payment of personal property taxes which is reported in
Other Expense on the Consolidated Statements of Income. The lessee is responsible for reimbursing the Company for personal
property taxes which is reported in Other Income on the Consolidated Statements of Income. The Company excludes sales taxes
and other similar taxes from being reported as lease revenue with an associated expense.
Lease Commitments — The Company leases certain banking center locations, office space, land and billboards. In determining
whether a contract contains a lease, the Company examines the contract to ensure an asset was specifically identified and that the
Company has control of use over the asset. To determine whether a lease is classified as operating or finance, the Company performs
an economic life test on all building leases with greater than a twenty years term. Further, the Company performs a fair value test
to identify any leases that have a present value of future lease payments over the lease term that is greater than 90% of the fair
value of the building. The Company only capitalizes leases with an initial lease liability of $2,000 or greater.
At lease inception, the Company determines the lease term by adding together the minimum lease term and all optional renewal
periods that it is reasonably certain to renew. The Company determines this on each lease by considering all relevant contract-
based, asset-based, market-based, and entity-based economic factors. Generally, the exercise of lease renewal options is at the
Company’s sole discretion. The lease term is used to determine whether a lease is operating or finance and is used to calculate
straight-line rent expense. Additionally, the depreciable life of leasehold improvements is limited by the expected lease term.
Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date the Company takes
possession of the property. Rent expense and variable lease costs are included in Net Occupancy Expense on the Consolidated
Statements of Income. Included in variable lease costs are leases with rent escalations based on recent financial indices, such as
the Consumer Price Index, where the Company estimates future rent increases and records the actual difference to variable costs.
Certain leases require the Company to pay common area maintenance, real estate taxes, insurance and other operating expenses
associated with the leases premises. These expenses are classified in Net Occupancy Expense on the Consolidated Statements of
Income, consistent with similar costs for owned locations. There are no residual value guarantees, restrictions or covenants imposed
by leases.
The Company accounts for lease and nonlease components together as a single lease component by class of underlying asset.
Operating lease obligations with an initial term longer than 12 months are recorded with a right of use asset and a lease liability
on the Consolidated Statements of Financial Condition.
The discount rate used in determining the lease liability and related right of use asset is based upon what would be obtained by
the Company for similar loans as an incremental rate as of the date of origination or renewal.
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Other Real Estate — Other real estate acquired through partial or total satisfaction of nonperforming loans is included in Other
Assets on the Consolidated Statements of Financial Condition 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 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, property maintenance costs, and gains or
losses recognized upon the sale of other real estate are recognized in Noninterest Expense on the Consolidated 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, 2019
and 2018, other real estate had carrying values of $0.52 million and $0.30 million, respectively, and is included in Other Assets
on the Consolidated 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 on the Consolidated Statements of Financial Condition 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 Consolidated Statements of Income. Gains or losses resulting from
the sale of repossessed assets are recognized on the date of sale. Repossessed assets totaled $8.62 million and $6.66 million, as
of December 31, 2019 and 2018, respectively, and are included in Other Assets on the Consolidated 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 years 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 earnings before interest, tax,
depreciation and amortization (EBITDA) 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 2019 and determined that no impairment exists.
Partnership Investments — 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 for which it owns three percent or more of the partnership on the equity
method. The Company accounts for its investments in partnerships of which it owns less than three percent at fair value less
impairment. The Company has elected to use the practical expedient to estimate fair value of an investment in an investment
company using the net asset value of its partnership interest. The Company uses the hypothetical liquidation book value (HLBV)
method for equity investments when the liquidation rights and priorities as defined by an equity investment agreement differ from
what is reflected by the underlying percentage ownership interests. The HLBV method is commonly applied to equity investments
in the renewable energy industry, where cash percentages vary at different points in time and are not directly linked to an investor’s
ownership percentage. A calculation is prepared at each balance sheet date to determine the amount that the Company would
receive if an equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that
cash to the investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation
distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions,
is 1st Source’s share of the earnings or losses from the equity investment for the period. Investments in partnerships are included
in Other Assets on the Consolidated Statements of Financial Condition. The balances as of December 31, 2019 and 2018 were
$61.08 million and $23.46 million, respectively.
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 day to 365 days of the transaction
date. Commercial paper matures within seven days to 270 days. Other short-term borrowings on the Consolidated Statements of
Financial Condition include the Company’s liability related to mortgage loans available for repurchase under GNMA optional
repurchase programs.
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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.
Revenue Recognition — The Company recognizes revenues as they are earned based on contractual terms, as transactions occur,
or as services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income
from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial
services offered primarily through 1st Source Bank and its subsidiaries.
Interest Income — The largest source of revenue for the Company is interest income which is primarily recognized on an accrual
basis according to nondiscretionary formulas in written contracts, such as loan and lease agreements or investment securities
contracts.
Noninterest Income — The Company earns noninterest income through a variety of financial and transaction services provided
to corporate and consumer clients such as trust and wealth advisory, deposit account, debit card, mortgage banking, insurance,
and equipment rental services. Revenue is recorded for noninterest income based on the contractual terms for the service or
transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.
Trust and Wealth Advisory Fees — Trust and wealth advisory 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.
The Company uses the deferral method of accounting on investments that generate investment tax credits. Under this method, the
investment tax credits are recognized as a reduction to the related asset. The expense on certain qualified affordable housing
investments is included in Tax Expense on the Consolidated Statements of Income.
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 on the Consolidated 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 on the
Consolidated Statements of Income based on their fair values on the measurement date, which, for its purposes, is the date of
grant. The Company recognizes forfeitures as they occur.
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.
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Derivative Financial Instruments — The Company occasionally enters into derivative financial instruments as part of its interest
rate risk management strategies. These derivative financial instruments consist primarily of interest rate swaps. All derivative
instruments are recorded on the Consolidated 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 on the Consolidated
Statements of Income. 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.
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, 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
Partnership Investments and Derivatives: In January 2020, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2020-01 “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures
(Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”
These amendments, among other things, clarify that a company should consider observable transactions that require a company
to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures,
for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon
discontinuing the equity method. The amendments also clarify that, when determining the accounting for certain forward contracts
and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be
accounted for under the equity method or fair value option. The guidance is effective for public business entities for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including early
adoption in an interim period. An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that
includes the adoption date. The Company is assessing ASU 2020-01 and its impact on its accounting and disclosures.
52 SRCE
2019 Form 10-K
Income Taxes: In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes.” These amendments remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the
need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for
intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments;
and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves
financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: franchise taxes that are partially
based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements
of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public
business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption
is permitted. The Company is assessing ASU 2019-12 and its impact on its accounting and disclosure.
Leases: In March 2019, the FASB issued ASU No. 2019-01 “Leases (Topic 842): Codification Improvements.” These amendments
align the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of
existing guidance. The ASU also requires lessors within the scope of Topic 842, Financial Services-Depository Lending, to present
all “principal payments received under leases” within investing activities on the Consolidated Statements of Cash Flows. Finally,
the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company
adopts the new leases standard. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years. Early application is permitted. An entity should apply the amendments as of the date that it first applied
Topic 842, using the same transition methodology in accordance with paragraph 842-10-65-1(c). The Company adopted Topic
842 on January 1, 2019 and applied the amendments in ASU 2019-01 as of the same date and it did not have a material impact on
its accounting and disclosures.
Intangibles - Internal-Use Software: In August 2018, the FASB issued ASU No. 2018-15 “Intangibles - Goodwill and Other -
Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred
in a hosting arrangement that is a service contact with the requirements for capitalizing implementation costs incurred to develop
or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the
service element of a hosting arrangement that is a service contract is not affected by these amendments. The guidance is effective
for public business entities for annual periods, including interim periods within those annual periods, beginning after December
15, 2019. Early adoption is permitted. The Company adopted ASU 2018-15 on January 1, 2020 and it did not have a material
impact on its accounting and disclosures.
Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued ASU No. 2018-13 “Fair Value
Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” These
amendments modify the disclosure requirements in Topic 820 as follows:
Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing
of transfers between levels; and the valuation processes for Level 3 fair value measurements.
Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of
liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated
the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure
is to communicate information about the uncertainty in measurement as of the reporting date.
Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level
3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements.
The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be
applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments
should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is
permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the
additional disclosures until their effective date. The Company adopted ASU 2018-13 on January 1, 2020 and it did not have a
material impact on its accounting and disclosures.
53 SRCE
2019 Form 10-K
Premium Amortization: In March 2017, the FASB issued ASU No. 2017-08 “Receivables - Nonrefundable Fees and Other Costs
(Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” These amendments shorten the amortization
period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized
to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount
continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.
If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes
that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment
directly to retained earnings as of the beginning of the period of adoption. The Company adopted ASU 2017-08 on January 1,
2019 and recognized a cumulative-effect adjustment to retained earnings of $0.30 million.
Simplifying the Test for Goodwill Impairment: In January 2017, the FASB issued ASU No. 2017-04 “Intangibles - Goodwill
and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” These amendments eliminate Step 2 from the goodwill
impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount
to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity
still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is
necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December
15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017. ASU 2017-04 should be adopted on a prospective basis. The Company adopted ASU 2017-04 on January 1, 2020 and it did
not have a material impact on its accounting and disclosures.
Measurement of Credit Losses on Financial Instruments: In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments (CECL).” The provisions of
ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit
losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment,
held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held
by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented
at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.
The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current
estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current
conditions, and reasonable and supportable forecasts that affect the collectibility of the financial assets.
Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a
direct write-down to the security.
The FASB issued additional ASUs containing clarifying guidance, transition relief provisions and minor updates to the original
ASU. These include ASU 2018-19 (issued November 2018), ASU 2019-04 (issued April 2019), ASU 2019-05 (issued May 2019),
ASU 2019-10 (issued November 2019) and ASU 2019-11 (issued November 2019). ASU 2016-13 and subsequent ASUs are
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This amendment is
required to be adopted using a modified retrospective approach with a cumulative-effect adjustment to beginning retained earnings,
as of the beginning of the first reporting period in which the guidance is effective.
As previously disclosed, the Company formed a cross-functional team to work through its implementation plan. The Company’s
cross-functional team is substantially complete with the assessment and documentation of processes, internal controls, data and
model validation testing, parallel testing, qualitative factors and forecast periods as well as model development. The Company
implemented a third-party software solution to assist in the application of the new standard including portfolio segmentation
according to shared risk characteristics and modeling methodologies. The Company has not finalized the results of its CECL
estimate as of year-end since it is in the final stages of completing the formal review and approval process. The Company estimates
the adoption of ASU 2016-13 on January 1, 2020 will result in a one-time cumulative effect adjustment through retained earnings
in a decrease of up to $1 million or an increase of up to $3 million on its allowance for credit losses.
The Company does not expect to record an allowance on January 1, 2020 with respect to its available-for-sale debt securities as
the majority of these securities are government agency-backed securities for which the risk of loss is minimal. The adoption of
ASU 2016-13 is not expected to have a significant impact on the Company’s regulatory capital ratios.
54 SRCE
2019 Form 10-K
Note 3 — Investment Securities Available-For-Sale
The following table shows investment securities available-for-sale.
(Dollars in thousands)
December 31, 2019
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 investment securities available-for-sale
December 31, 2018
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
$
$
$
Amortized Cost
Gross
Unrealized Gains
Gross
Unrealized Losses
Fair Value
524,896
$
2,538
$
(470) $
83,566
372,458
52,151
700
1,033,771
537,913
95,346
324,390
45,843
700
$
$
1,048
3,948
890
—
8,424
196
172
718
—
—
$
$
(109)
(1,017)
(16)
—
(6,886) $
(936)
(6,875)
(451)
(1)
(1,612) $
1,040,583
526,964
84,505
375,389
53,025
700
531,223
94,582
318,233
45,392
699
990,129
Total investment securities available-for-sale
$
1,004,192
$
1,086
$
(15,149) $
At December 31, 2019, 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).
The Company did not hold any marketable equity securities at December 31, 2019 and 2018.
The following table shows the contractual maturities of investments in debt securities available-for-sale at December 31, 2019.
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
$
147,306
$
482,118
31,209
680
372,458
147,629
485,745
31,173
647
375,389
$
1,033,771
$
1,040,583
55 SRCE
2019 Form 10-K
The following table summarizes gross unrealized losses and fair value by investment category and age. At December 31, 2019,
the Company’s available-for-sale securities portfolio consisted of 629 securities, 152 of which were in an unrealized loss position.
(Dollars in thousands)
December 31, 2019
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
$
87,352
$
(171) $
69,053
$
(299) $ 156,405
$
U.S. States and political subdivisions securities
Mortgage-backed securities - Federal agencies
Corporate debt securities
Foreign government and other securities
9,283
81,951
—
—
Total temporarily impaired available-for-sale securities
$ 178,586
December 31, 2018
U.S. Treasury and Federal agencies securities
$
55,491
$
$
U.S. States and political subdivisions securities
Mortgage-backed securities - Federal agencies
Corporate debt securities
Foreign government and other securities
21,059
65,554
21,496
699
(107)
(383)
—
—
1,042
51,165
8,091
—
(661) $ 129,351
(177) $ 424,269
(61)
(511)
(143)
(1)
45,365
198,221
23,896
—
$
$
(2)
10,325
(634)
133,116
(16)
—
8,091
—
(951) $ 307,937
(6,709) $ 479,760
(875)
66,424
(6,364)
263,775
(308)
—
45,392
699
$
$
(470)
(109)
(1,017)
(16)
—
(1,612)
(6,886)
(936)
(6,875)
(451)
(1)
Total temporarily impaired available-for-sale securities
$ 164,299
$
(893) $ 691,751
$
(14,256) $ 856,050
$
(15,149)
At December 31, 2019, 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.
The following table shows the gross realized gains and losses from the securities available-for-sale portfolio, including marketable
equity securities.
(Dollars in thousands)
Gross realized gains
Gross realized losses
OTTI losses
Net realized (losses) gains
2019
2018
2017
$
$
— $
2
$
—
—
(347)
—
— $
(345) $
7,425
(2,895)
(190)
4,340
At December 31, 2019 and 2018, investment securities with carrying values of $281.38 million and $242.31 million, respectively,
were pledged as collateral for security repurchase agreements and for other purposes.
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, 2019
and 2018, and totaled $5.09 billion and $4.84 billion, respectively. At December 31, 2019 and 2018, net deferred loan and lease
costs were $5.06 million and $4.54 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 $17.08 million and $11.38 million at December 31, 2019 and 2018, respectively.
During 2019, $6.69 million of new loans and other additions were made and repayments and other reductions totaled $0.99 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.
56 SRCE
2019 Form 10-K
All loans and leases, except residential real estate and home equity 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).
The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.
(Dollars in thousands)
December 31, 2019
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Total
December 31, 2018
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Total
Credit Quality Grades
1-6
7-12
Total
$
1,080,933
$
51,858
$
1,132,791
$
$
569,234
293,736
764,564
668,076
888,154
4,264,697
1,043,019
528,174
281,834
768,442
625,579
787,376
$
$
19,573
1,088
19,476
37,375
20,023
149,393
30,186
31,813
1,710
34,669
19,660
22,510
$
$
588,807
294,824
784,040
705,451
908,177
4,414,090
1,073,205
559,987
283,544
803,111
645,239
809,886
$
4,034,424
$
140,548
$
4,174,972
For residential real estate and home equity 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 home equity 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, 2019
Residential real estate and home equity
Consumer
Total
December 31, 2018
Residential real estate and home equity
Consumer
Total
Performing
Nonperforming
Total
$
$
$
$
529,557
138,951
668,508
521,846
136,423
658,269
$
$
$
$
2,446
483
2,929
2,009
214
2,223
$
$
$
$
532,003
139,434
671,437
523,855
136,637
660,492
57 SRCE
2019 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, 2019
30-59
Days
Past Due
60-89
Days
Past Due
Current
90 Days or
More Past
Due
and Accruing
Total
Accruing Loans
Nonaccrual
Total
Financing
Receivables
Commercial and agricultural
$ 1,131,704
$
118
$
— $
— $
1,131,822
$
969
$
1,132,791
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home
equity
Consumer
Total
December 31, 2018
586,212
293,736
772,846
702,671
906,468
528,844
138,132
$ 5,060,613
Commercial and agricultural
$ 1,070,530
$
$
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home
equity
Consumer
Total
544,022
283,284
790,233
641,270
807,793
520,124
135,591
1,268
14
7,026
819
58
561
632
10,496
22
3,154
154
4,149
1,643
109
1,267
682
77
—
3,293
609
—
152
187
—
—
—
—
—
257
54
587,557
293,750
783,165
704,099
906,526
529,814
139,005
$
$
4,318
$
311
$
5,075,738
— $
— $
1,070,552
$
$
1,437
—
1,168
—
—
455
150
—
—
—
—
—
295
73
548,613
283,438
795,550
642,913
807,902
522,141
136,496
1,250
1,074
875
1,352
1,651
2,189
429
9,789
2,653
11,374
106
7,561
2,326
1,984
1,714
141
$
$
588,807
294,824
784,040
705,451
908,177
532,003
139,434
5,085,527
1,073,205
559,987
283,544
803,111
645,239
809,886
523,855
136,637
$ 4,792,847
$
11,180
$
3,210
$
368
$
4,807,605
$
27,859
$
4,835,464
Interest income for the years ended December 31, 2019, 2018, and 2017, would have increased by approximately $0.69 million,
$2.18 million, and $1.14 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.
58 SRCE
2019 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, 2019
With no related reserve recorded:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total with no related reserve recorded
With a reserve recorded:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total with a reserve recorded
Total impaired loans
December 31, 2018
With no related reserve recorded:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total with no related reserve recorded
With a reserve recorded:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total with a reserve recorded
Total impaired loans
$
$
$
Recorded
Investment
Unpaid Principal
Balance
Related Reserve
$
218
853
1,074
875
615
1,487
—
—
5,122
$
218
853
1,074
875
615
1,487
—
—
5,122
—
—
—
—
—
—
—
—
—
10,366
10,366
3,003
278
—
—
736
—
337
—
278
—
—
736
—
339
—
11,717
11,719
16,839
$
16,841
$
2,471
$
7,504
2,471
$
7,504
106
556
905
1,131
—
—
106
556
905
1,131
—
—
12,673
12,673
—
3,840
—
7,004
1,340
759
344
—
—
3,840
—
7,004
1,340
759
346
—
13,287
13,289
$
25,960
$
25,962
$
30
—
—
75
—
117
—
3,225
3,225
—
—
—
—
—
—
—
—
—
—
372
—
1,255
279
51
126
—
2,083
2,083
59 SRCE
2019 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, 2019, 2018 and 2017.
(Dollars in thousands)
2019
2018
2017
Average
Recorded
Investment
Interest
Income
Average
Recorded
Investment
Interest
Income
Average
Recorded
Investment
Interest
Income
Commercial and agricultural
$
5,983
$
242
$
2,812
$
— $
4,526
$
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer loans
Total
2,721
244
2,409
1,664
1,715
340
—
—
—
8
—
—
19
—
9,352
247
9,987
1,663
2,303
347
—
$
15,076
$
269
$
26,711
$
—
—
20
—
—
15
—
35
766
658
4,873
1,011
3,220
355
—
$
15,409
$
1
—
—
5
—
2
15
—
23
The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during 2019, 2018 and
2017, 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 was one modification during 2019, no modifications during 2018, and one modification during 2017
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
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total performing TDR modifications
Nonperforming TDRs:
Commercial and agricultural
Auto and light truck
Medium and heavy duty truck
Aircraft
Construction equipment
Commercial real estate
Residential real estate and home equity
Consumer
Total nonperforming TDR modifications
Total TDR modifications
2019
2018
2017
Number of
Modifications
Recorded
Investment
Number of
Modifications
Recorded
Investment
Number of
Modifications
Recorded
Investment
1
—
—
—
—
—
—
—
1
1
—
—
—
—
—
—
—
1
2
$
9,901
— $
—
—
—
—
—
—
—
9,901
465
—
—
—
—
—
—
—
465
10,366
$
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
1
1
$
—
—
—
—
—
—
—
—
—
—
285
—
—
—
—
—
—
285
285
— $
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
1
1
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
There was one nonperforming auto and light truck TDR with a recorded investment of $0.00 million which had a payment default
within the twelve months following modification for the year ended December 31, 2019, no TDRs which had a payment default
within the twelve months following modification during the year ended December 31, 2018 and one nonperforming construction
equipment TDR with a recorded investment of $0.41 million which had a payment default within the twelve months following
modification for the year ended December 31, 2017.
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.
60 SRCE
2019 Form 10-K
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
2019
2018
$
$
10,238
486
10,724
$
$
344
316
660
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)
2019
Balance, beginning of year
Charge-offs
Recoveries
Net charge-offs
Provision (recovery of provision)
Balance, end of year
2018
Balance, beginning of year
Charge-offs
Recoveries
Net charge-offs (recoveries)
Provision (recovery of provision)
Balance, end of year
2017
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
Construction
equipment
Commercial
real estate
Residential
real estate and
home equity
Consumer
Total
$
$
$
$
$
$
17,063
$
14,689
$
4,303
$
33,047
$
10,922
$
15,705
$
3,425
$
1,315
$
100,469
1,040
664
376
6,984
991
97
894
605
1,132
32
1,100
1,409
3,066
1,143
1,923
(66)
238
160
78
5
75
(70)
3,276
2,575
53
85
(32)
152
1,066
287
779
898
7,591
2,543
5,048
15,833
23,671
$
14,400
$
4,612
$
31,058
$
14,120
$
18,350
$
3,609
$
1,434
$
111,254
16,228
$
10,103
$
4,844
$
34,619
$
9,343
$
14,792
$
3,666
$
1,288
$
94,883
229
222
7
842
3,308
68
3,240
7,826
23
—
23
(518)
12,222
2,499
9,723
8,151
288
100
188
1,767
70
53
17
930
63
23
40
(201)
909
271
638
665
17,112
3,236
13,876
19,462
17,063
$
14,689
$
4,303
$
33,047
$
10,922
$
15,705
$
3,425
$
1,315
$
100,469
14,668
$
8,064
$
4,740
$
34,352
$
8,207
$
13,677
$
3,550
$
1,285
$
88,543
2,415
984
1,431
2,991
774
1,153
(379)
1,660
—
—
—
104
1,872
227
1,645
1,912
164
298
(134)
1,002
344
851
(507)
608
124
109
15
131
836
267
569
572
6,529
3,889
2,640
8,980
16,228
$
10,103
$
4,844
$
34,619
$
9,343
$
14,792
$
3,666
$
1,288
$
94,883
61 SRCE
2019 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, 2019 and 2018.
(Dollars in thousands)
December 31, 2019
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
December 31, 2018
Reserve for loan and lease losses
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
Construction
equipment
Commercial
real estate
Residential
real estate and
home equity
Consumer
Total
$
$
$
$
$
3,003
$
30
$
— $
— $
75
$
— $
117
$
— $
3,225
20,668
14,370
4,612
31,058
14,045
18,350
3,492
1,434
108,029
23,671
$
14,400
$
4,612
$
31,058
$
14,120
$
18,350
$
3,609
$
1,434
$
111,254
10,584
$
1,131
$
1,074
$
875
$
1,351
$
1,487
$
337
$
— $
16,839
1,122,207
587,676
293,750
783,165
704,100
906,690
531,666
139,434
5,068,688
1,132,791
$
588,807
$
294,824
$
784,040
$
705,451
$
908,177
$
532,003
$
139,434
$ 5,085,527
— $
372
$
— $
1,255
$
279
$
51
$
126
$
— $
2,083
17,063
14,317
4,303
31,792
10,643
15,654
3,299
1,315
98,386
Total reserve for loan and lease losses
$
17,063
$
14,689
$
4,303
$
33,047
$
10,922
$
15,705
$
3,425
$
1,315
$
100,469
Recorded investment in loans
Ending balance, individually
evaluated for impairment
Ending balance, collectively
evaluated for impairment
Total recorded investment in loans
$
$
Note 6 — Lease Investments
2,471
$
11,344
$
106
$
7,560
$
2,245
$
1,890
$
344
$
— $
25,960
1,070,734
548,643
283,438
795,551
642,994
807,996
523,511
136,637
4,809,504
1,073,205
$
559,987
$
283,544
$
803,111
$
645,239
$
809,886
$
523,855
$
136,637
$ 4,835,464
As a lessor, the Company’s loan and lease portfolio includes direct finance leases, which are included in commercial and agricultural,
auto and light truck, medium and heavy duty truck, aircraft, and construction equipment on the Consolidated Statements of Financial
Condition. The Company also finances various types of construction equipment, medium and heavy duty trucks, automobiles and
other equipment under leases classified as operating leases, which are included in Equipment Owned Under Operating Leases,
net, on the Consolidated Statements of Financial Condition.
The following table shows the components of the investment in direct finance and operating leases as of December 31.
(Dollars in thousands)
Direct finance leases:
Minimum lease payments
Estimated unguaranteed residual values
Less: Unearned income
Net investment in direct finance leases
Operating leases:
Gross investment in operating leases
Accumulated depreciation
Net investment in operating leases
2019
2018
190,879
$
257,398
41
(30,568)
160,352
$
176,485
(64,801)
111,684
$
$
41
(46,709)
210,730
199,954
(65,514)
134,440
$
$
$
$
62 SRCE
2019 Form 10-K
The following table shows future minimum lease payments due from clients on direct finance and operating leases at December 31,
2019.
(Dollars in thousands)
2020
2021
2022
2023
2024
Thereafter
Total
Direct
Finance Leases
Operating Leases
$
42,940
$
34,966
33,577
29,027
16,001
34,368
$
190,879
$
33,015
20,036
12,800
7,208
2,968
934
76,961
To mitigate the risk of loss, the Company seeks to diversify both the type of equipment leased and the industries in which the
lessees participate. In addition, a portion of our leases are terminal rental adjustment clause or “TRAC” leases where the lessee
effectively guarantees the full residual value through a rental adjustment at the end of term or those where partial value is guaranteed
(“split-TRAC”), which has a limited residual risk. Under a split-TRAC structure, the limited residual risk would be satisfied first
by the net sale proceeds of the leased asset. The lessee’s at-risk portion, or top risk, is satisfied last and is subject to repayment as
additional rent, if the TRAC amount is not satisfied by the net sale proceeds. The carrying amount of residual assets covered by
residual value guarantees was $69.09 million and $87.61 million at December 31, 2019 and December 31, 2018, respectively.
The following table shows interest income recognized from direct finance lease payments and operating lease equipment rental
income and related depreciation expense.
(Dollars in thousands)
Direct finance leases:
Interest income on lease receivable
Operating leases:
Income related to lease payments
Depreciation expense
2019
2018
2017
10,985
$
13,052
$
11,482
30,741
$
25,128
31,793
$
26,248
30,381
25,215
$
$
Income related to reimbursements from lessees for personal property tax on operating leased equipment for the year ended
December 31, 2019 was $0.73 million. Expense related to personal property tax payments on operating leased equipment for the
year ended December 31, 2019 was $0.73 million.
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
2019
2018
$
15,222
$
59,508
41,831
116,561
(64,342)
15,223
59,691
40,789
115,703
(63,564)
$
52,219
$
52,139
Depreciation and amortization of properties and equipment totaled $5.79 million in 2019, $5.62 million in 2018, and $5.66 million
in 2017.
During 2019, 2018 and 2017, the Company recorded long-lived asset impairment charges totaling zero, $100,000 and $410,000,
respectively. The impairment charges were recorded as a result of appraisals on buildings and were recognized in Other Expense
on the Consolidated Statements of Income.
Note 8 — Mortgage Servicing Rights
The unpaid principal balance of residential mortgage loans serviced for third parties was $740.91 million at December 31, 2019,
compared to $734.30 million at December 31, 2018, and $752.99 million at December 31, 2017.
63 SRCE
2019 Form 10-K
Amortization expense on MSRs is expected to total $0.76 million, $0.64 million, $0.53 million, $0.43 million, and $0.36 million
in 2020, 2021, 2022, 2023 and 2024, 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
2019
2018
$
4,283
$
4,349
1,229
(1,312)
—
4,200
—
—
— $
4,200
5,986
$
$
890
(956)
—
4,283
—
—
—
4,283
7,238
$
$
$
At December 31, 2019, the fair value of MSRs exceeded the carrying value reported on the Consolidated Statements of Financial
Condition by $1.79 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 $16.77 million and $10.28 million at December 31, 2019 and December 31, 2018,
respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were $2.64 million, $2.61 million,
and $2.70 million for 2019, 2018, and 2017, respectively. Mortgage loan contractual servicing fees are included in Mortgage
Banking Income on the Consolidated Statements of Income.
Note 9 — Intangible Assets and Goodwill
At December 31, 2019, intangible assets consisted of goodwill of $83.87 million and other intangible assets of $0.10 million,
which was net of accumulated amortization of $0.10 million. At December 31, 2018, intangible assets consisted of goodwill of
$83.87 million and other intangible assets of $0.13 million, which was net of accumulated amortization of $0.07 million. Intangible
asset amortization was $0.03 million, $0.08 million, and $0.36 million for 2019, 2018, and 2017, respectively. Amortization on
other intangible assets is expected to total $0.02 million, $0.02 million, $0.02 million, $0.02 million, and $0.02 million in 2020,
2021, 2022, 2023, and 2024, respectively.
The following table shows a summary of other intangible assets as of December 31.
(Dollars in thousands)
Other intangibles:
Gross carrying amount
Less: accumulated amortization
Net carrying amount
Note 10 — Deposits
2019
2018
$
$
204
(100)
104
$
$
204
(71)
133
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, 2019 and 2018 was $749.44 million and $666.89 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, 2019, by time remaining until maturity.
(Dollars in thousands)
Under 3 months
4 – 6 months
7 – 12 months
Over 12 months
Total
64 SRCE
$
$
199,375
170,902
156,874
222,284
749,435
2019 Form 10-K
The following table shows scheduled maturities of time deposits, including both private and public funds, at December 31, 2019.
(Dollars in thousands)
2020
2021
2022
2023
2024
Thereafter
Total
$
1,256,577
227,115
105,218
49,999
7,496
2,093
$
1,648,498
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, 2019 and 2018.
(Dollars in thousands)
Federal Home Loan Bank borrowings (1.04% – 5.04%)
Mandatorily redeemable securities
Other long-term debt
Total long-term debt and mandatorily redeemable securities
2019
2018
$
$
45,819
$
17,972
7,848
71,639
$
46,444
16,542
8,137
71,123
Annual maturities of long-term debt outstanding at December 31, 2019, for the next five years and thereafter beginning in 2020,
are as follows (in thousands): $2,759; $3,047; $4,709; $1,928; $11,065; and $48,131.
At December 31, 2019, 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 17 fixed rate notes with maturities
ranging from 2021 to 2027. These notes were collateralized by $57.25 million of certain real estate loans.
Mandatorily redeemable securities as of December 31, 2019 and 2018, of $17.97 million and $16.54 million, respectively reflected
the “book value” shares under the 1st Source Executive Incentive Plan. See Note 16 - Stock Based Compensation (Stock Award
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 2019, 2018, and 2017 was $2.22 million, $1.61 million, and $1.68 million, respectively.
The following table shows the details of short-term borrowings as of December 31, 2019 and 2018.
(Dollars in thousands)
Federal funds purchased
Security repurchase agreements
Commercial paper
Federal Home Loan Bank advances
Other short-term borrowings
Total short-term borrowings
Note 12 — Variable Interest Entities
2019
2018
Amount
Weighted Average
Rate
Amount
Weighted Average
Rate
$
$
—
120,459
3,993
20,000
1,441
145,893
—% $
0.23
0.29
1.61
—
0.42% $
10,000
103,627
4,325
80,000
1,392
199,344
2.70%
0.25
0.29
2.57
—
1.30%
A variable interest entity (VIE) is a partnership, limited liability company, trust or other legal entity that meets any one of the
following criteria:
• The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from
another party.
• The entity’s investors lack the power to direct the activities that most significantly affect the entity’s economic performance.
• The entity’s at-risk holders do not have the obligation to absorb the losses or the right to receive residual returns.
• The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of
the entity’s activities involve, or are conducted on behalf of, investors with disproportionately few voting rights.
65 SRCE
2019 Form 10-K
The Company is involved in various entities that are considered to be VIEs. The Company’s investments in VIEs are primarily
related to investments promoting affordable housing, community development and renewable energy sources. Some of these tax-
advantaged investments support the Company’s regulatory compliance with the Community Reinvestment Act. The Company’s
investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other
tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits are
recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related
investment asset. The Company recognized federal and state income tax credits related to its affordable housing and community
development tax-advantaged investments in tax expense of $1.55 million, $1.29 million and $1.15 million for the years ended
December 31, 2019, 2018 and 2017, respectively. The Company also recognized $15.86 million, $10.45 million and $18.16 million
of investment tax credits for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and
thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant
activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. As a
limited partner in these operating partnerships, we are allocated credits and deductions associated with the underlying properties.
The Company has determined that it is not the primary beneficiary of these investments because the general partners have the
power to direct activities that most significantly influence the economic performance of their respective partnerships.
The Company’s investments in these unconsolidated VIEs are carried in Other Assets on the Consolidated Statements of Financial
Condition. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are generally carried
in Other Liabilities on the Consolidated Statements of Financial Condition. The Company’s maximum exposure to loss from these
unconsolidated VIEs include the investment recorded on the Consolidated Statements of Financial Condition, net of unfunded
capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on
compliance features required to be met at the project level. While the Company believes potential losses from these investments
are remote, the maximum exposure was determined by assuming a scenario where the community-based business, housing projects
and renewable energy projects completely fail and do not meet certain taxing authority compliance requirements resulting in
recapture of the related tax credits.
The following table provides a summary of investments in affordable housing, community development and renewable energy
VIEs that the Company has not consolidated as of December 31, 2019 and 2018.
(Dollars in thousands)
Investment carrying amount
Unfunded capital and other commitments
Maximum exposure to loss
2019
2018
$
19,843 $
17,420
37,904
15,083
6,449
40,705
The Company is required to consolidate VIEs in which it has concluded it has significant involvement in and the ability to direct
the activities that impact the entity’s economic performance. The Company is the managing general partner of entities to which
it shares interest in tax-advantaged investments with a third party. At December 31, 2019 and 2018, approximately $41.24 million
and $8.38 million, respectively, of the Company’s assets and $18.68 million and $6.70 million, respectively, of its liabilities
included on the Consolidated Statements of Financial Condition were related to tax-advantaged investment VIEs which the
Company has consolidated. The assets of the consolidated VIE are reported in Other Assets, the liabilities are reported in Other
Liabilities and the non-controlling interest is reported in Equity on the Consolidated Statements of Financial Condition. The assets
of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIE do not have recourse to the
general credit of the Company. The Company’s exposure to the consolidated VIE is generally limited to the carrying value of its
variable interest plus any related tax credits previously recognized.
Additionally, 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 on the Consolidated Statements of Financial Condition with
the corresponding interest distributions reflected as Interest Expense on the Consolidated Statements of Income. The common
shares issued by the Capital Trust are included in Other Assets on the Consolidated Statements of Financial Condition.
66 SRCE
2019 Form 10-K
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, 2019.
(Dollars in thousands)
June 2007 issuance (1)
August 2007 issuance (2)
Total
(1) Fixed rate through life of debt.
(2) 3-Month LIBOR +1.48% through remaining life of debt.
Note 13 — Earnings Per Share
Amount of
Subordinated
Notes
$
$
41,238
17,526
58,764
Interest Rate
Maturity Date
7.22%
3.37%
6/15/2037
9/15/2037
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, 2019, 2018 and 2017.
The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per
common share for the three years ending December 31.
(Dollars in thousands - except per share amounts)
Distributed earnings allocated to common stock
Undistributed earnings allocated to common stock
Net earnings allocated to common stock
Net earnings allocated to participating securities
Net income allocated to common stock and participating securities
Weighted average shares outstanding for basic earnings per common share
Dilutive effect of stock compensation
Weighted average shares outstanding for diluted earnings per common share
Basic earnings per common share
Diluted earnings per common share
Note 14 — Accumulated Other Comprehensive Income
2019
2018
2017
28,188
$
24,894
$
63,254
91,442
518
56,975
81,869
545
91,960
$
82,414
$
19,701
47,830
67,531
520
68,051
25,600,138
25,937,599
25,925,820
—
—
—
25,600,138
25,937,599
25,925,820
3.57
3.57
$
$
3.16
3.16
$
$
2.60
2.60
$
$
$
$
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)
2019
2018
Affected Line Item in the Statements of Income
Realized (losses) gains included in net income
Tax effect
Net of tax
67 SRCE
$
$
— $
(345)
(Losses) gains on investment securities available-for-sale
—
—
(345)
Income before income taxes
83
Income tax expense
— $
(262) Net income
2019 Form 10-K
Note 15 — Employee Benefit Plans
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, 2019 and 2018, there were 852,128 and 1,007,611 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 in-service and upon termination of service, retirement, or death.
Contribution expense for the years ended December 31, 2019, 2018, and 2017, amounted to $5.48 million, $4.87 million, and
$4.88 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 Salaries and Employee Benefits on the
Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017, amounted to zero, $(0.01) million,
and $(0.01) million, respectively. The accrued post retirement benefit cost was not material at December 31, 2019, 2018, and 2017.
Note 16 — Stock Based Compensation
As of December 31, 2019, 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); 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, 2019. 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 on the Consolidated Statements of Income based on
their fair values on the measurement date, which, for 1st Source, is the date of grant. Stock-based compensation expense is
recognized ratably over the requisite service period for all awards. The total fair value of share awards vested was $3.35 million
during 2019, $3.53 million in 2018, and $2.37 million in 2017.
68 SRCE
2019 Form 10-K
The following table shows the combined summary of activity regarding active stock option and stock award plans.
Balance, January 1, 2017
Shares authorized - 2017 EIP
Granted
Stock awards vested
Forfeited
Balance, December 31, 2017
Shares authorized - 2018 EIP
Granted
Stock awards vested
Forfeited
Balance, December 31, 2018
Shares authorized - 2019 EIP
Granted
Stock awards vested
Forfeited
Balance, December 31, 2019
Non-Vested Stock Awards Outstanding
Shares Available
for Grant
Number of Shares
Weighted-Average
Grant-Date
Fair Value
714,005
59,064
(98,625)
—
2,000
676,444
70,461
(74,981)
—
3,135
675,059
62,538
(74,336)
—
1,241
664,502
276,615
$
—
98,625
(76,858)
(2,456)
295,926
—
74,981
(106,513)
(10,575)
253,819
—
74,336
(100,299)
(8,865)
218,991
$
23.94
—
33.54
22.71
29.93
27.41
—
29.11
25.79
27.51
28.59
—
31.44
28.35
30.28
29.60
Stock Option Plans — Incentive stock option plans include the 2011 Stock Option Plan (the “2011 Plan”).
Each award from the plan 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 2019, 2018 or 2017. 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 2019, 2018 or 2017.
The fair value of each option on the date of grant is estimated using the Black-Scholes option pricing model. Expected volatility
is based on the historical volatility estimated over a period equal to the expected life of the options. In estimating the fair value
of stock options under the Black-Scholes valuation model, separate groups of employees that have similar historical exercise
behavior are considered separately. The expected life of the options granted is derived based on past experience and represents
the period of time that options granted are expected to be outstanding.
Stock Award Plans — Incentive stock award plans include the EIP, the 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 a period of up 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 $2.76 million in 2019, $3.55 million in 2018, and
$2.96 million in 2017. The total income tax benefit recognized in the accompanying Consolidated Statements of Income related
to stock-based compensation was $0.65 million in 2019, $0.86 million in 2018, and $1.11 million in 2017. Unrecognized stock-
based compensation expense related to non-vested stock awards (EIP/SDP/RSAP) was $4.91 million at December 31, 2019. At
such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 2.88 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.
69 SRCE
2019 Form 10-K
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 2019, 2018, and 2017 offerings were $43.81 (0.14%),
$53.84 (-0.09%), and $46.18 (-1.32%), 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 3, 2019 and runs through June 3, 2021, with $139,290 in stock value to be purchased at
$43.81 per share.
Note 17 — Income Taxes
The following table shows the composition of income tax expense.
Year Ended December 31 (Dollars in thousands)
2019
2018
2017
Current:
Federal
State
Total current
Deferred:
Federal
State
Deferred tax liability remeasurement
Total deferred
Total provision
$
28,130
$
20,167
$
5,739
33,869
(5,135)
(595)
—
(5,730)
2,996
23,163
(875)
1,200
(875)
(550)
$
28,139
$
22,613
$
26,012
4,530
30,542
5,869
(488)
(2,614)
2,767
33,309
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 (21% for 2019 and 2018 and 35% for 2017) to income before income taxes.
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
Deferred tax liability remeasurement
Other
Total
2019
2018
2017
Amount
$
25,232
Percent of
Pretax
Income
Amount
Percent of
Pretax
Income
Percent of
Pretax
Income
Amount
21.0% $
22,056
21.0% $
35,476
35.0%
(552)
4,064
—
(605)
(0.5)
3.4
—
(0.5)
(650)
3,315
(875)
(1,233)
(0.6)
3.2
(0.8)
(1.3)
(1,197)
2,627
(2,614)
(983)
(1.2)
2.6
(2.6)
(0.9)
$
28,139
23.4% $
22,613
21.5% $
33,309
32.9%
The tax expense related to (losses) gains on investment securities available-for-sale for the years 2019, 2018, and 2017 was
approximately $0, $(83,000), and $1,629,000, respectively.
70 SRCE
2019 Form 10-K
The following table shows the composition of deferred tax assets and liabilities as of December 31, 2019 and 2018.
(Dollars in thousands)
Deferred tax assets:
Reserve for loan and lease losses
Operating lease liability
Accruals for employee benefits
Net unrealized losses on securities available-for-sale
Other
Total deferred tax assets
Deferred tax liabilities:
Differing depreciable bases in premises and leased equipment
Right of use assets - leases
Differing bases in assets related to acquisitions
Tax advantaged partnerships
Net unrealized gains on securities available-for-sale
Mortgage servicing
Capitalized loan costs
Prepaid expenses
Other
Total deferred tax liabilities
Net deferred tax asset (liability)
2019
2018
$
28,792
$
25,386
5,899
2,842
—
222
—
2,974
3,386
127
37,755
31,873
18,614
21,184
5,899
4,092
4,383
1,640
394
1,207
297
544
37,070
$
685
$
—
4,021
4,354
—
586
1,110
273
364
31,892
(19)
No valuation allowance for deferred tax assets was recorded at December 31, 2019 and 2018 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
2019
2018
2017
— $
1,112
$
—
—
—
—
—
—
—
—
—
(1,112)
762
350
—
—
—
—
— $
— $
1,112
$
$
The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was zero at December 31, 2019
and 2018 and $0.72 million at December 31, 2017. Interest and penalties are recognized through the income tax provision. For
the years 2019, 2018 and 2017, the Company recognized approximately $0.00 million, $(0.09) million and $0.05 million in interest,
net of tax effect, and penalties, respectively. There were no accrued interest and penalties at December 31, 2019 and 2018 and
$0.09 million at December 31, 2017.
Tax years that remain open and subject to audit include the federal 2016-2019 years and the Indiana 2016-2019 years. Additionally,
in 2018 the Company reached a state tax settlement for the 2015-2017 years and as a result, recorded a reduction of unrecognized
tax benefits in the amount of $1.11 million. The Company does not anticipate a significant change in the amount of uncertain tax
positions within the next 12 months.
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to
21%. At December 31, 2017, the Company had not fully completed its accounting for the tax effects of enactment of the Act and
recorded a provisional benefit of $2.61 million which is included as a component of Income Tax Expense on the Consolidated
Statements of Income related to the remeasurement of its deferred tax balance. During the third quarter of 2018, the Company
completed its accounting for the provisional amounts recognized at December 31, 2017 and recorded an additional $0.88 million
benefit as provided by the SEC’s Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and
Jobs Act.
71 SRCE
2019 Form 10-K
Note 18 — Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk
Contingent Liabilities —1st Source and its subsidiaries are defendants in various legal proceedings arising in the normal course
of business. In the opinion of management, based upon present information including the advice of legal counsel, the ultimate
resolution of these proceedings will not have a material effect on the Company’s consolidated financial position or results of
operations.
1st Source Bank sells residential mortgage loans to Fannie Mae as well as FHA-insured, USDA-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 the past. 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 Consolidated Statements of
Financial Condition, was $0.29 million and $0.29 million as of December 31, 2019 and 2018, 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.
Lease Commitments — The Company and its subsidiaries are obligated under operating leases for certain office premises and
equipment.
The following table shows operating lease right of use assets and operating lease liabilities as of December 31, 2019.
(Dollars in thousands)
Operating lease right of use assets
Operating lease liabilities
Statement of Financial Condition classification
2019
Accrued income and other assets
Accrued expenses and other liabilities
$
$
24,147
24,319
During 2019, the Company amended the lease agreement for its corporate office building by extending the lease term which
resulted in an increase to its operating lease right of use assets of $14.65 million and an increase to its operating lease liabilities
of $14.64 million.
The following table shows the components of operating leases expense for the year ended December 31, 2019.
(Dollars in thousands)
Operating lease cost
Short-term lease cost
Variable lease cost
Total operating lease cost
Statement of Income classification
2019
Net occupancy expense
Net occupancy expense
Net occupancy expense
$
$
3,506
41
—
3,547
Gross rental expense for the years ended 2018 and 2017 was $3.73 million and $4.18 million, respectively.
The following table shows future minimum rental commitments for all noncancellable operating leases with an initial term longer
than 12 months for the next five years and thereafter.
(Dollars in thousands)
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: imputed interest
Present value of operating lease liabilities
$
$
3,477
3,800
3,714
2,653
2,552
11,508
27,704
(3,385)
24,319
72 SRCE
2019 Form 10-K
The following table shows the weighted average remaining operating lease term, the weighted average discount rate and
supplemental Consolidated Statement of Cash Flows information for operating leases at December 31, 2019.
(Dollars in thousands)
Weighted average remaining lease term
Weighted average discount rate
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
2019
10.88 years
2.83%
$
950
During the year ended December 31, 2019, the Company recognized a net gain on the sale of an office building in the amount of
$1.31 million. The Company commenced an operating lease with the buyer of the building to lease a portion of it for office space
resulting in a new right of use asset and operating lease liability.
There are no new significant leases that have not yet commenced as of December 31, 2019.
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
Commercial and similar letters of credit
2019
2018
$
$
$
1,095,054
27,549
2,332
$
$
$
1,095,053
31,133
2,500
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 two months to one year.
Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on
when the underlying transaction is consummated between the customer and the third party. Commercial letters of credit generally
have terms ranging from two months to six months.
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.
73 SRCE
2019 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 Consolidated Statements 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, 2019 and 2018.
(Dollars in thousands)
Interest rate swap contracts
Loan commitments
Forward contracts - mortgage loan
Total - December 31, 2019
Interest rate swap contracts
Loan commitments
Forward contracts - mortgage loan
Total - December 31, 2018
Asset derivatives
Liability derivatives
Notional or
contractual
amount
Statement of Financial
Condition
classification
Fair value
Statement of Financial
Condition
classification
Fair value
$
1,074,809 Other assets
9,950 Mortgages held for sale
23,632 N/A
1,108,391
855,848 Other assets
5,871 Mortgages held for sale
14,087 N/A
875,806
$
$
$
$
$
$
$
21,975 Other liabilities
185 N/A
— Mortgages held for sale
22,160
7,124 Other liabilities
112 N/A
— Mortgages held for sale
7,236
$
$
$
$
22,352
—
38
22,390
7,250
—
135
7,385
The following table shows the amounts included on the Consolidated Statements of Income for non-hedging derivative financial
instruments at December 31, 2019, 2018 and 2017.
(Dollars in thousands)
Interest rate swap contracts
Interest rate swap contracts
Loan commitments
Forward contracts - mortgage loan
Total
Statement of
Income classification
Other expense
Other income
Mortgage banking
Mortgage banking
Gain (loss)
2019
2018
2017
$
$
(252) $
1,356
73
97
(30) $
1,028
46
(125)
1,274
$
919
$
26
1,585
23
(232)
1,402
The following table shows the offsetting of financial assets and derivative assets at December 31, 2019 and 2018.
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
$
$
22,279
$
304
$
21,975
$
— $
— $
21,975
7,128
$
4
$
7,124
$
177
$
610
$
6,337
(Dollars in thousands)
December 31, 2019
Interest rate swaps
December 31, 2018
Interest rate swaps
74 SRCE
2019 Form 10-K
The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2019 and 2018.
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
$
$
$
$
22,656
120,459
143,115
7,254
103,627
110,881
$
$
$
$
304
—
304
4
—
4
$
$
$
$
22,352
120,459
142,811
7,250
103,627
110,877
$
$
$
$
23,482
120,459
143,941
1,700
103,627
105,327
$
$
$
$
— $
(1,130)
—
—
— $
(1,130)
— $
—
— $
5,550
—
5,550
(Dollars in thousands)
December 31, 2019
Interest rate swaps
Repurchase agreements
Total
December 31, 2018
Interest rate swaps
Repurchase agreements
Total
If a default in performance of any obligation of a repurchase or derivative agreement occurs, each party will set-off property held,
or loan indebtedness owing, in respect of transactions against obligations owing in respect of any other transactions. At
December 31, 2019 and December 31, 2018, repurchase agreements had a remaining contractual maturity of $119.45 million and
$102.34 million in overnight and $1.01 million and $1.29 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.
75 SRCE
2019 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, 2019 and 2018.
Actual
Minimum Capital
Adequacy
Minimum Capital
Adequacy with
Capital Buffer(1)
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
2019
Total Capital (to Risk-Weighted
Assets):
1st Source Corporation
$
882,453
14.90% $ 473,782
8.00% $621,839
10.50% $
592,227
1st Source Bank
804,131
13.57
474,189
8.00
622,373
10.50
592,736
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
2018
Total Capital (to Risk-Weighted Assets):
807,926
729,541
743,467
722,082
807,926
729,541
13.64
12.31
12.55
12.18
12.19
11.03
355,336
355,642
266,502
266,731
265,122
264,500
6.00
6.00
4.50
4.50
4.00
4.00
503,393
503,826
414,559
414,915
8.50
8.50
7.00
7.00
N/A
N/A
N/A
N/A
473,782
474,189
384,948
385,279
331,402
330,625
1st Source Corporation
$
821,975
14.68 % $ 447,909
8.00 % $552,888
9.875 % $
559,887
1st Source Bank
744,326
13.29
448,152
8.00
553,188
9.875
560,190
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
751,575
673,888
693,067
672,380
751,575
673,888
13.42
12.03
12.38
12.00
12.06
10.82
335,932
336,114
251,949
252,086
249,185
249,052
6.00
6.00
4.50
4.50
4.00
4.00
440,911
441,150
7.875
7.875
447,909
448,152
356,928
357,121
6.375
6.375
N/A
N/A
N/A
N/A
363,926
364,124
311,481
311,315
10.00%
10.00
8.00
8.00
6.50
6.50
5.00
5.00
10.00 %
10.00
8.00
8.00
6.50
6.50
5.00
5.00
(1) The capital conservation buffer requirement was fully phased in as of December 31, 2019.
The Bank was not required to maintain noninterest bearing cash balances with the Federal Reserve Bank as of December 31, 2019
and 2018.
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, 2019, 1st Source Bank met its minimum net worth capital
requirements.
76 SRCE
2019 Form 10-K
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 and for its best-efforts forward sales commitments.
The Company economically hedges its mortgages held for sale by either selling corresponding forward contracts on agency
securities (free-standing derivatives) or obtaining best-efforts forward sales commitments with an investor to sell the loans at an
agreed-upon price at the time the interest rate locks are issued to the customers. The Company believes the election for mortgages
held for sale will reduce certain timing differences and better match changes in the value of these assets with changes in the value
of the derivatives or best-efforts forward sales commitments. At December 31, 2019 and 2018, all mortgages held for sale are
carried at fair value.
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, 2019
and 2018.
(Dollars in thousands)
December 31, 2019
Mortgages held for sale reported at fair value:
Total Loans
December 31, 2018
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
$
$
20,277
$
19,890
$
387 (1)
11,290
$
11,076
$
214 (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.
77 SRCE
2019 Form 10-K
•
Inactively traded 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.
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 embedded
in these portfolios. Any change in the mid-market derivative valuation adjustment will be recognized immediately through the
Consolidated Statements of Income.
The following table shows the balance of assets and liabilities measured at fair value on a recurring basis.
(Dollars in thousands)
December 31, 2019
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 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, 2018
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 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
78 SRCE
$
$
$
Level 1
Level 2
Level 3
Total
$
80,393
$
446,571
$
— $
526,964
—
—
—
—
80,393
—
—
82,213
375,389
53,025
700
957,898
20,277
21,975
2,292
—
—
—
84,505
375,389
53,025
700
2,292
1,040,583
—
—
20,277
21,975
80,393
$
1,000,150
$
2,292
$
1,082,835
— $
— $
22,352
22,352
$
$
— $
— $
22,352
22,352
$
$
$
$
33,746
$
497,477
$
— $
531,223
—
—
—
—
33,746
—
—
93,557
318,233
45,392
699
955,358
11,290
7,124
1,025
—
—
—
1,025
—
—
94,582
318,233
45,392
699
990,129
11,290
7,124
33,746
$
973,772
$
1,025
$
1,008,543
— $
— $
7,250
7,250
$
$
— $
— $
7,250
7,250
2019 Form 10-K
The following table shows the changes in Level 3 assets and liabilities measured at fair value on a recurring basis.
U.S. States and
political subdivisions
securities
Foreign government
and other securities
Investment securities
available-for-sale
(Dollars in thousands)
Beginning balance January 1, 2019
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, 2019
Beginning balance January 1, 2018
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
$
1,025
$
— $
$
$
$
$
—
(35)
5,600
—
—
—
(4,298)
—
—
2,292
2,155
—
6
—
—
—
—
(1,136)
—
—
—
—
—
—
—
—
—
—
—
— $
710
$
—
(11)
200
—
—
—
(200)
—
(699)
1,025
—
(35)
5,600
—
—
—
(4,298)
—
—
2,292
2,865
—
(5)
200
—
—
—
(1,336)
—
(699)
1,025
Ending balance December 31, 2018
$
1,025
$
— $
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, 2019 or 2018. No transfers between levels occurred during 2019. A foreign
government debt security was transferred from Level 3 to Level 2 during 2018 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 2 as the unobservable inputs were deemed to be insignificant 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, 2019
Debt securities available-for-sale
Fair value
Valuation Methodology
Unobservable Inputs
Range of Inputs
Direct placement municipal securities
$
2,292 Discounted cash flows
Credit spread assumption
0.12% - 2.85%
December 31, 2018
Debt securities available-for-sale
Direct placement municipal securities
$
1,025 Discounted cash flows
Credit spread assumption
0.17% - 3.02%
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.
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.
79 SRCE
2019 Form 10-K
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.
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 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, 2019 and 2018, respectively: impaired loans - $4.29 million and $12.46 million;
MSRs - $0.00 million and $0.00 million; repossessions - $2.25 million and $1.92 million, and other real estate - $0.00 million and
$0.00 million.
80 SRCE
2019 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, 2019
Impaired loans - collateral based
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, 2018
Impaired loans - collateral based
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
— $
— $
8,492
$
—
—
—
—
—
—
4,200
8,623
522
8,492
4,200
8,623
522
— $
— $
21,837
$
21,837
— $
— $
7,306
$
—
—
—
—
—
—
4,283
6,666
299
7,306
4,283
6,666
299
— $
— $
18,554
$
18,554
$
$
$
$
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, 2019
Impaired loans
Carrying Value
Fair value
Valuation Methodology
Unobservable Inputs
Range of Inputs
$
8,492
$
8,492 Collateral based measurements
including appraisals, trade
publications, and auction values
Discount for lack of
marketability and
current conditions
0% - 90%
Mortgage servicing rights
4,200
5,986 Discounted cash flows
Constant prepayment
rate (CPR)
10.2% - 28.1%
Discount rate
9.3% - 12.1%
Repossessions
8,623
9,211 Appraisals, trade publications
and auction values
Other real estate
522
564 Appraisals
Discount for lack of
marketability
Discount for lack of
marketability
December 31, 2018
Impaired loans
$
7,306
$
7,306 Collateral based measurements
including appraisals, trade
publications, and auction values
Discount for lack of
marketability and current
conditions
3% - 25%
0% - 11%
20% - 35%
Mortgage servicing rights
4,283
7,238 Discounted cash flows
Repossessions
6,666
6,991 Appraisals, trade publications and
auction values
Other real estate
299
305 Appraisals
Constant prepayment rate
(CPR)
7.2% - 24.8%
Discount rate
10.3% - 13.1%
Discount for lack of
marketability
Discount for lack of
marketability
4% - 6%
0% - 10%
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.
81 SRCE
2019 Form 10-K
The following table shows the fair values of the Company’s financial instruments.
(Dollars in thousands)
December 31, 2019
Assets:
Carrying or
Contract Value
Fair Value
Level 1
Level 2
Level 3
Cash and due from banks
$
67,215
$
67,215
$
67,215
$
— $
Federal funds sold and interest bearing deposits with other
banks
Investment securities, available-for-sale
Other investments
Mortgages held for sale
16,150
16,150
1,040,583
1,040,583
28,414
20,277
28,414
20,277
Loans and leases, net of reserve for loan and lease losses
4,974,273
4,992,684
16,150
80,393
28,414
—
—
—
—
—
—
957,898
—
20,277
—
—
19,125
21,975
4,200
19,125
21,975
5,986
19,125
21,975
—
—
2,292
—
—
4,992,684
5,986
—
—
—
—
—
—
—
—
—
—
—
1,025
—
—
4,689,267
7,238
—
—
—
—
—
—
—
—
—
25,002
71,084
61,469
13,918
22,352
281
— $
—
955,358
—
11,290
—
—
18,880
7,124
$
5,357,326
$
5,362,633
$
3,708,828
$
1,653,805
$
145,893
145,893
120,891
71,639
58,764
13,918
22,352
—
71,084
61,469
13,918
22,352
281
—
—
—
—
—
$
94,907
$
94,907
$
94,907
$
$
5,122,322
$
5,111,711
$
3,654,556
$
1,457,155
$
199,344
71,123
58,764
8,950
7,250
—
199,344
68,751
45,874
8,950
7,250
259
113,734
—
—
—
—
—
85,610
68,751
45,874
8,950
7,250
259
Mortgage servicing rights
Accrued interest receivable
Interest rate swaps
Liabilities:
Deposits
Short-term borrowings
Long-term debt and mandatorily redeemable securities
Subordinated notes
Accrued interest payable
Interest rate swaps
Off-balance-sheet instruments *
December 31, 2018
Assets:
Cash and due from banks
Mortgage servicing rights
Accrued interest receivable
Interest rate swaps
Liabilities:
Deposits
Short-term borrowings
Long-term debt and mandatorily redeemable securities
Subordinated notes
Accrued interest payable
Interest rate swaps
Off-balance-sheet instruments *
Federal funds sold and interest bearing deposits with other banks
Investment securities, available-for-sale
Other investments
Mortgages held for sale
4,172
990,129
28,404
11,290
4,172
990,129
28,404
11,290
Loans and leases, net of reserve for loan and lease losses
4,734,995
4,689,267
4,172
33,746
28,404
—
—
—
—
—
4,283
18,880
7,124
7,238
18,880
7,124
* Represents estimated cash outflows required to currently settle the obligations at current market rates.
82 SRCE
2019 Form 10-K
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
Investments in:
Bank subsidiaries
Non-bank subsidiaries
Right of use assets
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Commercial paper
Long-term debt and mandatorily redeemable securities
Subordinated notes
Operating lease liability
Other liabilities
Total liabilities
Total shareholders’ equity
2019
2018
$
107,285
$
106,647
500
500
$
$
806,192
1
17,106
4,442
935,526
$
3,993
$
25,819
58,764
17,329
1,344
107,249
828,277
740,697
1
—
4,191
852,036
4,325
24,676
58,764
—
2,189
89,954
762,082
852,036
Total liabilities and shareholders’ equity
$
935,526
$
83 SRCE
2019 Form 10-K
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31 (Dollars in thousands)
2019
2018
2017
Income:
Dividends from bank subsidiary
Dividends from non-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
Occupancy
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
$
46,735
$
45,080
$
38,317
—
2,505
366
109
49,715
3,677
2,228
13
1,861
586
8,365
41,350
987
42,337
49,678
—
—
2,613
367
(180)
47,880
3,625
1,624
14
1,774
642
7,679
40,201
1,009
41,210
41,204
—
$
$
92,015
107,863
$
$
82,414
75,788
$
$
958
2,354
422
6,431
48,482
4,002
1,685
17
2,070
1,733
9,507
38,975
204
39,179
28,872
—
68,051
63,375
84 SRCE
2019 Form 10-K
STATEMENTS OF CASH FLOWS
Year Ended December 31 (Dollars in thousands)
2019
2018
2017
Operating activities:
Net income
$
92,015
$
82,414
$
68,051
Adjustments to reconcile net income to net cash provided by operating activities:
Equity (undistributed) distributed in excess of income of subsidiaries
(49,678)
(41,204)
(28,872)
Depreciation of premises and equipment
Amortization of right of use assets
Stock-based compensation
Realized/unrealized investment securities and other investment (gains) losses
Other
Net change in operating activities
Investing activities:
Proceeds from sales and maturities of investment securities
Net change in partnership investments
Capital contribution to subsidiary
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
2
1,350
78
(109)
533
2
—
71
180
45
44,191
41,508
—
(260)
(325)
—
(585)
(332)
1,611
(2,068)
49
1,878
(15,085)
(29,021)
(42,968)
638
106,647
—
(980)
—
—
(980)
(1,790)
1,867
(1,064)
145
1,763
(9,271)
(25,686)
(34,036)
6,492
100,155
2
—
48
(6,431)
4,122
36,920
6,327
(62)
—
854
7,119
354
1,248
(667)
153
2,176
(41)
(20,431)
(17,208)
26,831
73,324
$
107,285
$
106,647
$
100,155
85 SRCE
2019 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, 2019, 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 2019 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, 2019. 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, 2019, 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.
86 SRCE
2019 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 “Delinquent Section 16(a) Reports” of the 2020 Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation.
The information under the caption “Compensation Discussion & Analysis” of the 2020 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 2020 Proxy Statement is incorporated herein by reference.
The following table shows Equity Compensation Plan Information as of December 31, 2019.
(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
Total plans approved by shareholders
Equity compensation plans not approved by
shareholders
Director Retainer Stock Plan
Total equity compensation plans
— $
6,436
—
—
—
—
49.28
—
—
—
6,436
$
49.28
250,000
119,531
97,104 (1)(2)
218,753 (1)
98,645 (1)(2)
784,033
—
6,436
$
—
49.28
35,437
819,470
(1) Amount is to be awarded by grants administered by the Executive Compensation and Human Resources Committee of the 1st Source Corporation Board of
Directors.
(2) Amount includes market value stock only. Book value shares used for annual awards may only be sold to 1st Source.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information under the caption “Proposal Number 1: Election of Directors”, “Board Committees and Other Corporate
Governance Matters, “ and “Transactions with Related Persons” of the 2020 Proxy Statement is incorporated herein by reference.
The information under the caption “Relationship with Independent Registered Public Accounting Firm” of the 2020 Proxy
Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
87 SRCE
2019 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, 2019 and 2018
Consolidated Statements of Income — Years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income — Years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Shareholders’ Equity — Years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Cash Flows — Years ended December 31, 2019, 2018, and 2017
Notes to Consolidated Financial Statements — December 31, 2019, 2018, and 2017
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(a)(5)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
Articles of Incorporation of Registrant, amended April 30, 1996, filed as exhibit to Form 10-K, dated December 31, 2017, and
incorporated herein by reference.
By-Laws of Registrant, as amended January 23, 2020, 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 James R. Seitz, dated May 23, 2017, filed as an exhibit to Form 8-K, dated May 23, 2017, and
incorporated herein by reference.
Employment Agreement of Jeffrey L. Buhr, dated May 23, 2017, filed as an exhibit to Form 8-K, dated May 23, 2017, 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,
2017, and incorporated herein by reference.
1st Source Corporation 1982 Executive Incentive Plan, amended November 9, 2016, filed as an exhibit to Form 10-K, dated
December 31, 2016, and incorporated herein by reference.
1st Source Corporation 1982 Restricted Stock Award Plan, amended November 9, 2016, filed as Exhibit 4.3 to Registration
Statement on Form S-8 No. 333-215910, filed February 6, 2017, and incorporated herein by reference.
1st Source Corporation Strategic Deployment Incentive Plan, amended February 26, 2016, filed as exhibit to registrant’s 2016
definitive proxy statement, filed March 15, 2016, and incorporated herein by reference.
1st Source Corporation 2011 Stock Option Plan, amended November 9, 2016, filed as exhibit to Form 10-K, dated December
31, 2016, and incorporated herein by reference.
1st Source Corporation Director Retainer Stock Plan, amended August 3, 2018, filed as exhibit to Form 10-Q, dated September
30, 2018, and incorporated herein by reference.
88 SRCE
2019 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 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.*
1st Source Solar 1, LLC*
1st Source Solar 2, LLC
1st Source Solar 3, LLC
1st Source Solar 4, LLC
Historic Holding, LLC*
1st Source Solar 5, LLC
1st Source Solar 6, LLC
*Wholly-owned subsidiaries of 1st Source Bank
Jurisdiction
Indiana
Indiana
Indiana
Indiana
Indiana
Indiana
Delaware
Michigan
Delaware
Delaware
Indiana
Indiana
Indiana
Arizona
Delaware
Delaware
Delaware
Delaware
Indiana
Delaware
Delaware
23
31.1
31.2
32.1
32.2
Consent of BKD, 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 — The instance document does not appear in the interactive data file because its
XBRL tags are embedded within the Inline XBRL 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
104
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)
(c) Financial Statement Schedules — None.
89 SRCE
2019 Form 10-K
Not provided.
Signatures
Item 16. Form 10-K Summary.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
1st SOURCE CORPORATION
By
/s/ CHRISTOPHER J. MURPHY III
Christopher J. Murphy III, Chairman of the Board
and Chief Executive Officer
Date: February 20, 2020
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
Christopher J. Murphy III
Chairman of the Board
and Chief Executive Officer
February 20, 2020
/s/ JAMES R. SEITZ
James R. Seitz
/s/ ANDREA G. SHORT
Andrea G. Short
/s/ JOHN B. GRIFFITH
John B. Griffith
/s/ JOHN F. AFFLECK-GRAVES
John F. Affleck-Graves
/s/ MELODY BIRMINGHAM
Melody Birmingham
/s/ DANIEL B. FITZPATRICK
Daniel B. Fitzpatrick
/s/ VINOD M. KHILNANI
Vinod M. Khilnani
/s/ REX MARTIN
Rex Martin
/s/ CHRISTOPHER J. MURPHY IV
Christopher J. Murphy IV
/s/ TIMOTHY K. OZARK
Timothy K. Ozark
/s/ JOHN T. PHAIR
John T. Phair
/s/ MARK D. SCHWABERO
Mark D. Schwabero
President
February 20, 2020
Treasurer, Chief Financial Officer
and Principal Accounting Officer
Secretary
and General Counsel
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
90 SRCE
2019 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 20, 2020
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,
2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher J. Murphy III, Chief
Executive Officer of 1st Source, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities and Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of 1st Source.
Date: February 20, 2020
By /s/ CHRISTOPHER J. MURPHY III
Christopher J. Murphy III, Chief Executive Officer
91 SRCE
2019 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 20, 2020
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,
2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrea G. Short, Chief Financial
Officer of 1st Source, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities and Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of 1st Source.
Date: February 20, 2020
By /s/ ANDREA G. SHORT
Andrea G. Short, Chief Financial Officer
92 SRCE
2019 Form 10-K
SERVICES AND LOCATIONS
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 & Foundation Administration
Wealth Advisory 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
BUSINESS
Loans & Leasing
Treasury Services
Merchant Card Services
Business 401(k) Plans
Retirement Plan Services
Kalamazoo
St. Joseph
Stevensville
3131
Niles
Dowagiac
515
6060
Granger
1212
696
1313
Michigan City
Portage
Chesterton
9499949999994
1212
80/90
80/90
New Carlisle
South Bend
Elkhart
Middlebury
80/90/9
80/90/980/90/980/90
66
22
LaPorte
Westville
North Liberty
Valparaiso
Kouts
Hebron
Walkerton
LaPaz
3030
LaCrosse
Knox
232
Plymouth
Osceola
Mishawaka
Dunlap
55
2020
99
Goshen
Nappanee
666666666666666
3333
Bremen
1555
Argos
Warsaw
3030
55
3333
99
696
88
33
353
Winamac
4221
313
Rochester
2312
656
Columbia
City
Fort Wayne
New
Haven
2424
469469
11
Huntington
2424
2424
99
55
222424
6969
Bluffton
4141
3010
4141
780780
Lafayette
2313
SARASOTA, FL
Scope of coverage
through Bank Locations
Specialty Finance
Group Locations
SPECIALTY EQUIPMENT FINANCE
INSURANCE
Aircraft & Helicopter
Auto & Light Truck
Medium & Heavy Duty Trucks
Construction Equipment
Shuttle Bus
Step Vans
Funeral Cars
Motor Coaches
Personal
Homeowners
Rental
Flood
Umbrella Liability Coverage
Life & Health
Disability Income
Automobile
Snowmobile
Recreational Vehicle
Boat
Business
Commercial Auto
Commercial Property
Crime
Employment Practices
Key Man Life
Environmental Liability
General Liability
Umbrella/Excess Liability
Workers’ Compensation
Crop Insurance
P.O. Box 1602, South Bend, Indiana 46634
© 2020 1st Source Corporation all rights reserved.