UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~September 30, 2020

☐ 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						35-1068133
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

100 North Michigan Street

South Bend,

46601

(Address of principal executive offices)

(Zip Code)

(574) 235-2000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock - without par value

SRCE

The NASDAQ Stock Market LLC

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. x Yes o 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). x Yes o 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

Accelerated filer

☐

Non-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 Section13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No

Number of shares of common stock outstanding as of ~~April 17,~~October 16, 2020 — ~~25,535,634~~25,553,644 shares

Table of Contents

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition — ~~March 31,~~September 30, 2020 and December 31, 2019	3
	Consolidated Statements of Income — three and nine months ended ~~March~~ 3 1 ~~, 20~~20 September 30, 2020 and 20 192019	4
	Consolidated Statements of Comprehensive Income — three and nine months ended ~~March~~ 3 1 ~~, 20~~20 September 30, 2020 and ~~201~~92019	5
	Consolidated Statements of Shareholders’ Equity — three and nine months ended ~~March~~ 3 1 ~~, 20~~20 September 30, 2020 and ~~201~~92019	56
	Consolidated Statements of Cash Flows — ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019	67
	Notes to the Consolidated Financial Statements	78
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2931
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3946
Item 4.	Controls and Procedures	3946

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3946
Item 1A.	Risk Factors	3946
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4047
Item 3.	Defaults Upon Senior Securities	4047
Item 4.	Mine Safety Disclosures	4047
Item 5.	Other Information	4047
Item 6.	Exhibits	4048

SIGNATURES			4149

EXHIBITS
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.1
	Exhibit 32.2

Table of Contents

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited - Dollars in thousands)


		March 31, 2020		December 31, 2019			September 30, 2020		December 31, 2019
ASSETS	ASSETS					ASSETS
Cash and due from banks	Cash and due from banks	$	72,756	$	67,215	Cash and due from banks	$	62,575	$	67,215
Federal funds sold and interest bearing deposits with other banks	Federal funds sold and interest bearing deposits with other banks	49,543		16,150		Federal funds sold and interest bearing deposits with other banks	91,641		16,150
Investment securities available-for-sale	Investment securities available-for-sale	1,057,169		1,040,583		Investment securities available-for-sale	1,083,427		1,040,583
Other investments	Other investments	28,414		28,414		Other investments	27,674		28,414

Mortgages held for sale	Mortgages held for sale	13,449		20,277		Mortgages held for sale	20,990		20,277
Loans and leases, net of unearned discount:	Loans and leases, net of unearned discount:					Loans and leases, net of unearned discount:
Commercial and agricultural	Commercial and agricultural	1,166,462		1,132,791		Commercial and agricultural	1,681,519		1,132,791
Auto and light truck	Auto and light truck	577,757		588,807		Auto and light truck	527,582		588,807
Medium and heavy duty truck	Medium and heavy duty truck	278,076		294,824		Medium and heavy duty truck	271,248		294,824
Aircraft	Aircraft	773,132		784,040		Aircraft	806,162		784,040
Construction equipment	Construction equipment	718,307		705,451		Construction equipment	723,596		705,451
Commercial real estate	Commercial real estate	930,757		908,177		Commercial real estate	961,550		908,177
Residential real estate and home equity	Residential real estate and home equity	545,606		532,003		Residential real estate and home equity	519,881		532,003
Consumer	Consumer	139,417		139,434		Consumer	135,498		139,434
Total loans and leases	Total loans and leases	5,129,514		5,085,527		Total loans and leases	5,627,036		5,085,527
Reserve for loan and lease losses	Reserve for loan and lease losses	(120,798)		(111,254)		Reserve for loan and lease losses	(136,817)		(111,254)
Net loans and leases	Net loans and leases	5,008,716		4,974,273		Net loans and leases	5,490,219		4,974,273
Equipment owned under operating leases, net	Equipment owned under operating leases, net	101,238		111,684		Equipment owned under operating leases, net	79,703		111,684
Net premises and equipment	Net premises and equipment	52,431		52,219		Net premises and equipment	49,933		52,219
Goodwill and intangible assets	Goodwill and intangible assets	83,964		83,971		Goodwill and intangible assets	83,953		83,971
Accrued income and other assets	Accrued income and other assets	267,438		227,990		Accrued income and other assets	300,834		227,990
Total assets	Total assets	$	6,735,118	$	6,622,776	Total assets	$	7,290,949	$	6,622,776

LIABILITIES	LIABILITIES					LIABILITIES
Deposits:	Deposits:					Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	$	1,219,327	$	1,216,834	Noninterest-bearing demand	$	1,720,768	$	1,216,834
Interest-bearing deposits:	Interest-bearing deposits:					Interest-bearing deposits:
Interest-bearing demand	Interest-bearing demand	1,591,419		1,677,200		Interest-bearing demand	1,885,771		1,677,200
Savings	Savings	840,606		814,794		Savings	992,320		814,794
Time	Time	1,624,559		1,648,498		Time	1,297,996		1,648,498
Total interest-bearing deposits	Total interest-bearing deposits	4,056,584		4,140,492		Total interest-bearing deposits	4,176,087		4,140,492
Total deposits	Total deposits	5,275,911		5,357,326		Total deposits	5,896,855		5,357,326
Short-term borrowings:	Short-term borrowings:					Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase	Federal funds purchased and securities sold under agreements to repurchase	135,942		120,459		Federal funds purchased and securities sold under agreements to repurchase	158,834		120,459
Other short-term borrowings	Other short-term borrowings	146,903		25,434		Other short-term borrowings	6,740		25,434
Total short-term borrowings	Total short-term borrowings	282,845		145,893		Total short-term borrowings	165,574		145,893
Long-term debt and mandatorily redeemable securities	Long-term debt and mandatorily redeemable securities	81,877		71,639		Long-term debt and mandatorily redeemable securities	81,659		71,639
Subordinated notes	Subordinated notes	58,764		58,764		Subordinated notes	58,764		58,764
Accrued expenses and other liabilities	Accrued expenses and other liabilities	158,419		140,518		Accrued expenses and other liabilities	173,082		140,518
Total liabilities	Total liabilities	5,857,816		5,774,140		Total liabilities	6,375,934		5,774,140

SHAREHOLDERS’ EQUITY	SHAREHOLDERS’ EQUITY					SHAREHOLDERS’ EQUITY
Preferred stock; 0 par value	Preferred stock; 0 par value					Preferred stock; 0 par value
Authorized 10,000,000 shares; NaN issued or outstanding	Authorized 10,000,000 shares; NaN issued or outstanding	—		—		Authorized 10,000,000 shares; NaN issued or outstanding	0		0
Common stock; 0 par value	Common stock; 0 par value					Common stock; 0 par value
Authorized 40,000,000 shares; issued 28,205,674 at March 31, 2020 and December 31, 2019		436,538		436,538
Authorized 40,000,000 shares; issued 28,205,674 at September 30, 2020 and December 31, 2019						Authorized 40,000,000 shares; issued 28,205,674 at September 30, 2020 and December 31, 2019	436,538		436,538
Retained earnings	Retained earnings	472,911		463,269		Retained earnings	497,419		463,269
Cost of common stock in treasury (2,670,290 shares at March 31, 2020 and 2,696,200 shares at December 31, 2019)		(76,203)		(76,702)
Cost of common stock in treasury (2,652,030 shares at September 30, 2020 and 2,696,200 shares at December 31, 2019)						Cost of common stock in treasury (2,652,030 shares at September 30, 2020 and 2,696,200 shares at December 31, 2019)	(75,861)		(76,702)
Accumulated other comprehensive income	Accumulated other comprehensive income	17,651		5,172		Accumulated other comprehensive income	19,658		5,172
Total shareholders’ equity	Total shareholders’ equity	850,897		828,277		Total shareholders’ equity	877,754		828,277
Noncontrolling interests	Noncontrolling interests	$	26,405	$	20,359	Noncontrolling interests	37,261		20,359
Total equity	Total equity	$	877,302	$	848,636	Total equity	915,015		848,636
Total liabilities and equity	Total liabilities and equity	$	6,735,118	$	6,622,776	Total liabilities and equity	$	7,290,949	$	6,622,776

The accompanying notes are a part of the unaudited consolidated financial statements.

Table of Contents

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

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


		Three Months Ended March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
		2020		2019			2020		2019		2020		2019
Interest income:	Interest income:					Interest income:
Loans and leases	Loans and leases	$	61,526	$	62,683	Loans and leases	$	58,318	$	66,807	$	178,659	$	195,089
Investment securities, taxable	Investment securities, taxable	5,550		5,515		Investment securities, taxable	4,103		5,056		14,140		15,757
Investment securities, tax-exempt	Investment securities, tax-exempt	264		385		Investment securities, tax-exempt	207		316		703		1,054
Other	Other	346		438		Other	289		497		951		1,434
Total interest income	Total interest income	67,686		69,021		Total interest income	62,917		72,676		194,453		213,334
Interest expense:	Interest expense:					Interest expense:
Deposits	Deposits	10,851		11,470		Deposits	6,532		13,524		25,648		37,972
Short-term borrowings	Short-term borrowings	254		931		Short-term borrowings	83		293		427		1,764
Subordinated notes	Subordinated notes	884		928		Subordinated notes	824		914		2,543		2,770
Long-term debt and mandatorily redeemable securities	Long-term debt and mandatorily redeemable securities	853		744		Long-term debt and mandatorily redeemable securities	610		750		2,122		2,258
Total interest expense	Total interest expense	12,842		14,073		Total interest expense	8,049		15,481		30,740		44,764
Net interest income	Net interest income	54,844		54,948		Net interest income	54,868		57,195		163,713		168,570
Provision for loan and lease losses	Provision for loan and lease losses	11,353		4,918		Provision for loan and lease losses	9,303		3,717		31,031		12,882
Net interest income after provision for loan and lease losses	Net interest income after provision for loan and lease losses	43,491		50,030		Net interest income after provision for loan and lease losses	45,565		53,478		132,682		155,688
Noninterest income:	Noninterest income:					Noninterest income:
Trust and wealth advisory	Trust and wealth advisory	4,848		4,858		Trust and wealth advisory	5,153		4,982		15,590		15,423
Service charges on deposit accounts	Service charges on deposit accounts	2,605		2,498		Service charges on deposit accounts	2,336		2,892		6,851		8,175
Debit card	Debit card	3,373		3,220		Debit card	4,019		3,727		10,993		10,616
Mortgage banking	Mortgage banking	2,336		936		Mortgage banking	6,474		1,362		12,125		3,297
Insurance commissions	Insurance commissions	1,881		2,174		Insurance commissions	1,825		1,603		5,401		5,295
Equipment rental	Equipment rental	6,630		7,982		Equipment rental	5,593		7,578		18,213		23,369
Gains on investment securities available-for-sale	Gains on investment securities available-for-sale	280		—		Gains on investment securities available-for-sale	0		0		279		0
Other	Other	2,669		2,456		Other	2,641		3,621		8,452		9,378
Total noninterest income	Total noninterest income	24,622		24,124		Total noninterest income	28,041		25,765		77,904		75,553
Noninterest expense:	Noninterest expense:					Noninterest expense:
Salaries and employee benefits	Salaries and employee benefits	24,401		23,495		Salaries and employee benefits	25,609		24,434		74,009		71,716
Net occupancy	Net occupancy	2,721		2,772		Net occupancy	2,512		2,635		7,737		7,888
Furniture and equipment	Furniture and equipment	6,407		6,024		Furniture and equipment	6,247		6,027		18,912		18,340
Depreciation – leased equipment	Depreciation – leased equipment	5,427		6,524		Depreciation – leased equipment	4,694		6,198		15,263		19,122
Professional fees	Professional fees	1,442		1,598		Professional fees	2,041		1,603		4,741		4,907
Supplies and communication	Supplies and communication	1,634		1,493		Supplies and communication	1,305		1,643		4,329		4,744
FDIC and other insurance	FDIC and other insurance	288		645		FDIC and other insurance	868		260		1,755		1,513
Business development and marketing	Business development and marketing	1,359		949		Business development and marketing	923		1,844		3,403		4,471
Loan and lease collection and repossession	Loan and lease collection and repossession	763		1,361		Loan and lease collection and repossession	1,054		697		2,655		2,288
Other	Other	2,093		343		Other	1,790		1,765		5,599		4,674
Total noninterest expense	Total noninterest expense	46,535		45,204		Total noninterest expense	47,043		47,106		138,403		139,663
Income before income taxes	Income before income taxes	21,578		28,950		Income before income taxes	26,563		32,137		72,183		91,578
Income tax expense	Income tax expense	5,160		6,754		Income tax expense	6,509		7,689		17,185		21,517
Net income	Net income	16,418		22,196		Net income	20,054		24,448		54,998		70,061
Net (income) loss attributable to noncontrolling interests		(5)		—
Net loss (income) attributable to noncontrolling interests						Net loss (income) attributable to noncontrolling interests	4		(10)		(25)		(42)
Net income available to common shareholders	Net income available to common shareholders	$	16,413	$	22,196	Net income available to common shareholders	$	20,058	$	24,438	$	54,973	$	70,019
Per common share:	Per common share:					Per common share:
Basic net income per common share	Basic net income per common share	$	0.64	$	0.86	Basic net income per common share	$	0.78	$	0.95	$	2.14	$	2.72
Diluted net income per common share	Diluted net income per common share	$	0.64	$	0.86	Diluted net income per common share	$	0.78	$	0.95	$	2.14	$	2.72
Cash dividends	Cash dividends	$	0.29	$	0.27	Cash dividends	$	0.28	$	0.27	$	0.85	$	0.81
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	25,523,356		25,759,186		Basic weighted average common shares outstanding	25,552,374		25,520,035		25,538,910		25,630,771
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	25,523,356		25,759,186		Diluted weighted average common shares outstanding	25,552,374		25,520,035		25,538,910		25,630,771

The accompanying notes are a part of the unaudited consolidated financial statements.

Table of Contents

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - Dollars in thousands)


		Three Months Ended March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
		2020		2019			2020		2019		2020		2019
Net income	Net income	$	16,418	$	22,196	Net income	$	20,054	$	24,448	$	54,998	$	70,061
Other comprehensive income:	Other comprehensive income:					Other comprehensive income:
Unrealized appreciation of available-for-sale securities		16,717		9,573
Unrealized (depreciation) appreciation of available-for-sale securities						Unrealized (depreciation) appreciation of available-for-sale securities	(303)		2,920		19,360		20,161
Reclassification adjustment for realized gains included in net income	Reclassification adjustment for realized gains included in net income	(280)		—		Reclassification adjustment for realized gains included in net income	0		0		(279)		0
Income tax effect	Income tax effect	(3,958)		(2,305)		Income tax effect	73		(703)		(4,595)		(4,855)
Other comprehensive income, net of tax		12,479		7,268
Other comprehensive (loss) income, net of tax						Other comprehensive (loss) income, net of tax	(230)		2,217		14,486		15,306
Comprehensive income	Comprehensive income	$	28,897	$	29,464	Comprehensive income	19,824		26,665		$	69,484	$	85,367
Comprehensive (income) loss attributable to noncontrolling interests		(5)		—
Comprehensive loss (income) attributable to noncontrolling interests						Comprehensive loss (income) attributable to noncontrolling interests	4		(10)		(25)		(42)
Comprehensive income available to common shareholders	Comprehensive income available to common shareholders	$	28,892	$	29,464	Comprehensive income available to common shareholders	$	19,828	$	26,655	$	69,459	$	85,325

The accompanying notes are a part of the unaudited consolidated financial statements.

Table of Contents

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

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


	Three Months Ended
	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 July 1, 2019	$	—	$	436,538	$	431,091	$	(75,380)	$	2,413	$	794,662	$	10,024	$	804,686
Net income	—		—		24,438		—		—		24,438		10		24,448
Other comprehensive income	—		—		—		—		2,217		2,217		—		2,217
Issuance of 3,544 common shares under stock based compensation awards	—		—		91		70		—		161		—		161
Cost of 30,000 shares of common stock acquired for treasury	—		—		—		(1,406)		—		(1,406)		—		(1,406)
Common stock dividend ($0.27 per share)	—		—		(6,905)		—		—		(6,905)		—		(6,905)
Contributions from noncontrolling interests	—		—		—		—		—		0		9,879		9,879
Distributions to noncontrolling interests	—		—		—		—		—		0		(38)		(38)
Balance at September 30, 2019	$	—	$	436,538	$	448,715	$	(76,716)	$	4,630	$	813,167	$	19,875	833,042

Balance at July 1, 2020	$	—	$	436,538	$	484,491	$	(75,922)	$	19,888	$	864,995	$	36,658	$	901,653
Net income (loss)	—		—		20,058		—		—		20,058		(4)		20,054
Other comprehensive loss	—		—		—		—		(230)		(230)		—		(230)
Issuance of 3,289 common shares under stock based compensation awards	—		—		52		61		—		113		—		113
Cost of 0 shares of common stock acquired for treasury	—		—		—		0		—		0		—		0
Common stock dividend ($0.28 per share)	—		—		(7,182)		—		—		(7,182)		—		(7,182)

Contributions from noncontrolling interests	—		—		—		—		—		0		928		928
Distributions to noncontrolling interests	—		—		—		—		—		0		(321)		(321)
Balance at September 30, 2020	$	—	$	436,538	$	497,419	$	(75,861)	$	19,658	$	877,754	$	37,261	$	915,015


		Three Months Ended																															Nine Months Ended
		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			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, 2019	Balance at January 1, 2019	$	—	$	436,538	$	398,980	$	(62,760)	$	(10,676)	$	762,082	$	1,508	$	763,590	Balance at January 1, 2019	$	—	$	436,538	$	398,980	$	(62,760)	$	(10,676)	$	762,082	$	1,508	$	763,590
Cumulative-effect adjustment	Cumulative-effect adjustment	—		—		(301)		—		—		(301)		—		(301)		Cumulative-effect adjustment	—		—		(301)		—		0		(301)		—		(301)
Balance at January 1, 2019, adjusted	Balance at January 1, 2019, adjusted	—		436,538		398,679		(62,760)		(10,676)		761,781		1,508		763,289		Balance at January 1, 2019, adjusted	—		436,538		398,679		(62,760)		(10,676)		761,781		1,508		763,289
Net income	Net income	—		—		22,196		—		—		22,196		—		22,196		Net income	—		—		70,019		—		—		70,019		42		70,061
Other comprehensive income	Other comprehensive income	—		—		—		—		7,268		7,268		—		7,268		Other comprehensive income	—		—		—		—		15,306		15,306		—		15,306
Issuance of 38,365 common shares under stock based compensation awards		—		—		533		882		—		1,415		—		1,415
Cost of 154,160 shares of common stock acquired for treasury		—		—		—		(7,258)		—		(7,258)		—		(7,258)
Common stock dividend ($0.27 per share)		—		—		(6,980)		—		—		(6,980)		—		(6,980)
Issuance of 50,815 common shares under stock based compensation awards																		Issuance of 50,815 common shares under stock based compensation awards	—		—		841		1,129		—		1,970		—		1,970
Cost of 325,787 shares of common stock acquired for treasury																		Cost of 325,787 shares of common stock acquired for treasury	—		—		—		(15,085)		—		(15,085)		—		(15,085)
Common stock dividend ($0.81 per share)																		Common stock dividend ($0.81 per share)	—		—		(20,824)		—		—		(20,824)		—		(20,824)
Contributions from noncontrolling interests	Contributions from noncontrolling interests	—		—		—		—		—		—		1,171		1,171		Contributions from noncontrolling interests	—		—		—		—		—		0		18,363		18,363
Balance at March 31, 2019		$	—	$	436,538	$	414,428	$	(69,136)	$	(3,408)	$	778,422	$	2,679	781,101
Distributions to noncontrolling interests																		Distributions to noncontrolling interests	—		—		—		—		—		—		(38)		(38)
Balance at September 30, 2019																		Balance at September 30, 2019	$	—	$	436,538	$	448,715	$	(76,716)	$	4,630	$	813,167	$	19,875	833,042

Balance at January 1, 2020	Balance at January 1, 2020	$	—	$	436,538	$	463,269	$	(76,702)	$	5,172	$	828,277	$	20,359	$	848,636	Balance at January 1, 2020	$	—	$	436,538	$	463,269	$	(76,702)	$	5,172	$	828,277	$	20,359	$	848,636

Net income	Net income	—		—		16,413		—		—		16,413		5		16,418		Net income	—		—		54,973		—		—		54,973		25		54,998
Other comprehensive income	Other comprehensive income	—		—		—		—		12,479		12,479		—		12,479		Other comprehensive income	—		—		—		—		14,486		14,486		—		14,486
Issuance of 25,910 common shares under stock based compensation awards		—		—		638		499		—		1,137		—		1,137
Issuance of 44,170 common shares under stock based compensation awards																		Issuance of 44,170 common shares under stock based compensation awards	—		—		934		841		—		1,775		—		1,775
Cost of 0 shares of common stock acquired for treasury	Cost of 0 shares of common stock acquired for treasury	—		—		—		—		—		—		—		—		Cost of 0 shares of common stock acquired for treasury	—		—		—		0		—		0		—		0
Common stock dividend ($0.29 per share)		—		—		(7,409)		—		—		(7,409)		—		(7,409)
Common stock dividend ($0.85 per share)																		Common stock dividend ($0.85 per share)	—		—		(21,757)		—		—		(21,757)		—		(21,757)
Contributions from noncontrolling interests	Contributions from noncontrolling interests	—		—		—		—		—		—		6,140		6,140		Contributions from noncontrolling interests	—		—		—		—		—		0		17,369		17,369
Distributions to noncontrolling interests	Distributions to noncontrolling interests	—		—		—		—		—		—		(99)		(99)		Distributions to noncontrolling interests	—		—		—		—		—		0		(492)		(492)

Balance at March 31, 2020		$	—	$	436,538	$	472,911	$	(76,203)	$	17,651	$	850,897	$	26,405	$	877,302
Balance at September 30, 2020																		Balance at September 30, 2020	$	—	$	436,538	$	497,419	$	(75,861)	$	19,658	$	877,754	$	37,261	$	915,015

The accompanying notes are a part of the unaudited consolidated financial statements.

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1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - Dollars in thousands)


		Three Months Ended March 31,							Nine Months Ended September 30,
		2020		2019			2020		2019
Operating activities:	Operating activities:					Operating activities:
Net income	Net income	$	16,418	$	22,196	Net income	$	54,998	$	70,061
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses	Provision for loan and lease losses	11,353		4,918		Provision for loan and lease losses	31,031		12,882
Depreciation of premises and equipment	Depreciation of premises and equipment	1,435		1,466		Depreciation of premises and equipment	4,255		4,412
Depreciation of equipment owned and leased to others	Depreciation of equipment owned and leased to others	5,427		6,524		Depreciation of equipment owned and leased to others	15,263		19,122
Stock-based compensation	Stock-based compensation	736		673		Stock-based compensation	2,377		2,069
Amortization of investment securities premiums and accretion of discounts, net	Amortization of investment securities premiums and accretion of discounts, net	717		824		Amortization of investment securities premiums and accretion of discounts, net	4,238		2,857
Amortization of mortgage servicing rights	Amortization of mortgage servicing rights	409		233		Amortization of mortgage servicing rights	1,757		879
Mortgage servicing rights impairments						Mortgage servicing rights impairments	808		0
Amortization of right of use assets	Amortization of right of use assets	704		785		Amortization of right of use assets	2,115		2,348
Deferred income taxes	Deferred income taxes	(2,941)		444		Deferred income taxes	(10,509)		(4,586)
Gains on investment securities available-for-sale	Gains on investment securities available-for-sale	(280)		—		Gains on investment securities available-for-sale	(279)		0
Originations of loans held for sale, net of principal collected	Originations of loans held for sale, net of principal collected	(33,104)		(19,966)		Originations of loans held for sale, net of principal collected	(248,639)		(100,903)
Proceeds from the sales of loans held for sale	Proceeds from the sales of loans held for sale	41,699		22,534		Proceeds from the sales of loans held for sale	258,253		85,400
Net gain on sale of loans held for sale	Net gain on sale of loans held for sale	(1,767)		(488)		Net gain on sale of loans held for sale	(10,327)		(1,861)
Net gain on sale of other real estate and repossessions	Net gain on sale of other real estate and repossessions	(23)		(167)		Net gain on sale of other real estate and repossessions	(73)		(473)

Net gain on sale of premises and equipment	Net gain on sale of premises and equipment	—		(1,288)		Net gain on sale of premises and equipment	0		(1,289)
Change in interest receivable	Change in interest receivable	(702)		(2,696)		Change in interest receivable	(2,440)		(1,717)
Change in interest payable	Change in interest payable	(199)		2,427		Change in interest payable	(6,271)		5,885
Change in other assets	Change in other assets	(826)		1,115		Change in other assets	2,312		7,889
Change in other liabilities	Change in other liabilities	(6,237)		(4,735)		Change in other liabilities	(2,906)		8,763
Other	Other	486		598		Other	1,049		1,348
Net change in operating activities	Net change in operating activities	33,305		35,397		Net change in operating activities	97,012		113,086

Investing activities:	Investing activities:					Investing activities:
Proceeds from sales of investment securities available-for-sale	Proceeds from sales of investment securities available-for-sale	5,578		—		Proceeds from sales of investment securities available-for-sale	8,403		0
Proceeds from maturities and paydowns of investment securities available-for-sale	Proceeds from maturities and paydowns of investment securities available-for-sale	121,353		28,840		Proceeds from maturities and paydowns of investment securities available-for-sale	301,050		128,257
Purchases of investment securities available-for-sale	Purchases of investment securities available-for-sale	(127,517)		(33,072)		Purchases of investment securities available-for-sale	(337,175)		(153,310)
Net change in partnership investments	Net change in partnership investments	(12,904)		(3,171)		Net change in partnership investments	(31,298)		(29,823)

Net change in other investments						Net change in other investments	740		0
Loans sold or participated to others	Loans sold or participated to others	2,863		2,862		Loans sold or participated to others	10,722		50,140
Proceeds from principal payments on direct finance leases	Proceeds from principal payments on direct finance leases	9,682		15,238		Proceeds from principal payments on direct finance leases	35,384		56,798
Proceeds from PPP lender origination fees						Proceeds from PPP lender origination fees	19,375		0
Net change in loans and leases	Net change in loans and leases	(59,609)		(121,297)		Net change in loans and leases	(615,427)		(386,170)
Net change in equipment owned under operating leases	Net change in equipment owned under operating leases	5,019		(3,678)		Net change in equipment owned under operating leases	16,691		(3,975)
Purchases of premises and equipment	Purchases of premises and equipment	(1,659)		(2,821)		Purchases of premises and equipment	(1,988)		(6,091)
Proceeds from disposal of premises and equipment	Proceeds from disposal of premises and equipment	12		3,426		Proceeds from disposal of premises and equipment	19		3,427
Proceeds from sales of other real estate and repossessions	Proceeds from sales of other real estate and repossessions	764		4,044		Proceeds from sales of other real estate and repossessions	6,303		9,522
Net change in investing activities	Net change in investing activities	(56,418)		(109,629)		Net change in investing activities	(587,201)		(331,225)

Financing activities:	Financing activities:					Financing activities:
Net change in demand deposits and savings accounts	Net change in demand deposits and savings accounts	(57,476)		(95,505)		Net change in demand deposits and savings accounts	890,031		17,518
Net change in time deposits	Net change in time deposits	(23,939)		97,274		Net change in time deposits	(350,502)		251,839
Net change in short-term borrowings	Net change in short-term borrowings	136,952		56,044		Net change in short-term borrowings	19,681		(2,193)
Proceeds from issuance of long-term debt	Proceeds from issuance of long-term debt	10,000		—		Proceeds from issuance of long-term debt	10,000		0
Payments on long-term debt	Payments on long-term debt	(1,917)		(1,718)		Payments on long-term debt	(2,710)		(2,499)

Stock issued under stock purchase plans						Stock issued under stock purchase plans	39		49
Acquisition of treasury stock	Acquisition of treasury stock	—		(7,258)		Acquisition of treasury stock	0		(15,085)
Net change in noncontrolling interests	Net change in noncontrolling interests	6,041		1,171		Net change in noncontrolling interests	16,877		18,325
Cash dividends paid on common stock	Cash dividends paid on common stock	(7,614)		(7,174)		Cash dividends paid on common stock	(22,376)		(21,409)
Net change in financing activities	Net change in financing activities	62,047		42,834		Net change in financing activities	561,040		246,545

Net change in cash and cash equivalents	Net change in cash and cash equivalents	38,934		(31,398)		Net change in cash and cash equivalents	70,851		28,406
Cash and cash equivalents, beginning of year	Cash and cash equivalents, beginning of year	83,365		99,079		Cash and cash equivalents, beginning of year	83,365		99,079
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	122,299	$	67,681	Cash and cash equivalents, end of period	$	154,216	$	127,485
Supplemental Information:	Supplemental Information:					Supplemental Information:
Non-cash transactions:	Non-cash transactions:					Non-cash transactions:
Loans transferred to other real estate and repossessed assets	Loans transferred to other real estate and repossessed assets	$	1,268	$	8,939	Loans transferred to other real estate and repossessed assets	$	2,969	$	10,740
Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan	Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan	622		300		Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan	622		300
Right of use assets obtained in exchange for lease obligations	Right of use assets obtained in exchange for lease obligations	31		1,058		Right of use assets obtained in exchange for lease obligations	253		16,006

The accompanying notes are a part of the unaudited consolidated financial statements.

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1ST SOURCE CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

Basis of Presentation – The accompanying unaudited consolidated financial statements reflect all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income (loss), changes in shareholders’ equity, and cash flows for the periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted.

The Notes to the Consolidated Financial Statements appearing in 1st Source Corporation’s Annual Report on Form 10-K (2019 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The Consolidated Statement of Financial Condition at December 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation.

Use of Estimates in the Preparation of Financial Statements – Financial statements prepared in accordance with 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 expense during the reporting period. Actual results could differ from those estimates.

Loans and Leases – Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. Interest income is accrued as earned based on unpaid principal balances. Origination fees and direct loan and lease origination costs are deferred, and the net amount amortized to interest income over the estimated life of the related loan or lease. Loan commitment fees are deferred and amortized into other income over the commitment period.

Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment. Effective January 1, 2019, as part of the new leasing standard, only those costs incurred as a direct result of closing a lease transaction can be capitalized. All existing deferrals will continue to be amortized over the estimated life of the lease while all new incremental direct costs will be 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 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.

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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.

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides entities with optional temporary relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES Act allows financial institutions to suspend application of certain TDR accounting guidance for loan and lease modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan and lease modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan and lease modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. The Company chose to apply this relief to eligible loan and lease modifications.

Note 2 — Recent Accounting Pronouncements

~~Reference Rate Reform:~~Nonrefundable Fees and Other Costs: In ~~March~~October 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-08 “Codification Improvements to Subtopic 310-20, Receivables–Nonrefundable Fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. 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 not permitted. All entities should apply ASU 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company is assessing ASU 2020-08 and its impact its accounting and disclosures.

Reference Rate Reform: In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company is ~~assessing~~continuing to assess ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

Partnership Investments and Derivatives: In January 2020, the FASB issued 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~~has assessed ASU 2020-01 and ~~its~~does not expect it to have a material impact on its accounting and disclosures.

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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~~has assessed ASU 2019-12 and ~~its~~does not expect it to have a material impact on its accounting and ~~disclosure.~~disclosures.

~~Table of Contents~~

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), ASU 2019-11 (issued November 2019), ASU 2020-02 (issued February 2020) and ASU 2020-03 (issued March 2020). 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 had finalized the formal review and approval process and the results of its CECL estimate as of year-end but has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, until the date on which the national emergency related to the COVID-19 outbreak is terminated or December 31, 2020, whichever occurs first. Upon adoption of ASU 2016-13, the Company will recognize a one-time cumulative effect adjustment through retained earnings of $2.58 million to increase its allowance for credit losses and $0.78 million to increase the unfunded loan commitment liability as of January 1, 2020. As of ~~March 31,~~September 30, 2020, the Company estimates an additional increase to its allowance for credit losses of between $2$0 million and ~~$10~~$2 million which will be recognized through earnings ~~after~~upon adoption.

Upon adopting ASU 2016-13, the Company will not record an allowance as of 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.

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Note 3 — Investment Securities Available-For-Sale

The following table shows investment securities available-for-sale.

(Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
March 31, 2020
U.S. Treasury and Federal agencies securities $ 525,959 $ 11,488 $ (26) $ 537,421
U.S. States and political subdivisions securities 79,724 1,370 (80) 81,014
Mortgage-backed securities — Federal agencies 382,200 10,483 (374) 392,309
Corporate debt securities 45,337 593 (205) 45,725
Foreign government and other securities 700 — — 700
Total debt securities available-for-sale $ 1,033,920 $ 23,934 $ (685) $ 1,057,169
December 31, 2019
U.S. Treasury and Federal agencies securities $ 524,896 $ 2,538 $ (470) $ 526,964
U.S. States and political subdivisions securities 83,566 1,048 (109) 84,505
Mortgage-backed securities — Federal agencies 372,458 3,948 (1,017) 375,389
Corporate debt securities 52,151 890 (16) 53,025
Foreign government and other securities 700 — — 700
Total debt securities available-for-sale $ 1,033,771 $ 8,424 $ (1,612) $ 1,040,583

~~Table of Contents~~


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2020
U.S. Treasury and Federal agencies securities	$	557,262	$	10,954	$	(208)	$	568,008
U.S. States and political subdivisions securities	66,323		2,423		(13)		68,733
Mortgage-backed securities — Federal agencies	392,427		11,154		(91)		403,490
Corporate debt securities	40,822		1,674		0		42,496
Foreign government and other securities	700		0		0		700
Total debt securities available-for-sale	$	1,057,534	$	26,205	$	(312)	$	1,083,427

December 31, 2019
U.S. Treasury and Federal agencies securities	$	524,896	$	2,538	$	(470)	$	526,964
U.S. States and political subdivisions securities	83,566		1,048		(109)		84,505
Mortgage-backed securities — Federal agencies	372,458		3,948		(1,017)		375,389
Corporate debt securities	52,151		890		(16)		53,025
Foreign government and other securities	700		0		0		700
Total debt securities available-for-sale	$	1,033,771	$	8,424	$	(1,612)	$	1,040,583

At ~~March 31,~~September 30, 2020 and 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 following table shows the contractual maturities of investments in debt securities available-for-sale at ~~March 31,~~September 30, 2020. 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)	(Dollars in thousands)	Amortized Cost		Fair Value		(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	Due in one year or less	$	168,808	$	170,311	Due in one year or less	$	126,626	$	127,388
Due after one year through five years	Due after one year through five years	462,563		473,762		Due after one year through five years	454,199		468,075
Due after five years through ten years	Due after five years through ten years	19,769		20,253		Due after five years through ten years	83,702		83,903
Due after ten years	Due after ten years	580		534		Due after ten years	580		571
Mortgage-backed securities	Mortgage-backed securities	382,200		392,309		Mortgage-backed securities	392,427		403,490
Total debt securities available-for-sale	Total debt securities available-for-sale	$	1,033,920	$	1,057,169	Total debt securities available-for-sale	$	1,057,534	$	1,083,427

The following table summarizes gross unrealized losses and fair value by investment category and age. At ~~March 31,~~September 30, 2020, the Company’s available-for-sale securities portfolio consisted of ~~609~~600 securities, 7035 of which were in an unrealized loss position.


		Less than 12 Months						12 months or Longer							Total							Less than 12 Months						12 months or Longer	Total
(Dollars in thousands)	(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(Dollars in thousands)		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2020
September 30, 2020														September 30, 2020
U.S. Treasury and Federal agencies securities	U.S. Treasury and Federal agencies securities	$	25,129	$	(26)	$	—	$	—	$	25,129	$	(26)	U.S. Treasury and Federal agencies securities		$	47,792	$	(208)	$	0	$	0	$	47,792	$	(208)
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	2,337		(80)		—		—		2,337		(80)		U.S. States and political subdivisions securities		857		(13)		0		0		857		(13)
Mortgage-backed securities - Federal agencies	Mortgage-backed securities - Federal agencies	13,989		(101)		16,447		(273)		30,436		(374)		Mortgage-backed securities - Federal agencies		45,256		(85)		3,245		(6)		48,501		(91)
Corporate debt securities	Corporate debt securities	12,530		(179)		3,059		(26)		15,589		(205)		Corporate debt securities		0		0		0		0		0		0
Foreign government and other securities	Foreign government and other securities	500		—		—		—		500		—		Foreign government and other securities		200		0		0		0		200		0
Total debt securities available-for-sale	Total debt securities available-for-sale	$	54,485	$	(386)	$	19,506	$	(299)	$	73,991	$	(685)	Total debt securities available-for-sale		$	94,105	$	(306)	$	3,245	$	(6)	$	97,350	$	(312)

December 31, 2019	December 31, 2019													December 31, 2019
U.S. Treasury and Federal agencies securities	U.S. Treasury and Federal agencies securities	$	87,352	$	(171)	$	69,053	$	(299)	$	156,405	$	(470)	U.S. Treasury and Federal agencies securities		$	87,352	$	(171)	$	69,053	$	(299)	$	156,405	$	(470)
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	9,283		(107)		1,042		(2)		10,325		(109)		U.S. States and political subdivisions securities		9,283		(107)		1,042		(2)		10,325		(109)
Mortgage-backed securities - Federal agencies	Mortgage-backed securities - Federal agencies	81,951		(383)		51,165		(634)		133,116		(1,017)		Mortgage-backed securities - Federal agencies		81,951		(383)		51,165		(634)		133,116		(1,017)
Corporate debt securities	Corporate debt securities	—		—		8,091		(16)		8,091		(16)		Corporate debt securities		0		0		8,091		(16)		8,091		(16)
Foreign government and other securities	Foreign government and other securities	—		—		—		—		—		—		Foreign government and other securities		0		0		0		0		0		0
Total debt securities available-for-sale	Total debt securities available-for-sale	$	178,586	$	(661)	$	129,351	$	(951)	$	307,937	$	(1,612)	Total debt securities available-for-sale		$	178,586	$	(661)	$	129,351	$	(951)	$	307,937	$	(1,612)

Table of Contents

The initial indication of potential other-than-temporary-impairment (OTTI) for debt securities is a decline in fair value below amortized cost. Quarterly, the impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI. Declines in the fair value of debt securities available-for-sale 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 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 a recovery of cost.

At ~~March 31,~~September 30, 2020, the Company does not have the intent to sell any of the debt securities available-for-sale 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. Primarily the unrealized losses on debt securities are due to increases in market rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover on all debt securities as they approach their maturity date or re-pricing 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.

~~Table of Contents~~

The following table shows the gross realized gains and losses from the available-for-sale debt securities portfolio. Realized gains and losses of all securities are computed using the specific identification cost basis.


		Three Months Ended March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		(Dollars in thousands)	2020		2019		2020		2019
Gross realized gains	Gross realized gains	$	280	$	—	Gross realized gains	$	0	$	0	$	285	$	0
Gross realized losses	Gross realized losses	—		—		Gross realized losses	0		0		(6)		0
OTTI losses	OTTI losses	—		—		OTTI losses	0		0		0		0
Net realized gains (losses)	Net realized gains (losses)	$	280	$	—	Net realized gains (losses)	$	0	$	0	$	279	$	0

At ~~March 31,~~September 30, 2020 and December 31, 2019, investment securities available-for-sale with carrying values of ~~$336.38~~$371.45 million and $281.38 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.

Note 4 — Loan and Lease Financings

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 2 methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.

All loans and leases, except residential real estate 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 the Company’s 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 the 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).

Table of Contents

The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.

Credit Quality Grades
(Dollars in thousands) 1-6 7-12 Total
March 31, 2020
Commercial and agricultural $ 1,110,313 $ 56,149 $ 1,166,462
Auto and light truck 559,395 18,362 577,757
Medium and heavy duty truck 277,056 1,020 278,076
Aircraft 751,689 21,443 773,132
Construction equipment 670,176 48,131 718,307
Commercial real estate 905,605 25,152 930,757
Total $ 4,274,234 $ 170,257 $ 4,444,491
December 31, 2019
Commercial and agricultural $ 1,080,933 $ 51,858 $ 1,132,791
Auto and light truck 569,234 19,573 588,807
Medium and heavy duty truck 293,736 1,088 294,824
Aircraft 764,564 19,476 784,040
Construction equipment 668,076 37,375 705,451
Commercial real estate 888,154 20,023 908,177
Total $ 4,264,697 $ 149,393 $ 4,414,090

~~Table of Contents~~


	Credit Quality Grades
(Dollars in thousands)	1-6		7-12		Total
September 30, 2020
Commercial and agricultural	$	1,617,272	$	64,247	$	1,681,519
Auto and light truck	470,744		56,838		527,582
Medium and heavy duty truck	269,070		2,178		271,248
Aircraft	782,656		23,506		806,162
Construction equipment	671,254		52,342		723,596
Commercial real estate	932,782		28,768		961,550
Total	$	4,743,778	$	227,879	$	4,971,657

December 31, 2019
Commercial and agricultural	$	1,080,933	$	51,858	$	1,132,791
Auto and light truck	569,234		19,573		588,807
Medium and heavy duty truck	293,736		1,088		294,824
Aircraft	764,564		19,476		784,040
Construction equipment	668,076		37,375		705,451
Commercial real estate	888,154		20,023		908,177
Total	$	4,264,697	$	149,393	$	4,414,090
*Paycheck Protection Program (PPP) loans are included in the Commercial and agricultural category in the Grades 1-6 column above.

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)	(Dollars in thousands)	Performing		Nonperforming		Total		(Dollars in thousands)	Performing		Nonperforming		Total
March 31, 2020
September 30, 2020								September 30, 2020
Residential real estate and home equity	Residential real estate and home equity	$	543,513	$	2,093	$	545,606	Residential real estate and home equity	$	518,127	$	1,754	$	519,881
Consumer	Consumer	138,986		431		139,417		Consumer	135,074		424		135,498
Total	Total	$	682,499	$	2,524	$	685,023	Total	$	653,201	$	2,178	$	655,379

December 31, 2019	December 31, 2019							December 31, 2019
Residential real estate and home equity	Residential real estate and home equity	$	529,557	$	2,446	$	532,003	Residential real estate and home equity	$	529,557	$	2,446	$	532,003
Consumer	Consumer	138,951		483		139,434		Consumer	138,951		483		139,434
Total	Total	$	668,508	$	2,929	$	671,437	Total	$	668,508	$	2,929	$	671,437

Table of Contents

The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.


(Dollars in thousands)	(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Total Accruing Loans		Nonaccrual		Total Financing Receivables		(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Total Accruing Loans		Nonaccrual		Total Financing Receivables
March 31, 2020
September 30, 2020																September 30, 2020
Commercial and agricultural	Commercial and agricultural	$	1,163,169	$	50	$	—	$	—	$	1,163,219	$	3,243	$	1,166,462	Commercial and agricultural	$	1,679,388	$	49	$	574	$	—	$	1,680,011	$	1,508	$	1,681,519
Auto and light truck	Auto and light truck	575,110		1,684		110		—		576,904		853		577,757		Auto and light truck	488,688		682		302		—		489,672		37,910		527,582
Medium and heavy duty truck	Medium and heavy duty truck	277,042		14		—		—		277,056		1,020		278,076		Medium and heavy duty truck	270,211		93		0		—		270,304		944		271,248
Aircraft	Aircraft	765,861		2,135		3,130		—		771,126		2,006		773,132		Aircraft	793,451		6,837		3,921		—		804,209		1,953		806,162
Construction equipment	Construction equipment	699,932		2,557		338		—		702,827		15,480		718,307		Construction equipment	697,020		1,633		321		—		698,974		24,622		723,596
Commercial real estate	Commercial real estate	929,323		67		—		—		929,390		1,367		930,757		Commercial real estate	959,816		173		0		—		959,989		1,561		961,550
Residential real estate and home equity	Residential real estate and home equity	542,382		1,086		45		162		543,675		1,931		545,606		Residential real estate and home equity	517,233		875		19		80		518,207		1,674		519,881
Consumer	Consumer	138,346		531		109		30		139,016		401		139,417		Consumer	134,222		779		73		1		135,075		423		135,498
Total	Total	$	5,091,165	$	8,124	$	3,732	$	192	$	5,103,213	$	26,301	$	5,129,514	Total	$	5,540,029	$	11,121	$	5,210	$	81	$	5,556,441	$	70,595	$	5,627,036

December 31, 2019	December 31, 2019															December 31, 2019
Commercial and agricultural	Commercial and agricultural	$	1,131,704	$	118	$	—	$	—	$	1,131,822	$	969	$	1,132,791	Commercial and agricultural	$	1,131,704	$	118	$	0	$	—	$	1,131,822	$	969	$	1,132,791
Auto and light truck	Auto and light truck	586,212		1,268		77		—		587,557		1,250		588,807		Auto and light truck	586,212		1,268		77		—		587,557		1,250		588,807
Medium and heavy duty truck	Medium and heavy duty truck	293,736		14		—		—		293,750		1,074		294,824		Medium and heavy duty truck	293,736		14		0		—		293,750		1,074		294,824
Aircraft	Aircraft	772,846		7,026		3,293		—		783,165		875		784,040		Aircraft	772,846		7,026		3,293		—		783,165		875		784,040
Construction equipment	Construction equipment	702,671		819		609		—		704,099		1,352		705,451		Construction equipment	702,671		819		609		—		704,099		1,352		705,451
Commercial real estate	Commercial real estate	906,468		58		—		—		906,526		1,651		908,177		Commercial real estate	906,468		58		0		—		906,526		1,651		908,177
Residential real estate and home equity	Residential real estate and home equity	528,844		561		152		257		529,814		2,189		532,003		Residential real estate and home equity	528,844		561		152		257		529,814		2,189		532,003
Consumer	Consumer	138,132		632		187		54		139,005		429		139,434		Consumer	138,132		632		187		54		139,005		429		139,434
Total	Total	$	5,060,613	$	10,496	$	4,318	$	311	$	5,075,738	$	9,789	$	5,085,527	Total	$	5,060,613	$	10,496	$	4,318	$	311	$	5,075,738	$	9,789	$	5,085,527

1214

Table of Contents

The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.


(Dollars in thousands)	(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Reserve		(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Reserve
March 31, 2020
September 30, 2020								September 30, 2020
With no related reserve recorded:	With no related reserve recorded:							With no related reserve recorded:
Commercial and agricultural	Commercial and agricultural	$	208	$	208	$	—	Commercial and agricultural	$	768	$	768	$	—
Auto and light truck	Auto and light truck	158		158		—		Auto and light truck	20,094		20,094		—
Medium and heavy duty truck	Medium and heavy duty truck	1,008		1,008		—		Medium and heavy duty truck	830		830		—
Aircraft	Aircraft	1,965		1,965		—		Aircraft	1,953		1,953		—
Construction equipment	Construction equipment	1,057		1,057		—		Construction equipment	5,312		5,312		—
Commercial real estate	Commercial real estate	1,209		1,209		—		Commercial real estate	1,354		1,354		—
Residential real estate and home equity	Residential real estate and home equity	—		—		—		Residential real estate and home equity	0		0		—
Consumer	Consumer	—		—		—		Consumer	0		0		—
Total with no related reserve recorded	Total with no related reserve recorded	5,605		5,605		—		Total with no related reserve recorded	30,311		30,311		—
With a reserve recorded:	With a reserve recorded:							With a reserve recorded:
Commercial and agricultural	Commercial and agricultural	2,678		2,678		711		Commercial and agricultural	6,647		6,647		1,554
Auto and light truck	Auto and light truck	500		500		73		Auto and light truck	16,980		16,980		7,517
Medium and heavy duty truck	Medium and heavy duty truck	—		—		—		Medium and heavy duty truck	114		114		34
Aircraft	Aircraft	—		—		—		Aircraft	0		0		0
Construction equipment	Construction equipment	14,341		14,341		8,318		Construction equipment	12,910		12,910		7,966
Commercial real estate	Commercial real estate	—		—		—		Commercial real estate	0		0		0
Residential real estate and home equity	Residential real estate and home equity	335		337		115		Residential real estate and home equity	331		333		111
Consumer	Consumer	—		—		—		Consumer	0		0		0
Total with a reserve recorded	Total with a reserve recorded	17,854		17,856		9,217		Total with a reserve recorded	36,982		36,984		17,182
Total impaired loans	Total impaired loans	$	23,459	$	23,461	$	9,217	Total impaired loans	$	67,293	$	67,295	$	17,182

December 31, 2019	December 31, 2019							December 31, 2019
With no related reserve recorded:	With no related reserve recorded:							With no related reserve recorded:
Commercial and agricultural	Commercial and agricultural	$	218	$	218	$	—	Commercial and agricultural	$	218	$	218	$	—
Auto and light truck	Auto and light truck	853		853		—		Auto and light truck	853		853		—
Medium and heavy duty truck	Medium and heavy duty truck	1,074		1,074		—		Medium and heavy duty truck	1,074		1,074		—
Aircraft	Aircraft	875		875		—		Aircraft	875		875		—
Construction equipment	Construction equipment	615		615		—		Construction equipment	615		615		—
Commercial real estate	Commercial real estate	1,487		1,487		—		Commercial real estate	1,487		1,487		—
Residential real estate and home equity	Residential real estate and home equity	—		—		—		Residential real estate and home equity	0		0		—
Consumer	Consumer	—		—		—		Consumer	0		0		—
Total with no related reserve recorded	Total with no related reserve recorded	5,122		5,122		—		Total with no related reserve recorded	5,122		5,122		—
With a reserve recorded:	With a reserve recorded:							With a reserve recorded:
Commercial and agricultural	Commercial and agricultural	10,366		10,366		3,003		Commercial and agricultural	10,366		10,366		3,003
Auto and light truck	Auto and light truck	278		278		30		Auto and light truck	278		278		30
Medium and heavy duty truck	Medium and heavy duty truck	—		—		—		Medium and heavy duty truck	0		0		0
Aircraft	Aircraft	—		—		—		Aircraft	0		0		0
Construction equipment	Construction equipment	736		736		75		Construction equipment	736		736		75
Commercial real estate	Commercial real estate	—		—		—		Commercial real estate	0		0		0
Residential real estate and home equity	Residential real estate and home equity	337		339		117		Residential real estate and home equity	337		339		117
Consumer	Consumer	—		—		—		Consumer	0		0		0
Total with a reserve recorded	Total with a reserve recorded	11,717		11,719		3,225		Total with a reserve recorded	11,717		11,719		3,225
Total impaired loans	Total impaired loans	$	16,839	$	16,841	$	3,225	Total impaired loans	$	16,839	$	16,841	$	3,225

1315

Table of Contents

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class.


		Three Months Ended March 31,															Three Months Ended September 30,											Nine Months Ended September 30,
		2020						2019							2020						2019						2020		2019
(Dollars in thousands)	(Dollars in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		(Dollars in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Commercial and agricultural	Commercial and agricultural	$	7,807	$	102	$	2,821	$	—	Commercial and agricultural	$	8,989	$	1	$	5,177	$	68	$	7,393	$	139	$	4,026	$	81
Auto and light truck	Auto and light truck	743		—		5,003		—		Auto and light truck	32,369		0		1,793		0		14,632		0		3,196		0
Medium and heavy duty truck	Medium and heavy duty truck	1,025		—		54		—		Medium and heavy duty truck	985		0		0		0		1,011		0		205		0
Aircraft	Aircraft	1,781		—		5,445		—		Aircraft	1,957		0		593		0		2,015		0		2,542		0
Construction equipment	Construction equipment	7,778		4		1,929		—		Construction equipment	15,543		0		1,838		0		12,541		4		1,728		0
Commercial real estate	Commercial real estate	1,372		—		1,859		—		Commercial real estate	1,306		0		1,595		0		1,235		0		1,763		0
Residential real estate and home equity	Residential real estate and home equity	336		4		343		5		Residential real estate and home equity	332		4		340		4		334		11		341		14
Consumer	Consumer	—		—		—		—		Consumer	0		0		0		0		0		0		0		0
Total	Total	$	20,842	$	110	$	17,454	$	5	Total	$	61,481	$	5	$	11,336	$	72	$	39,161	$	154	$	13,801	$	95

There were 0 loan and lease modifications classified as a troubled debt ~~restructuring~~restructurings (TDR) during the three months ended ~~March 31,~~September 30, 2020 and 2 nonperforming loan and lease modifications classified as TDR during the nine months ended September 30, 2020. There was 1 performing loan and lease modification classified as a TDR during the three months ended September 30, 2019 and 2 (1 performing and 1 nonperforming) loan and lease modifications classified as TDR during the nine months ended September 30, 2019. The TDRs during 2020 were the result of issues that predated the COVID-19 pandemic. The classification between nonperforming and performing is determined at the time of modification. Modification programs focus on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. Modifications do not result in the contractual forgiveness of principal or interest. There were 0 modifications during the three and nine months ended ~~March 31,~~September 30, 2020 and one modification during the three and nine months ended September 30, 2019 that resulted in an interest rate below market rate. Consequently, the financial impact of the modification was immaterial.

There ~~was 1 TDR which had a payment default within the twelve months following modification during the three months ended March 31, 2020 and~~were 0 TDRs which had payment defaults within the twelve months following modification during the three months ended ~~March 31,~~September 30, 2020 and 2019, respectively. There were 0 TDRs which had a payment default within the twelve months following modification during the nine months ended September 30, 2020 and 1 TDR which had a payment default within the twelve months following modification during the nine months ended September 30, 2019. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of ~~March 31,~~September 30, 2020 and December 31, 2019.


(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2020		December 31, 2019
Performing TDRs	Performing TDRs	$	335	$	10,238	Performing TDRs	$	331	$	10,238
Nonperforming TDRs	Nonperforming TDRs	480		486		Nonperforming TDRs	14,503		486
Total TDRs	Total TDRs	$	815	$	10,724	Total TDRs	$	14,834	$	10,724

Note 5 — 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 the historical charge-off analysis is updated, the Company reviews the look-back periods for each business loan portfolio. Furthermore, a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency is performed 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. The Company adjusts the calculated historical based ratio as a result of the analysis of environmental factors, principally economic risk and concentration risk. Key economic factors affecting the portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation and global economic and political issues. Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in the business banking and commercial real estate portfolios and by collateral concentration in the specialty finance portfolios and exposure to foreign markets by geographic risk.

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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 8 classes exist within the loan and lease portfolio. The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, formula reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not deemed impaired, and reserves for pooled homogeneous loans and leases. The Company’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change.

The following table shows the changes in the reserve for loan and lease losses, segregated by class, for the three months ended ~~March 31,~~September 30, 2020 and 2019.


(Dollars in thousands)	(Dollars in thousands)	Commercial and agricultural loans		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer loans		Total		(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
March 31, 2020
September 30, 2020																				September 30, 2020
Balance, beginning of period	Balance, beginning of period	$	23,671	$	14,400	$	4,612	$	31,058	$	14,120	$	18,350	$	3,609	$	1,434	$	111,254	Balance, beginning of period	$	29,007	$	17,371	$	4,649	$	31,101	$	23,872	$	19,936	$	3,821	$	1,526	$	131,283
Charge-offs	Charge-offs	529		34		—		586		1,432		1		13		243		2,838		Charge-offs	182		4,382		0		0		21		36		61		210		4,892
Recoveries	Recoveries	166		82		—		448		211		15		27		80		1,029		Recoveries	231		263		0		191		347		15		1		75		1,123
Net charge-offs (recoveries)	Net charge-offs (recoveries)	363		(48)		—		138		1,221		(14)		(14)		163		1,809		Net charge-offs (recoveries)	(49)		4,119		0		(191)		(326)		21		60		135		3,769
Provision (recovery of provision)	Provision (recovery of provision)	(129)		1,023		(256)		(851)		9,794		1,224		285		263		11,353		Provision (recovery of provision)	(3,986)		11,997		(192)		953		(1,395)		1,834		(29)		121		9,303
Balance, end of period	Balance, end of period	$	23,179	$	15,471	$	4,356	$	30,069	$	22,693	$	19,588	$	3,908	$	1,534	$	120,798	Balance, end of period	$	25,070	$	25,249	$	4,457	$	32,245	$	22,803	$	21,749	$	3,732	$	1,512	$	136,817

March 31, 2019
September 30, 2019																				September 30, 2019
Balance, beginning of period	Balance, beginning of period	$	17,063	$	14,689	$	4,303	$	33,047	$	10,922	$	15,705	$	3,425	$	1,315	$	100,469	Balance, beginning of period	$	19,052	$	16,341	$	4,671	$	31,918	$	12,284	$	15,757	$	3,518	$	1,370	$	104,911
Charge-offs	Charge-offs	79		409		—		3,000		195		—		21		250		3,954		Charge-offs	83		61		0		65		19		0		4		705		937
Recoveries	Recoveries	34		9		—		185		104		9		3		75		419		Recoveries	438		57		0		614		17		6		40		78		1,250
Net charge-offs (recoveries)	Net charge-offs (recoveries)	45		400		—		2,815		91		(9)		18		175		3,535		Net charge-offs (recoveries)	(355)		4		0		(549)		2		(6)		(36)		627		(313)
Provision (recovery of provision)	Provision (recovery of provision)	1,289		(30)		106		3,208		52		120		(21)		194		4,918		Provision (recovery of provision)	2,823		(610)		(87)		(429)		370		970		12		668		3,717
Balance, end of period	Balance, end of period	$	18,307	$	14,259	$	4,409	$	33,440	$	10,883	$	15,834	$	3,386	$	1,334	$	101,852	Balance, end of period	$	22,230	$	15,727	$	4,584	$	32,038	$	12,652	$	16,733	$	3,566	$	1,411	$	108,941

The following table shows the changes in the reserve for loan and lease losses, segregated by class, for the nine months ended September 30, 2020 and 2019.


(Dollars in thousands)	Commercial and agricultural loans		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer loans		Total
September 30, 2020
Balance, beginning of period	$	23,671	$	14,400	$	4,612	$	31,058	$	14,120	$	18,350	$	3,609	$	1,434	$	111,254
Charge-offs	753		4,416		0		840		1,582		37		74		640		8,342
Recoveries	533		403		0		694		937		43		31		233		2,874
Net charge-offs (recoveries)	220		4,013		0		146		645		(6)		43		407		5,468
Provision (recovery of provision)	1,619		14,862		(155)		1,333		9,328		3,393		166		485		31,031
Balance, end of period	$	25,070	$	25,249	$	4,457	$	32,245	$	22,803	$	21,749	$	3,732	$	1,512	$	136,817

September 30, 2019
Balance, beginning of period	$	17,063	$	14,689	$	4,303	$	33,047	$	10,922	$	15,705	$	3,425	$	1,315	$	100,469
Charge-offs	171		527		1,132		3,066		215		0		25		1,268		6,404
Recoveries	500		86		0		916		136		66		46		244		1,994
Net charge-offs (recoveries)	(329)		441		1,132		2,150		79		(66)		(21)		1,024		4,410
Provision (recovery of provision)	4,838		1,479		1,413		1,141		1,809		962		120		1,120		12,882
Balance, end of period	$	22,230	$	15,727	$	4,584	$	32,038	$	12,652	$	16,733	$	3,566	$	1,411	$	108,941

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The following table shows the reserve for loan and lease losses and recorded investment in loans and leases, segregated by class, separated between individually and collectively evaluated for impairment as of ~~March 31,~~September 30, 2020 and December 31, 2019.


(Dollars in thousands)	(Dollars in thousands)	Commercial and agricultural loans		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer loans		Total		(Dollars in thousands)	Commercial and agricultural loans		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer loans		Total
March 31, 2020
September 30, 2020																				September 30, 2020
Reserve for loan and lease losses	Reserve for loan and lease losses																			Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	Ending balance, individually evaluated for impairment	$	711	$	73	$	—	$	—	$	8,318	$	—	$	115	$	—	$	9,217	Ending balance, individually evaluated for impairment	$	1,554	$	7,517	$	34	$	0	$	7,966	$	0	$	111	$	0	$	17,182
Ending balance, collectively evaluated for impairment	Ending balance, collectively evaluated for impairment	22,468		15,398		4,356		30,069		14,375		19,588		3,793		1,534		111,581		Ending balance, collectively evaluated for impairment	23,516		17,732		4,423		32,245		14,837		21,749		3,621		1,512		119,635
Total reserve for loan and lease losses	Total reserve for loan and lease losses	$	23,179	$	15,471	$	4,356	$	30,069	$	22,693	$	19,588	$	3,908	$	1,534	$	120,798	Total reserve for loan and lease losses	$	25,070	$	25,249	$	4,457	$	32,245	$	22,803	$	21,749	$	3,732	$	1,512	$	136,817

Recorded investment in loans	Recorded investment in loans																			Recorded investment in loans
Ending balance, individually evaluated for impairment	Ending balance, individually evaluated for impairment	$	2,886	$	658	$	1,008	$	1,965	$	15,398	$	1,209	$	335	$	—	$	23,459	Ending balance, individually evaluated for impairment	$	7,415	$	37,074	$	944	$	1,953	$	18,222	$	1,354	$	331	$	0	$	67,293
Ending balance, collectively evaluated for impairment	Ending balance, collectively evaluated for impairment	1,163,576		577,099		277,068		771,167		702,909		929,548		545,271		139,417		5,106,055		Ending balance, collectively evaluated for impairment	1,674,104		490,508		270,304		804,209		705,374		960,196		519,550		135,498		5,559,743
Total recorded investment in loans	Total recorded investment in loans	$	1,166,462	$	577,757	$	278,076	$	773,132	$	718,307	$	930,757	$	545,606	$	139,417	$	5,129,514	Total recorded investment in loans	$	1,681,519	$	527,582	$	271,248	$	806,162	$	723,596	$	961,550	$	519,881	$	135,498	$	5,627,036

December 31, 2019	December 31, 2019																			December 31, 2019
Reserve for loan and lease losses	Reserve for loan and lease losses																			Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	Ending balance, individually evaluated for impairment	$	3,003	$	30	$	—	$	—	$	75	$	—	$	117	$	—	$	3,225	Ending balance, individually evaluated for impairment	$	3,003	$	30	$	0	$	0	$	75	$	0	$	117	$	0	$	3,225
Ending balance, collectively evaluated for impairment	Ending balance, collectively evaluated for impairment	20,668		14,370		4,612		31,058		14,045		18,350		3,492		1,434		108,029		Ending balance, collectively evaluated for impairment	20,668		14,370		4,612		31,058		14,045		18,350		3,492		1,434		108,029
Total reserve for loan and lease losses	Total reserve for loan and lease losses	$	23,671	$	14,400	$	4,612	$	31,058	$	14,120	$	18,350	$	3,609	$	1,434	$	111,254	Total reserve for loan and lease losses	$	23,671	$	14,400	$	4,612	$	31,058	$	14,120	$	18,350	$	3,609	$	1,434	$	111,254

Recorded investment in loans	Recorded investment in loans																			Recorded investment in loans
Ending balance, individually evaluated for impairment	Ending balance, individually evaluated for impairment	$	10,584	$	1,131	$	1,074	$	875	$	1,351	$	1,487	$	337	$	—	$	16,839	Ending balance, individually evaluated for impairment	$	10,584	$	1,131	$	1,074	$	875	$	1,351	$	1,487	$	337	$	0	$	16,839
Ending balance, collectively evaluated for impairment	Ending balance, collectively evaluated for impairment	1,122,207		587,676		293,750		783,165		704,100		906,690		531,666		139,434		5,068,688		Ending balance, collectively evaluated for impairment	1,122,207		587,676		293,750		783,165		704,100		906,690		531,666		139,434		5,068,688
Total recorded investment in loans	Total recorded investment in loans	$	1,132,791	$	588,807	$	294,824	$	784,040	$	705,451	$	908,177	$	532,003	$	139,434	$	5,085,527	Total recorded investment in loans	$	1,132,791	$	588,807	$	294,824	$	784,040	$	705,451	$	908,177	$	532,003	$	139,434	$	5,085,527

Note 6 — Lease Investments

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 interest income recognized from direct finance lease payments and operating lease equipment rental income and related depreciation expense.


		Three Months Ended March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		(Dollars in thousands)	2020		2019		2020		2019
Direct finance leases:	Direct finance leases:					Direct finance leases:
Interest income on lease receivable	Interest income on lease receivable	$	2,333	$	2,778	Interest income on lease receivable	$	1,880	$	2,280	$	6,310	$	8,699

Operating leases:	Operating leases:					Operating leases:
Income related to lease payments	Income related to lease payments	$	6,630	$	7,982	Income related to lease payments	$	5,593	$	7,578	$	18,213	$	23,369
Depreciation expense	Depreciation expense	5,427		6,524		Depreciation expense	4,694		6,198		15,263		19,122

Income related to reimbursements from lessees for personal property tax on operating leased equipment for the three months ended ~~March 31,~~September 30, 2020 and 2019 was ~~$0.25~~$0.02 million and ~~$0.24~~$0.15 million, respectively and for the nine months ended September 30, 2020 and 2019 was $0.44 million and $0.50 million, respectively. Expense related to personal property tax payments on operating leased equipment for the three months ended ~~March 31,~~September 30, 2020 and 2019 was ~~$0.25~~$0.02 million and ~~$0.24~~$0.15 million, respectively and for the nine months ended September 30, 2020 and 2019 was $0.44 million and $0.50 million, respectively.

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Note 7 — Mortgage Servicing Rights

The Company recognizes the rights to service residential 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. The unpaid principal balance of residential mortgage loans serviced for third parties was ~~$745.39~~$808.14 million and $740.91 million at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.

Mortgage servicing rights (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.

The following table shows changes in the carrying value of MSRs and the associated valuation allowance.


		Three Months Ended March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		(Dollars in thousands)	2020		2019		2020		2019
Mortgage servicing rights:	Mortgage servicing rights:					Mortgage servicing rights:
Balance at beginning of period	Balance at beginning of period	$	4,200	$	4,283	Balance at beginning of period	$	4,294	$	4,141	$	4,200	$	4,283
Additions	Additions	362		197		Additions	897		318		2,094		703
Amortization	Amortization	(409)		(233)		Amortization	(654)		(352)		(1,757)		(879)
Sales	Sales	—		—		Sales	0		0		0		0
Carrying value before valuation allowance at end of period	Carrying value before valuation allowance at end of period	4,153		4,247		Carrying value before valuation allowance at end of period	4,537		4,107		4,537		4,107
Valuation allowance:	Valuation allowance:					Valuation allowance:
Balance at beginning of period	Balance at beginning of period	—		—		Balance at beginning of period	(546)		0		0		0
Impairment recoveries		—		—
Impairment charges						Impairment charges	(262)		0		(808)		0
Balance at end of period	Balance at end of period	$	—	$	—	Balance at end of period	$	(808)	$	0	$	(808)	$	0
Net carrying value of mortgage servicing rights at end of period	Net carrying value of mortgage servicing rights at end of period	$	4,153	$	4,247	Net carrying value of mortgage servicing rights at end of period	$	3,729	$	4,107	$	3,729	$	4,107
Fair value of mortgage servicing rights at end of period	Fair value of mortgage servicing rights at end of period	$	4,538	$	6,677	Fair value of mortgage servicing rights at end of period	$	4,000	$	5,722	$	4,000	$	5,722

At ~~March 31,~~September 30, 2020 and 2019, the fair value of MSRs exceeded the carrying value reported in the Consolidated Statements of Financial Condition by ~~$0.39~~$0.27 million and ~~$2.43~~$1.62 million, respectively. This difference represents increases in the fair value of certain MSRs that could not be recorded above cost basis.

Mortgage loan contractual servicing fees, including late fees and ancillary income, were ~~$0.69~~$0.81 million and ~~$0.62~~$0.68 million for the three months ended ~~March 31,~~September 30, 2020 and 2019, respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were $2.31 million and $1.93 million for the nine months ended September 30, 2020 and 2019, respectively. Mortgage loan contractual servicing fees are included in Mortgage Banking on the Consolidated Statements of Income.

Note 8 — Commitments and Financial Instruments with Off-Balance-Sheet Risk

Financial Instruments with Off-Balance-Sheet Risk — 1st Source and its subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business. These off-balance-sheet financial instruments include commitments to originate and sell loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.

The following table shows financial instruments whose contract amounts represent credit risk.


(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2020		December 31, 2019
Amounts of commitments:	Amounts of commitments:					Amounts of commitments:
Loan commitments to extend credit	Loan commitments to extend credit	$	1,053,202	$	1,095,054	Loan commitments to extend credit	$	1,121,554	$	1,095,054
Standby letters of credit	Standby letters of credit	$	26,148	$	27,549	Standby letters of credit	$	25,231	$	27,549
Commercial and similar letters of credit	Commercial and similar letters of credit	$	3,207	$	2,332	Commercial and similar letters of credit	$	3,526	$	2,332

The 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.

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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. 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.

Standby letters of credit are conditional commitments that guarantee the performance of a client to a third party. The credit risk involved in and collateral obtained when issuing standby letters of credit is essentially the same as that 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 9 — 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 8 for further information.

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 institutions 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.


				Asset derivatives				Liability derivatives								Asset derivatives			Liability derivatives
(Dollars in thousands)	(Dollars in thousands)	Notional or contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification	Fair value		(Dollars in thousands)	Notional or contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification	Fair value
March 31, 2020
September 30, 2020										September 30, 2020
Interest rate swap contracts	Interest rate swap contracts	$	1,073,560	Other assets	$	52,485	Other liabilities	$	53,382	Interest rate swap contracts	$	1,139,493	Other assets	$	53,027	Other liabilities	$	53,988
Loan commitments	Loan commitments	73,794		Mortgages held for sale	1,381		N/A	—		Loan commitments	51,834		Mortgages held for sale	2,477		N/A	0
Forward contracts - mortgage loan	Forward contracts - mortgage loan	29,637		N/A	—		Mortgages held for sale	358		Forward contracts - mortgage loan	57,187		N/A	0		Mortgages held for sale	75
Total	Total	$	1,176,991		$	53,866		$	53,740	Total	$	1,248,514		$	55,504		$	54,063

December 31, 2019	December 31, 2019									December 31, 2019
Interest rate swap contracts	Interest rate swap contracts	$	1,074,809	Other assets	$	21,975	Other liabilities	$	22,352	Interest rate swap contracts	$	1,074,809	Other assets	$	21,975	Other liabilities	$	22,352
Loan commitments	Loan commitments	9,950		Mortgages held for sale	185		N/A	—		Loan commitments	9,950		Mortgages held for sale	185		N/A	0
Forward contracts - mortgage loan	Forward contracts - mortgage loan	23,632		N/A	—		Mortgages held for sale	38		Forward contracts - mortgage loan	23,632		N/A	0		Mortgages held for sale	38
Total	Total	$	1,108,391		$	22,160		$	22,390	Total	$	1,108,391		$	22,160		$	22,390

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The following table shows the amounts included in the Consolidated Statements of Income for non-hedging derivative financial instruments.


			Gain (loss)											Gain (loss)
				Three Months Ended March 31,								Three Months Ended September 30,							Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)	Statement of Income classification		2020		2019		(Dollars in thousands)	Statement of Income classification	2020		2019			2020		2019
Interest rate swap contracts	Interest rate swap contracts	Other expense		$	(519)	$	(57)	Interest rate swap contracts	Other expense	$	50	$	(129)		$	(583)	$	(378)
Interest rate swap contracts	Interest rate swap contracts	Other income		91		279		Interest rate swap contracts	Other income	23		272			560		1,056
Loan commitments	Loan commitments	Mortgage banking		1,196		77		Loan commitments	Mortgage banking	1,406		(6)			2,292		86
Forward contracts - mortgage loan	Forward contracts - mortgage loan	Mortgage banking		(320)		10		Forward contracts - mortgage loan	Mortgage banking	26		157			(37)		118
Total	Total			$	448	$	309	Total		$	1,505	$	294		$	2,232	$	882

The following table shows the offsetting of financial assets and derivative assets.


								Gross Amounts Not Offset in the Statement of Financial Condition															Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	(Dollars in thousands)	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		(Dollars in thousands)	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
March 31, 2020
September 30, 2020														September 30, 2020
Interest rate swaps	Interest rate swaps	$	53,595	$	1,110	$	52,485	$	—	$	—	$	52,485	Interest rate swaps	$	57,457	$	4,430	$	53,027	$	0	$	0	$	53,027

December 31, 2019	December 31, 2019													December 31, 2019
Interest rate swaps	Interest rate swaps	$	22,279	$	304	$	21,975	$	—	$	—	$	21,975	Interest rate swaps	$	22,279	$	304	$	21,975	$	0	$	0	$	21,975

The following table shows the offsetting of financial liabilities and derivative liabilities.


								Gross Amounts Not Offset in the Statement of Financial Condition															Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	(Dollars in thousands)	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		(Dollars in thousands)	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
March 31, 2020
September 30, 2020														September 30, 2020
Interest rate swaps	Interest rate swaps	$	54,492	$	1,110	$	53,382	$	53,114	$	—	$	268	Interest rate swaps	$	58,418	$	4,430	$	53,988	$	53,891	$	0	$	97
Repurchase agreements	Repurchase agreements	135,942		—		135,942		135,942		—		—		Repurchase agreements	158,834		—		158,834		158,834		—		—
Total	Total	$	190,434	$	1,110	$	189,324	$	189,056	$	—	$	268	Total	$	217,252	$	4,430	$	212,822	$	212,725	$	0	$	97

December 31, 2019	December 31, 2019													December 31, 2019
Interest rate swaps	Interest rate swaps	$	22,656	$	304	$	22,352	$	23,482	$	—	$	(1,130)	Interest rate swaps	$	22,656	$	304	$	22,352	$	23,482	$	0	$	(1,130)
Repurchase agreements	Repurchase agreements	120,459		—		120,459		120,459		—		—		Repurchase agreements	120,459		—		120,459		120,459		—		—
Total	Total	$	143,115	$	304	$	142,811	$	143,941	$	—	$	(1,130)	Total	$	143,115	$	304	$	142,811	$	143,941	$	0	$	(1,130)

If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions. At ~~March 31,~~September 30, 2020 and December 31, 2019, repurchase agreements had a remaining contractual maturity of ~~$133.79~~$157.83 million and $119.45 million in overnight and ~~$2.15~~$1.00 million and $1.01 million in up to 30 days, respectively and were collateralized by U.S. Treasury and Federal agencies securities.

Note 10 — Variable Interest Entities

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.

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•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.

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 income tax credits related to its affordable housing and community development tax-advantaged investments in tax expense of $0.43 million and $0.35 million for the three months ended ~~March 31,~~September 30, 2020 and 2019, respectively and $1.29 million and $1.05 million for the nine months ended September 30, 2020 and 2019, respectively. The Company also recognized ~~$2.24~~$0.00 million and ~~$1.60~~$3.53 million of investment tax credits for the three months ended ~~March 31,~~September 30, 2020 and 2019, respectively and $7.84 million and $9.08 million for the nine months ended September 30, 2020 and 2019, 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 Company’s 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.


(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2020		December 31, 2019
Investment carrying amount	Investment carrying amount	$	18,075	$	19,843	Investment carrying amount	$	47,719	$	19,843
Unfunded capital and other commitments	Unfunded capital and other commitments	11,969		17,420		Unfunded capital and other commitments	41,409		17,420
Maximum exposure to loss	Maximum exposure to loss	41,269		37,904		Maximum exposure to loss	43,329		37,904

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 third parties. At ~~March 31,~~September 30, 2020 and December 31, 2019, approximately ~~$53.10~~$52.55 million and $41.24 million of the Company’s assets and ~~$23.83~~$11.17 million and $18.68 million of its liabilities included on the Consolidated Statements of Financial Condition were related to tax-advantaged investment VIEs which the Company has consolidated, respectively. The assets of the consolidated VIEs 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 1 trust, 1st Source Master Trust (Capital Trust) of which 100% of the common equity is owned by the Company. The Capital Trust was formed in 2007 for the purpose of issuing corporation-obligated mandatorily redeemable capital securities (the capital securities) to third-party investors and investing the proceeds from the sale of the capital securities solely in junior subordinated debenture securities of the Company (the subordinated notes). The subordinated notes held by the Capital Trust are the sole assets of the Capital Trust. The Capital Trust qualifies as a variable interest entity for which the Company is not the primary beneficiary and therefore reported in the financial statements as an unconsolidated subsidiary. The junior subordinated debentures are reflected as subordinated notes in the Statements of Financial Condition with the corresponding interest distributions reflected as Interest Expense in the Statements of Income. The common shares issued by the Capital Trust are included in Other Assets in the Statements of Financial Condition.

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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 ~~March 31,~~September 30, 2020.


(Dollars in thousands)	(Dollars in thousands)	Amount of Subordinated Notes		Interest Rate		Maturity Date	(Dollars in thousands)	Amount of Subordinated Notes		Interest Rate		Maturity Date
June 2007 issuance (1)	June 2007 issuance (1)	$	41,238	7.22	%	6/15/2037	June 2007 issuance (1)	$	41,238	7.22	%	6/15/2037
August 2007 issuance (2)	August 2007 issuance (2)	17,526		2.22	%	9/15/2037	August 2007 issuance (2)	17,526		1.73	%	9/15/2037
Total	Total	$	58,764				Total	$	58,764

(1) Fixed rate through life of debt.

(2) 3-Month LIBOR +1.48% through remaining life of debt.

Note 11 — Earnings Per Share

Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards. Non-vested restricted stock awards are considered participating securities to the extent the holders of these securities receive non-forfeitable dividends at the same rate as holders of common stock. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

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. There were 0 stock options outstanding as of ~~March 31,~~September 30, 2020 and 2019.

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share.


		Three Months Ended March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands - except per share amounts)	(Dollars in thousands - except per share amounts)	2020		2019		(Dollars in thousands - except per share amounts)	2020		2019		2020		2019
Distributed earnings allocated to common stock	Distributed earnings allocated to common stock	$	7,399	$	6,966	Distributed earnings allocated to common stock	$	7,166	$	6,895	$	21,714	$	20,791
Undistributed earnings allocated to common stock	Undistributed earnings allocated to common stock	8,941		15,102		Undistributed earnings allocated to common stock	12,755		17,402		32,941		48,827
Net earnings allocated to common stock	Net earnings allocated to common stock	16,340		22,068		Net earnings allocated to common stock	19,921		24,297		54,655		69,618
Net earnings allocated to participating securities	Net earnings allocated to participating securities	73		128		Net earnings allocated to participating securities	137		141		318		401
Net income allocated to common stock and participating securities	Net income allocated to common stock and participating securities	$	16,413	$	22,196	Net income allocated to common stock and participating securities	$	20,058	$	24,438	$	54,973	$	70,019

Weighted average shares outstanding for basic earnings per common share	Weighted average shares outstanding for basic earnings per common share	25,523,356		25,759,186		Weighted average shares outstanding for basic earnings per common share	25,552,374		25,520,035		25,538,910		25,630,771
Dilutive effect of stock compensation	Dilutive effect of stock compensation	—		—		Dilutive effect of stock compensation	0		0		0		0
Weighted average shares outstanding for diluted earnings per common share	Weighted average shares outstanding for diluted earnings per common share	25,523,356		25,759,186		Weighted average shares outstanding for diluted earnings per common share	25,552,374		25,520,035		25,538,910		25,630,771

Basic earnings per common share	Basic earnings per common share	$	0.64	$	0.86	Basic earnings per common share	$	0.78	$	0.95	$	2.14	$	2.72
Diluted earnings per common share	Diluted earnings per common share	$	0.64	$	0.86	Diluted earnings per common share	$	0.78	$	0.95	$	2.14	$	2.72

Note 12 — Stock Based Compensation

As of ~~March 31,~~September��30, 2020, the Company had 4 active stock-based employee compensation plans, which are more fully described in Note 16 of the Consolidated Financial Statements in 1st Source’s Annual Report on Form 10-K for the year ended December 31, 2019. These plans include 3 executive stock award plans, the Executive Incentive Plan, the Restricted Stock Award Plan, the Strategic Deployment Incentive Plan; and the Employee Stock Purchase Plan. The 2011 Stock Option Plan was approved by the shareholders on April 21, 2011 but the Company had not made any grants through ~~March 31,~~September 30, 2020.

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Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value. For all awards except stock option awards, the grant date fair value is either the fair market value per share or book value per share (corresponding to the type of stock awarded) as of the grant date. For stock option awards, the grant date fair value is estimated using the Black-Scholes option pricing model. For all awards, the Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, for which the Company uses the related vesting term.

Total fair value of options vested and expensed was 0 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019. As of ~~March 31,~~September 30, 2020 and 2019 there were 0 outstanding stock options. There were 0 stock options exercised during the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019. All shares issued in connection with stock option exercises are issued from available treasury stock.

As of ~~March 31,~~September 30, 2020, there was ~~$8.12~~$8.21 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of ~~3.73~~3.60 years.

Note 13 — Accumulated Other Comprehensive Income (Loss)

The following table presents reclassifications out of accumulated other comprehensive income (loss) related to unrealized gains and losses on available-for-sale securities.


		Three Months Ended March 31,						Affected Line Item in the Statements of Income				Three Months Ended September 30,									Nine Months Ended September 30,		Affected Line Item in the Statements of Income
(Dollars in thousands)	(Dollars in thousands)	2020		2019			Affected Line Item in the Statements of Income				2020			2019			2020			2019		Affected Line Item in the Statements of Income
Realized gains included in net income	Realized gains included in net income	$	280	$	—	Gains on investment securities available-for-sale			$	0		$	0		$	279		$	0		Gains on investment securities available-for-sale
		280		—		Income before income taxes			0			0			279			0			Income before income taxes
Tax effect	Tax effect	(67)		—		Income tax expense	Tax effect		0			0			(65)			0			Income tax expense
Net of tax	Net of tax	$	213	$	—	Net income	Net of tax		$	0		$	0		$	214		$	0		Net income

Note 14 — Income Taxes

The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was 0 at ~~March 31,~~September 30, 2020 and December 31, 2019. Interest and penalties are recognized through the income tax provision. For the three and nine months ended ~~March 31,~~September 30, 2020 and 2019, the Company recognized 0 interest or penalties. There were 0 accrued interest and penalties at ~~March 31,~~September 30, 2020 and December 31, 2019.

Tax years that remain open and subject to audit include the federal 2016-2019 years and the Indiana 2016-2019 years. The Company does not anticipate a significant change in the amount of uncertain tax positions within the next 12 months.

Note 15 — 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. 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 is 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.

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A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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 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 derivatives or best-best efforts forward sales commitments. At ~~March 31,~~September 30, 2020 and December 31, 2019, all mortgages held for sale were carried at fair value.

The following table shows the differences between the 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.


(Dollars in thousands)	(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Excess of fair value carrying amount over (under) unpaid principal			(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Excess of fair value carrying amount over (under) unpaid principal
March 31, 2020
September 30, 2020									September 30, 2020
Mortgages held for sale reported at fair value	Mortgages held for sale reported at fair value	$	13,449	$	12,094	$	1,355	(1)	Mortgages held for sale reported at fair value	$	20,990	$	17,618	$	3,372	(1)

December 31, 2019	December 31, 2019								December 31, 2019
Mortgages held for sale reported at fair value	Mortgages held for sale reported at fair value	$	20,277	$	19,890	$	387	(1)	Mortgages held for sale reported at fair value	$	20,277	$	19,890	$	387	(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.

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•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 includes 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)	(Dollars in thousands)	Level 1		Level 2		Level 3		Total		(Dollars in thousands)	Level 1		Level 2		Level 3		Total
March 31, 2020
September 30, 2020										September 30, 2020
Assets:	Assets:									Assets:
Investment securities available-for-sale:	Investment securities available-for-sale:									Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities	U.S. Treasury and Federal agencies securities	$	82,813	$	454,608	$	—	$	537,421	U.S. Treasury and Federal agencies securities	$	76,298	$	491,710	$	0	$	568,008
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	—		75,719		5,295		81,014		U.S. States and political subdivisions securities	0		65,468		3,265		68,733
Mortgage-backed securities — Federal agencies	Mortgage-backed securities — Federal agencies	—		392,309		—		392,309		Mortgage-backed securities — Federal agencies	0		403,490		0		403,490
Corporate debt securities	Corporate debt securities	—		45,725		—		45,725		Corporate debt securities	0		42,496		0		42,496
Foreign government and other securities	Foreign government and other securities	—		700		—		700		Foreign government and other securities	0		700		0		700
Total debt securities available-for-sale	Total debt securities available-for-sale	82,813		969,061		5,295		1,057,169		Total debt securities available-for-sale	76,298		1,003,864		3,265		1,083,427

Mortgages held for sale	Mortgages held for sale	—		13,449		—		13,449		Mortgages held for sale	0		20,990		0		20,990
Accrued income and other assets (interest rate swap agreements)	Accrued income and other assets (interest rate swap agreements)	—		52,485		—		52,485		Accrued income and other assets (interest rate swap agreements)	0		53,027		0		53,027
Total	Total	$	82,813	$	1,034,995	$	5,295	$	1,123,103	Total	$	76,298	$	1,077,881	$	3,265	$	1,157,444

Liabilities:	Liabilities:									Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	Accrued expenses and other liabilities (interest rate swap agreements)	$	—	$	53,382	$	—	$	53,382	Accrued expenses and other liabilities (interest rate swap agreements)	$	0	$	53,988	$	0	$	53,988
Total	Total	$	—	$	53,382	$	—	$	53,382	Total	$	0	$	53,988	$	0	$	53,988

December 31, 2019	December 31, 2019									December 31, 2019
Assets:	Assets:									Assets:
Investment securities available-for-sale:	Investment securities available-for-sale:									Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities	U.S. Treasury and Federal agencies securities	$	80,393	$	446,571	$	—	$	526,964	U.S. Treasury and Federal agencies securities	$	80,393	$	446,571	$	0	$	526,964
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	—		82,213		2,292		84,505		U.S. States and political subdivisions securities	0		82,213		2,292		84,505
Mortgage-backed securities — Federal agencies	Mortgage-backed securities — Federal agencies	—		375,389		—		375,389		Mortgage-backed securities — Federal agencies	0		375,389		0		375,389
Corporate debt securities	Corporate debt securities	—		53,025		—		53,025		Corporate debt securities	0		53,025		0		53,025
Foreign government and other securities	Foreign government and other securities	—		700		—		700		Foreign government and other securities	0		700		0		700
Total debt securities available-for-sale	Total debt securities available-for-sale	80,393		957,898		2,292		1,040,583		Total debt securities available-for-sale	80,393		957,898		2,292		1,040,583

Mortgages held for sale	Mortgages held for sale	—		20,277		—		20,277		Mortgages held for sale	0		20,277		0		20,277
Accrued income and other assets (interest rate swap agreements)	Accrued income and other assets (interest rate swap agreements)	—		21,975		—		21,975		Accrued income and other assets (interest rate swap agreements)	0		21,975		0		21,975
Total	Total	$	80,393	$	1,000,150	$	2,292	$	1,082,835	Total	$	80,393	$	1,000,150	$	2,292	$	1,082,835

Liabilities:	Liabilities:									Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	Accrued expenses and other liabilities (interest rate swap agreements)	$	—	$	22,352	$	—	$	22,352	Accrued expenses and other liabilities (interest rate swap agreements)	$	0	$	22,352	$	0	$	22,352
Total	Total	$	—	$	22,352	$	—	$	22,352	Total	$	0	$	22,352	$	0	$	22,352

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The following table shows changes in Level 3 assets measured at fair value on a recurring basis for the quarter ended ~~March 31,~~September 30, 2020 and 2019.

(Dollars in thousands)

U.S. States and
political
subdivisions
securities

Beginning balance ~~January~~July 1, 2020

~~2,292~~3,179

Total gains or losses (realized/unrealized):

Included in earnings

—0

Included in other comprehensive income

~~(17)~~166

Purchases

~~3,100~~0

Issuances

—0

Sales

—0

Settlements

—0

Maturities

(80)

Transfers into Level 3

—0

Transfers out of Level 3

—0

Ending balance ~~March 31,~~September 30, 2020

~~5,295~~3,265

Beginning balance ~~January~~July 1, 2019

~~1,025~~5,061

Total gains or losses (realized/unrealized):

Included in earnings

—0

Included in other comprehensive income

19 (12)

Purchases

~~4,100~~0

Issuances

—0

Sales

—0

Settlements

—0

Maturities

(80)

Transfers into Level 3

—0

Transfers out of Level 3

—0

Ending balance ~~March 31,~~September 30, 2019

~~5,064~~4,969

There were 0 gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at ~~March 31,~~September 30, 2020 or 2019.

The following table shows the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring basis.

(Dollars in thousands)

Fair Value

Valuation Methodology

Unobservable Inputs

Range of Inputs

Weighted Average

(Dollars in thousands)

Fair Value

Valuation Methodology

Unobservable Inputs

Range of Inputs

Weighted Average

March 31, 2020

September 30, 2020

Debt securities available-for sale

Direct placement municipal securities

5,295

Discounted cash flows

Credit spread assumption

0.95% - 3.24%

1.69

Direct placement municipal securities

3,265

Discounted cash flows

Credit spread assumption

1.12% - 2.52%

1.47

December 31, 2019

Debt securities available-for sale

Direct placement municipal securities

2,292

Discounted cash flows

Credit spread assumption

0.12% - 2.85%

Direct placement municipal securities

2,292

Discounted cash flows

Credit spread assumption

0.12% - 2.85%

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.

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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 gains 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% 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 quarter ended ~~March 31,~~September 30, 2020: impaired loans - ~~$1.28~~$3.80 million; mortgage servicing rights - ~~$0.00~~$0.26 million; repossessions - ~~$0.29~~$0.65 million; and other real estate - $0.00 million.

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The following table shows the carrying value of assets measured at fair value on a non-recurring basis.


(Dollars in thousands)	(Dollars in thousands)	Level 1		Level 2		Level 3		Total		(Dollars in thousands)	Level 1		Level 2		Level 3		Total
March 31, 2020
September 30, 2020										September 30, 2020
Impaired loans - collateral based	Impaired loans - collateral based	$	—	$	—	$	8,639	$	8,639	Impaired loans - collateral based	$	—	$	—	$	19,802	$	19,802
Accrued income and other assets (mortgage servicing rights)	Accrued income and other assets (mortgage servicing rights)	—		—		4,153		4,153		Accrued income and other assets (mortgage servicing rights)	—		—		3,729		3,729
Accrued income and other assets (repossessions)	Accrued income and other assets (repossessions)	—		—		9,020		9,020		Accrued income and other assets (repossessions)	—		—		4,639		4,639
Accrued income and other assets (other real estate)	Accrued income and other assets (other real estate)	—		—		362		362		Accrued income and other assets (other real estate)	—		—		303		303
Total	Total	$	—	$	—	$	22,174	$	22,174	Total	$	—	$	—	$	28,473	$	28,473

December 31, 2019	December 31, 2019									December 31, 2019
Impaired loans - collateral based	Impaired loans - collateral based	$	—	$	—	$	8,492	$	8,492	Impaired loans - collateral based	$	—	$	—	$	8,492	$	8,492
Accrued income and other assets (mortgage servicing rights)	Accrued income and other assets (mortgage servicing rights)	—		—		4,200		4,200		Accrued income and other assets (mortgage servicing rights)	—		—		4,200		4,200
Accrued income and other assets (repossessions)	Accrued income and other assets (repossessions)	—		—		8,623		8,623		Accrued income and other assets (repossessions)	—		—		8,623		8,623
Accrued income and other assets (other real estate)	Accrued income and other assets (other real estate)	—		—		522		522		Accrued income and other assets (other real estate)	—		—		522		522
Total	Total	$	—	$	—	$	21,837	$	21,837	Total	$	—	$	—	$	21,837	$	21,837

The following table below 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)	(Dollars in thousands)	Carrying Value		Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs	Weighted Average		(Dollars in thousands)	Carrying Value		Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs	Weighted Average
March 31, 2020
September 30, 2020											September 30, 2020
Impaired loans	Impaired loans	$	8,639	$	8,639	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	10% - 60%	22	%	Impaired loans	$	19,802	$	19,802	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	0% - 90%	28	%

Mortgage servicing rights	Mortgage servicing rights	4,153		4,538		Discounted cash flows	Constant prepayment rate (CPR)	13.3% - 23.9%	17.6	%	Mortgage servicing rights	3,729		4,000		Discounted cash flows	Constant prepayment rate (CPR)	15.3% - 24.7%	21.7	%
							Discount rate	9.0% - 11.9%	9.3	%							Discount rate	8.4% - 11.2%	8.6	%

Repossessions	Repossessions	9,020		9,508		Appraisals, trade publications and auction values	Discount for lack of marketability	3% - 19%	5	%	Repossessions	4,639		4,898		Appraisals, trade publications and auction values	Discount for lack of marketability	3% - 16%	5	%

Other real estate	Other real estate	362		383		Appraisals	Discount for lack of marketability	0% - 6%	5	%	Other real estate	303		324		Appraisals	Discount for lack of marketability	0% - 6%	6	%

December 31, 2019	December 31, 2019										December 31, 2019
Impaired loans	Impaired loans	$	8,492	$	8,492	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	0% - 90%			Impaired loans	$	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	Mortgage servicing rights	4,200		5,986		Discounted cash flows	Constant prepayment rate (CPR)	10.2% - 28.1%			Mortgage servicing rights	4,200		5,986		Discounted cash flows	Constant prepayment rate (CPR)	10.2% - 28.1%
							Discount rate	9.3% - 12.1%									Discount rate	9.3% - 12.1%

Repossessions	Repossessions	8,623		9,211		Appraisals, trade publications and auction values	Discount for lack of marketability	3% - 25%			Repossessions	8,623		9,211		Appraisals, trade publications and auction values	Discount for lack of marketability	3% - 25%

Other real estate	Other real estate	522		564		Appraisals	Discount for lack of marketability	0% - 11%			Other real estate	522		564		Appraisals	Discount for lack of marketability	0% - 11%

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.

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The following table shows the fair values of the Company’s financial instruments.


(Dollars in thousands)	(Dollars in thousands)	Carrying or Contract Value		Fair Value		Level 1		Level 2		Level 3		(Dollars in thousands)	Carrying or Contract Value		Fair Value		Level 1		Level 2		Level 3
March 31, 2020
September 30, 2020												September 30, 2020
Assets:	Assets:											Assets:
Cash and due from banks	Cash and due from banks	$	72,756	$	72,756	$	72,756	$	—	$	—	Cash and due from banks	$	62,575	$	62,575	$	62,575	$	0	$	0
Federal funds sold and interest bearing deposits with other banks	Federal funds sold and interest bearing deposits with other banks	49,543		49,543		49,543		—		—		Federal funds sold and interest bearing deposits with other banks	91,641		91,641		91,641		0		0
Investment securities, available-for-sale	Investment securities, available-for-sale	1,057,169		1,057,169		82,813		969,061		5,295		Investment securities, available-for-sale	1,083,427		1,083,427		76,298		1,003,864		3,265
Other investments	Other investments	28,414		28,414		28,414		—		—		Other investments	27,674		27,674		27,674		0		0
Mortgages held for sale	Mortgages held for sale	13,449		13,449		—		13,449		—		Mortgages held for sale	20,990		20,990		0		20,990		0
Loans and leases, net of reserve for loan and lease losses	Loans and leases, net of reserve for loan and lease losses	5,008,716		5,052,121		—		—		5,052,121		Loans and leases, net of reserve for loan and lease losses	5,490,219		5,568,395		0		0		5,568,395
Mortgage servicing rights	Mortgage servicing rights	4,153		4,538		—		—		4,538		Mortgage servicing rights	3,729		4,000		0		0		4,000
Accrued interest receivable	Accrued interest receivable	19,827		19,827		—		19,827		—		Accrued interest receivable	21,565		21,565		0		21,565		0
Interest rate swaps	Interest rate swaps	52,485		52,485		—		52,485		—		Interest rate swaps	53,027		53,027		0		53,027		0
Liabilities:	Liabilities:											Liabilities:
Deposits	Deposits	$	5,275,911	$	5,290,109	$	3,651,352	$	1,638,757	$	—	Deposits	$	5,896,855	$	5,909,192	$	4,598,859	$	1,310,333	$	0
Short-term borrowings	Short-term borrowings	282,845		282,845		135,154		147,691		—		Short-term borrowings	165,574		165,574		159,822		5,752		0
Long-term debt and mandatorily redeemable securities	Long-term debt and mandatorily redeemable securities	81,877		82,393		—		82,393		—		Long-term debt and mandatorily redeemable securities	81,659		82,894		0		82,894		0
Subordinated notes	Subordinated notes	58,764		49,893		—		49,893		—		Subordinated notes	58,764		57,617		0		57,617		0
Accrued interest payable	Accrued interest payable	13,719		13,719		—		13,719		—		Accrued interest payable	7,647		7,647		0		7,647		0
Interest rate swaps	Interest rate swaps	53,382		53,382		—		53,382		—		Interest rate swaps	53,988		53,988		0		53,988		0
Off-balance-sheet instruments *	Off-balance-sheet instruments *	—		283		—		283		—		Off-balance-sheet instruments *	0		289		0		289		0

December 31, 2019	December 31, 2019											December 31, 2019
Assets:	Assets:											Assets:
Cash and due from banks	Cash and due from banks	$	67,215	$	67,215	$	67,215	$	—	$	—	Cash and due from banks	$	67,215	$	67,215	$	67,215	$	0	$	0
Federal funds sold and interest bearing deposits with other banks	Federal funds sold and interest bearing deposits with other banks	16,150		16,150		16,150		—		—		Federal funds sold and interest bearing deposits with other banks	16,150		16,150		16,150		0		0
Investment securities, available-for-sale	Investment securities, available-for-sale	1,040,583		1,040,583		80,393		957,898		2,292		Investment securities, available-for-sale	1,040,583		1,040,583		80,393		957,898		2,292
Other investments	Other investments	28,414		28,414		28,414		—		—		Other investments	28,414		28,414		28,414		0		0
Mortgages held for sale	Mortgages held for sale	20,277		20,277		—		20,277		—		Mortgages held for sale	20,277		20,277		0		20,277		0
Loans and leases, net of reserve for loan and lease losses	Loans and leases, net of reserve for loan and lease losses	4,974,273		4,992,684		—		—		4,992,684		Loans and leases, net of reserve for loan and lease losses	4,974,273		4,992,684		0		0		4,992,684
Mortgage servicing rights	Mortgage servicing rights	4,200		5,986		—		—		5,986		Mortgage servicing rights	4,200		5,986		0		0		5,986
Accrued interest receivable	Accrued interest receivable	19,125		19,125		—		19,125		—		Accrued interest receivable	19,125		19,125		0		19,125		0
Interest rate swaps	Interest rate swaps	21,975		21,975		—		21,975		—		Interest rate swaps	21,975		21,975		0		21,975		0
Liabilities:	Liabilities:											Liabilities:
Deposits	Deposits	$	5,357,326	$	5,362,633	$	3,708,828	$	1,653,805	$	—	Deposits	$	5,357,326	$	5,362,633	$	3,708,828	$	1,653,805	$	0
Short-term borrowings	Short-term borrowings	145,893		145,893		120,891		25,002		—		Short-term borrowings	145,893		145,893		120,891		25,002		0
Long-term debt and mandatorily redeemable securities	Long-term debt and mandatorily redeemable securities	71,639		71,084		—		71,084		—		Long-term debt and mandatorily redeemable securities	71,639		71,084		0		71,084		0
Subordinated notes	Subordinated notes	58,764		61,469		—		61,469		—		Subordinated notes	58,764		61,469		0		61,469		0
Accrued interest payable	Accrued interest payable	13,918		13,918		—		13,918		—		Accrued interest payable	13,918		13,918		0		13,918		0
Interest rate swaps	Interest rate swaps	22,352		22,352		—		22,352		—		Interest rate swaps	22,352		22,352		0		22,352		0
Off-balance-sheet instruments *	Off-balance-sheet instruments *	—		281		—		281		—		Off-balance-sheet instruments *	0		281		0		281		0

* Represents estimated cash outflows required to currently settle the obligations at current market rates.

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.

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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.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis is presented to provide information concerning 1st Source Corporation and its subsidiaries’ (collectively referred to as “the Company”, “we”, and “our”) financial condition as of ~~March 31,~~September 30, 2020, as compared to December 31, 2019, and the results of operations for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019. This discussion and analysis should be read in conjunction with our consolidated financial statements and the financial and statistical data appearing elsewhere in this report and our 2019 Annual Report.

Except for historical information contained herein, the matters discussed in this document express “forward-looking statements.” Generally, the words “believe,” “contemplate,” “seek,” “plan,” “possible,” “assume,” “expect,” “intend,” “targeted,” “continue,” “remain,” “estimate,” “anticipate,” “project,” “will,” “should,” “indicate,” “would,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Those statements, including statements, projections, estimates or assumptions concerning future events or performance, and other statements that are other than statements of historical fact, are subject to material risks and uncertainties. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. We may make other written or oral forward-looking statements from time to time. Readers are advised that various important factors could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected in such forward-looking statements. Such factors include, but are not limited to, changes in law, regulations or GAAP; our competitive position within the markets we serve; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen changes in loan prepayment assumptions; unforeseen downturns in or major events affecting the local, regional or national economies or the industries in which we have credit concentrations; more recently, potential impacts of the COVID-19 pandemic; and other matters discussed in our filings with the SEC, including our Annual Report on Form 10-K for 2019, which filings are available from the SEC. We undertake no obligation to publicly update or revise any forward-looking statements.

FINANCIAL CONDITION

Our total assets at ~~March 31,~~September 30, 2020 were ~~$6.74~~$7.29 billion, an increase of ~~$112.34~~$668.17 million or ~~1.70%~~10.09% from December 31, 2019. Total investment securities, available-for-sale were ~~$1.06~~$1.08 billion, an increase of ~~$16.59~~$42.84 million or ~~1.59%~~4.12% from December 31, 2019. Federal funds sold and interest bearing deposits with other banks were ~~$49.54~~$91.64 million, an increase of ~~$33.39~~$75.49 million or ~~206.77%~~467.44% from December 31, 2019.

Total loans and leases were ~~$5.13~~$5.63 billion, an increase of ~~$43.99~~$541.51 million or ~~0.86%~~10.65% from December 31, 2019. The largest contributor to the increase in loans and leases was PPP loans funded during the second and third quarters of 2020. PPP loans are discussed in the “COVID-19 Impact” section below. Our foreign loan and lease ~~outstandings,~~balances, all denominated in U.S. dollars were ~~$176.94~~$176.62 million and $184.24 million as of ~~March 31,~~September 30, 2020 and December 31, 2019, respectively. Foreign loans and leases are in aircraft financing. Loan and lease ~~outstandings~~balances to borrowers in Brazil and Mexico were ~~$54.73~~$66.46 million and ~~$102.41~~$104.80 million as of ~~March 31,~~September 30, 2020, respectively, compared to $58.29 million and $111.91 million as of December 31, 2019, respectively. As of ~~March 31,~~September 30, 2020 and December 31, 2019 there was not a significant concentration in any other country. Solar loan and lease ~~outstandings~~balances were ~~$178.35~~$263.47 million as of ~~March 31,~~September 30, 2020, an increase of ~~$14.75~~$93.85 million or ~~9.02%~~55.33% from the ~~$163.60~~$169.62 million at December 31, 2019. Solar loan and lease ~~outstandings~~balances are included in commercial and agricultural loans.

Equipment owned under operating leases was ~~$101.24~~$79.70 million, a decrease of ~~$10.45~~$31.98 million, or ~~9.35%~~28.64% compared to December 31, 2019. The largest contributor to the decrease in equipment owned under operating leases was reduced leasing volume primarily due to a change in customer preferences.

Total deposits were ~~$5.28~~$5.90 billion, ~~a decrease~~an increase of ~~$81.42~~$539.53 million or ~~1.52%~~10.07% from the end of 2019. The largest contributors to the increase in total deposits was PPP loan fundings into business accounts and consumer savings levels. Short-term borrowings were ~~$282.85~~$165.57 million, an increase of ~~$136.95~~$19.68 million or ~~93.87%~~13.49% from December 31, 2019. Long-term debt and mandatorily redeemable securities were ~~$81.88~~$81.66 million, an increase of ~~$10.24~~$10.02 million or ~~14.29%~~13.99% from December 31, 2019.

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The following table shows accrued income and other assets.


(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2020		December 31, 2019
Accrued income and other assets:	Accrued income and other assets:					Accrued income and other assets:
Bank owned life insurance cash surrender value	Bank owned life insurance cash surrender value	$	69,280	$	68,774	Bank owned life insurance cash surrender value	$	69,938	$	68,774
Operating lease right of use assets	Operating lease right of use assets	23,451		24,147		Operating lease right of use assets	22,261		24,147
Accrued interest receivable	Accrued interest receivable	19,827		19,125		Accrued interest receivable	21,565		19,125
Mortgage servicing rights	Mortgage servicing rights	4,153		4,200		Mortgage servicing rights	3,729		4,200
Other real estate	Other real estate	362		522		Other real estate	303		522
Repossessions	Repossessions	9,020		8,623		Repossessions	4,639		8,623
Partnership investments carrying amount	Partnership investments carrying amount	71,178		61,083		Partnership investments carrying amount	100,265		61,083
All other assets	All other assets	70,167		41,516		All other assets	78,134		41,516
Total accrued income and other assets	Total accrued income and other assets	$	267,438	$	227,990	Total accrued income and other assets	$	300,834	$	227,990

The largest contributors to the increase in accrued income and other assets from December 31, 2019 was an increase in the fair value of interest rate swaps contracts with customers and higher solar partnership investment carrying amounts.

CORONAVIRUS (COVID-19) IMPACT

The following is a description of the impact the Coronavirus (COVID-19) pandemic is having on our financial condition and results of operations and certain risks to our business that the pandemic creates or exacerbates.

Operational Impact

Pursuant to our preexisting disaster recovery plan addressing potential pandemic outbreaks, we created a dedicated executive COVID-19 response team that is closely monitoring developments and providing guidance for additional precautions and initiatives. We have divided departments among various locations to help ensure that infection will not spread across entire departments. We are encouraging virtual meetings and conference calls in place of in-person meetings, including our annual shareholder meeting which was held virtually this year. Employees with health conditions putting them at higher risk of adverse effects from coronavirus infection are working remotely. Additionally, travel has been restricted. We are promoting social distancing, frequent hand washing, thorough disinfection of all surfaces, and the use of masks or nose and mouth coverings have been mandated in all of our locations. The majority of our banking center lobbies have been closed except for advance appointments only. Banking center drive-ups, ATMs and online/mobile banking services continue to operate. It remains undetermined how long our banking centers will operate at these service levels. Infection rates in the communities we serve vary by region and we will make prudent decisions for the safety of our colleagues and our clients.

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Loan and lease modifications

We began receiving requests from our borrowers for loan and lease deferrals in March. Modifications include the deferral of principal payments or the deferral of principal and interest payments for terms generally 90 - 180 days. Requests are evaluated individually and approved modifications are based on the unique circumstances of each borrower. We are committed to working with our clients to allow time to work through the challenges of this pandemic. At this time, it is uncertain what future impact loan and lease modifications related to COVID-19 difficulties will have on our financial condition, results of operations and reserve for loan and lease losses. The following table shows coronavirus loan and lease ~~modifications approved~~modification balances in deferment as of ~~mid-April.~~June 30, 2020 and September 30, 2020.


		Principal-only Deferrals						Principal and Interest Deferrals								Total Coronavirus Modifications			Recorded Investment at March 31, 2020	COVID-19 Related Loan and Lease Modifications
(Dollars in millions)	(Dollars in millions)	90 Days or Less		91 Days - 180 Days		90 Days or Less		91 Days - 180 Days						Total Coronavirus Modifications			(Dollars in millions)	June 30, 2020		September 30, 2020
Auto and light truck rental	Auto and light truck rental	$	86	$	—	$	28	$	—	$	114	$	427			224		$	22
Specialty vehicle⁽¹⁾	Specialty vehicle⁽¹⁾	2		—		51		—		53		151		Specialty vehicle⁽¹⁾	75			23
Medium and heavy duty truck	Medium and heavy duty truck	12		7		3		—		22		278		Medium and heavy duty truck	87			5
Aircraft	Aircraft	43		16		13		—		72		773		Aircraft	93			13
Construction	Construction	78		4		12		20		114		718		Construction	139			—
Commercial	Commercial	48		30		17		24		119		2,097		Commercial	210			63
Total		$	269	$	57	$	124	$	44	$	494	$	4,444
(1) Includes motor coaches, shuttle buses, step vans, work trucks and funeral cars.
Residential real estate and home equity														Residential real estate and home equity	4			—
Consumer														Consumer	8			—
Total loans and leases														Total loans and leases	$	840		$	126
(1) Includes buses, step vans and funeral cars.														(1) Includes buses, step vans and funeral cars.

The following table shows the coronavirus loan and lease modification balances by deferral type as of September 30, 2020.


(Dollars in millions)	Principal Only Deferrals		Principal and Interest Deferrals		Total Modifications in Deferment		Additional Modifications Expected⁽¹⁾		Total Modifications		Recorded Investment at September 30, 2020		Total Modifications as a % of September 30, 2020 Balance
Auto and light truck rental	$	21	$	1	$	22	$	16	$	38	$	379	10	%
Specialty vehicle⁽²⁾	11		12		23		23		46		149		31	%
Medium and heavy duty truck	5		—		5		—		5		271		2	%
Aircraft	13		—		13		6		19		806		2	%
Construction	—		—		—		1		1		724		—	%
Commercial	5		58		63		23		86		2,643		3	%
Residential real estate and home equity	—		—		—		—		—		520		—	%
Consumer	—		—		—		—		—		135		—	%
Total loans and leases	55		71		126		69		195		5,627		3	%
PPP loans, net of unearned discount⁽³⁾	—		—		—		—		—		581		—	%
Total loans and leases less PPP loans	$	55	$	71	$	126	$	69	$	195	$	5,046	4	%
(1) Represents modifications which ended deferment during September 2020 and are in the process of receiving or expected to receive an extension.
(2) Includes buses, step vans and funeral cars.
(3) PPP loan balances are located within the Commercial category above.

As of September 30, 2020, COVID-19 related loan modifications for our bus lending were $45.35 million or 50.85% (includes $22.92 million whose modification period ended during September but we expect to grant further extensions) of our total bus loan balances. COVID-19 related loan modifications for the hotel industry were $74.62 million or 47.25% (includes $17.21 million whose modification period ended during September but we expect to grant further extensions) of our total hotel loan balances. Hotel loans are shown within the Commercial category in the charts above and below.

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With the imposition of travel restrictions as a result of taking steps to slow the spread of COVID-19, our bus clients were immediately impacted resulting in numerous deferral requests. We initially granted three-month deferrals to many of these clients, most of which were principal and interest deferrals. During the second quarter, we sent questionnaires to all of our bus clients in order to gain a better understanding of their situation, their customer base and the likely long-term impact of the economic downturn on their business model, i.e. their ability to withstand reduced revenue for an extended period of time. The problems persisted into the third quarter with most of our bus clients having lost all but a small fraction of their revenue base. During the third quarter, we continued our efforts to differentiate our bus clients based on the underlying risks in their business models and management teams and, to differentiate collateral types, we created tiers from more desirable to less desirable collateral pools and valued the units accordingly, using deeper discount rates against collateral deemed less desirable. Our bus team gathered information on these bus clients, many of which are relatively small relationships and were initially credit scored. We sent out a second round of questionnaires and made personal contacts, asking our clients how they are coping in this unprecedented environment. We tried to assess our client’s outlook and their ability to manage through several more months of extreme distress. We gathered information on how they are maintaining their assets and if the units are currently insured. We are diligently working with these clients to try to keep them in business. The government relief programs have not been of much benefit to this sector and the outlook for the next relief package is uncertain. To date, we have extended two rounds of three-month deferrals to many of our bus clients and will continue to agree to a third round of deferrals if we think our clients can support the maintenance and insurance of their units; we will work to collect interest payments where we can. Our intent is to repossess collateral as a last result. If the borrower cannot maintain the assets, we will move to take them back either voluntarily or by legal action. We expect long holding periods until we will be able to sell any repossessed units. So far, we have minimal repossessed bus assets, $638,000 as of September 30, 2020, but this number will likely increase. We believe some of the clients for whom we have established specific impairment reserves will eventually require charge-offs but at this time it is difficult to determine which clients. We hope to have more clarity by the end of the 2020.

The following table shows the coronavirus loan and lease modification balances. Modification terms generally ranged between three and six months depending on industry.


	First Modification										Second Modification								Third Modification
(Dollars in millions)	Expired		In Deferment		Total		Expired		In Deferment⁽¹⁾		Total		Expired		In Deferment⁽¹⁾		Total
Auto and light truck rental	$	255	$	18	$	273	$	61	$	4	$	65	$	—	$	16	$	16
Specialty vehicle⁽²⁾	88		—		88		55		16		71		—		30		30
Medium and heavy duty truck	89		—		89		—		5		5		—		—		—
Aircraft	97		—		97		11		19		30		—		—		—
Construction	144		—		144		8		—		8		—		1		1
Commercial	185		55		240		19		25		44		—		6		6
Residential real estate and home equity	7		—		7		2		—		2		—		—		—
Consumer	9		—		9		—		—		—		—		—		—
Total loans and leases	$	874	$	73	$	947	$	156	$	69	$	225	$	—	$	53	$	53
(1) Includes modifications which ended deferment during September 2020 and are in the process of receiving or expected to receive an extension.
(2) Includes buses, step vans and funeral cars.

Paycheck Protection Program (PPP) and Liquidity

As part of the CARES Act, approved by the President on March 27, 2020 and extended on July 4, 2020, the Small Business Administration (SBA) has been authorized to guarantee loans under the PPP through ~~June 30,~~August 8, 2020 for ~~small~~ businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. We began accepting applications on April 3, ~~2020. As of mid-April, we had processed 2,061~~2020 and disbursed the final PPP ~~loans totaling $554 million.~~loan on August 25, 2020. PPP loans are fully guaranteed by the SBA and as such do not represent a credit risk. The following table shows PPP loan disbursements as of September 30, 2020.


	Number of Loans	$ of Loans (000's)		Average Loan Size
Phase One	2,024	$	520,583	$	257,000
Phase Two	1,516	76,868		51,000
Total	3,540	$	597,451	$	169,000

As of September 30, 2020, PPP loans were $580.62 million which is net of an unearned discount of $14.21 million and located within the commercial and agricultural portfolio. At September 30, 2020, specialty finance customers had $104.80 million of PPP loans and traditional commercial banking customers had $475.82 million of PPP loans.

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During the quarter, we began working with our PPP clients to submit loan forgiveness applications to the SBA. On October 8, 2020, the SBA announced a streamlined loan forgiveness application for loans $50,000 or less. Of the 3,540 PPP loans we originated, 1,972 loans were for $50,000 or less. As of mid-October, we had submitted over $100 million loan forgiveness requests to the SBA. The majority of the requests we have submitted to date remain in process pending SBA review before reimbursement can proceed.

On April 9, 2020, the FDIC, Federal Reserve and OCC created the Paycheck Protection Program Liquidity Facility (PPPLF) to bolster the effectiveness of the PPP by providing liquidity to and neutralizing the regulatory capital effects on participating financial institutions. ~~We intend to~~If needed, we will utilize the liquidity relief offered by the PPPLF ~~to the extent needed~~ and as such do not expect our participation in the PPP to have a negative impact on our liquidity position, capital resources, financial condition or results of operations. As of September 30, 2020, we had not yet utilized the PPPLF.

~~Table~~See Part I Financial Information, Item 2 Management’s Discussion and Analysis of ~~Contents~~

Financial Condition and Results of Operations under the heading “Capital” for more information regarding the COVID-19 impact on share repurchases and dividend activity.

Asset impairment

Our MSRs have experienced a decrease in their fair value as of September 30, 2020 resulting in year-to-date impairment charges of $0.81 million due to lower mortgage rates leading to faster prepayment speeds. We will continue to evaluate MSRs at each reporting date to determine whether further valuation allowances are appropriate.

We evaluate goodwill for impairment during the fourth quarter of each year, with financial data as of September 30. Based on the analysis performed as of October 1, 2019, we determined that goodwill for our reporting units was not impaired. During the first quarter of 2020, management determined that the deterioration in general economic conditions as a result of the COVID-19 pandemic and responses thereto represented a triggering event prompting an evaluation of goodwill impairment. Based on the analyses performed during the first, second and third quarters of 2020, we determined that goodwill was not impaired.

At this time, we do not believe there exists any impairment to our ~~goodwill and~~ intangible assets, long-lived assets, ~~MSRs,~~ right of use assets, or available-for-sale investment securities due to the COVID-19 pandemic. ~~Our MSRs have experienced a decrease in their fair value as of March 31, 2020 and we will continue to evaluate MSRs at each reporting date to determine whether a valuation allowance is appropriate.~~ It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets.

Risks

See Part II Other Information, Item 1A, Risk Factors for more information.

Reserve for loan and lease losses

We have experienced increasing downgrades and defaults as a result of the impact COVID-19 is having on our borrowers as evidenced by increasing special attention and non-performing loan balances. Special attention loan balances increased $10.91 million in the third quarter of 2020 and $78.49 million since December 31, 2019 and we anticipate further downgrades during the fourth quarter of 2020 and into 2021. Likewise, non-performing loans increased by $7.62 million during the third quarter and $60.58 million since year-end. Third quarter 2020 downgrades were concentrated in the bus segment within the auto and light truck portfolio as well as a couple of downgrades in the commercial portfolio, one of which was directly impacted by COVID-19 restrictions. We are in communication with our customers to gain a better understanding of our highest risk exposures and probable defaults. As a result of the discussions with our customers, we downgraded an additional 43 bus accounts to special attention and placed several of these accounts on nonaccrual status. We anticipate further defaults in our bus lending during the fourth quarter of 2020. Furthermore, the bus collateral may be difficult to liquidate, particularly in this environment. We believe our auto rental customers will continue to struggle; however, vehicle auctions are well established and are an effective means of liquidating collateral and used vehicle values, to date, have remained strong, so our loss exposure is well managed. Our local market customers have been buoyed in the short-term with funds from the PPP program. Thus far, we have not seen many downgrades or defaults in our commercial lending, but we anticipate this will change particularly as businesses continue to struggle and customers request an additional round of loan modifications. During the last recession, we also noted a delayed impact on our commercial lending as compared to our specialty finance lending. Our losses year-to-date remain moderate but we continue to build reserves as we anticipate some of the current and future downgrades and defaults will eventually result in losses.

See Part I Financial Information, Note 5 to the Consolidated Financial Statements and Part I Financial Information, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Provision and Reserve for Loan and Lease Losses” for more information.

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CAPITAL

As of ~~March 31,~~September 30, 2020, total shareholders’ equity was ~~$850.90~~$877.75 million, up ~~$22.62~~$49.48 million, or ~~2.73%~~5.97% from the $828.28 million at December 31, 2019. In addition to net income of ~~$16.41~~$54.97 million, other significant changes in shareholders’ equity during the first ~~three~~nine months of 2020 included ~~$7.41~~$21.76 million of dividends paid. The accumulated other comprehensive income component of shareholders’ equity totaled ~~$17.65~~$19.66 million at ~~March 31,~~September 30, 2020, compared to $5.17 million at December 31, 2019. Our shareholders’ equity-to-assets ratio was ~~12.63%~~12.04% as of ~~March 31,~~September 30, 2020, compared to 12.51% at December 31, 2019. Book value per common share rose to ~~$33.32~~$34.35 at ~~March 31,~~September 30, 2020, from $32.47 at December 31, 2019.

We declared and paid cash dividends per common share of ~~$0.29~~$0.28 during the ~~first~~third quarter of 2020. The trailing four quarters dividend payout ratio, representing cash dividends per common share divided by diluted earnings per common share, was ~~33.43%~~38.00%. The dividend payout is continually reviewed by management and the Board of Directors subject to the Company’s capital and dividend policy. Due to COVID-19, we had temporarily suspended the repurchase of common shares from the open market earlier this year. Subject to the Company’s capital policy, management and the Board of Directors may resume share repurchases based on a careful examination of facts and circumstances at such time.

The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations.

The actual capital amounts and ratios of 1st Source Corporation and 1st Source Bank as of ~~March 31,~~September 30, 2020, are presented in the table below.


		Actual						Minimum Capital Adequacy						Minimum Capital Adequacy with Capital Buffer							To Be Well Capitalized Under Prompt Corrective Action Provisions							Actual						Minimum Capital Adequacy		Minimum Capital Adequacy with Capital Buffer	To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		(Dollars in thousands)	Amount			Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets):	Total Capital (to Risk-Weighted Assets):																	Total Capital (to Risk-Weighted Assets):
1st Source Corporation	1st Source Corporation	$	912,548	15.23	%	$	479,457	8.00	%	$	629,288	10.50	%	$	599,322	10.00	%	1st Source Corporation	$	948,891		15.74	%	$	482,133	8.00	%	$	632,800	10.50	%	$	602,667	10.00	%
1st Source Bank	1st Source Bank	830,076		13.84		479,812		8.00		629,753		10.50		599,765		10.00		1st Source Bank	859,135			14.24		482,677		8.00		633,514		10.50		603,347		10.00
Tier 1 Capital (to Risk-Weighted Assets):	Tier 1 Capital (to Risk-Weighted Assets):																	Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	1st Source Corporation	837,026		13.97		359,593		6.00		509,423		8.50		479,457		8.00		1st Source Corporation	872,755			14.48		361,600		6.00		512,267		8.50		482,133		8.00
1st Source Bank	1st Source Bank	754,499		12.58		359,859		6.00		509,800		8.50		479,812		8.00		1st Source Bank	782,915			12.98		362,008		6.00		512,845		8.50		482,677		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):	Common Equity Tier 1 Capital (to Risk-Weighted Assets):																	Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	1st Source Corporation	753,621		12.57		269,695		4.50		419,525		7.00		389,559		6.50		1st Source Corporation	778,494			12.92		271,200		4.50		421,867		7.00		391,733		6.50
1st Source Bank	1st Source Bank	728,094		12.14		269,894		4.50		419,835		7.00		389,847		6.50		1st Source Bank	745,654			12.36		271,506		4.50		422,343		7.00		392,175		6.50
Tier 1 Capital (to Average Assets):	Tier 1 Capital (to Average Assets):																	Tier 1 Capital (to Average Assets):
1st Source Corporation	1st Source Corporation	837,026		12.82		261,190		4.00		N/A		N/A		326,488		5.00		1st Source Corporation	872,755			12.14		287,593		4.00		N/A		N/A		359,492		5.00
1st Source Bank	1st Source Bank	754,499		11.56		261,168		4.00		N/A		N/A		326,460		5.00		1st Source Bank	782,915			10.89		287,573		4.00		N/A		N/A		359,467		5.00

As part of the CARES Act, PPP loan balances have been assigned a zero percent risk weight and therefore had no impact on our total risk-weighted assets at September 30, 2020.

LIQUIDITY AND INTEREST RATE SENSITIVITY

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as our operating cash needs are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, access to the national brokered certificates of deposit market, national listing service certificates of deposit, Federal Home Loan Bank (FHLB) borrowings, Federal Reserve Bank (FRB) borrowings, and the capability to package loans for sale.

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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 ~~March 31,~~September 30, 2020, we had no borrowings in the federal funds market. We could borrow $225.00 million in additional funds for a short time from these banks on a collective basis. As of ~~March 31,~~September 30, 2020, we had ~~$196.64~~$55.36 million outstanding in FHLB advances and could borrow an additional ~~$401.88~~$500.50 million contingent on the FHLB activity-based stock ownership requirement. We also had no outstandings with the FRB and could borrow ~~$543.27~~$456.53 million as of ~~March 31,~~September 30, 2020.

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Our loan to asset ratio was ~~76.16%~~77.18% at ~~March 31,~~September 30, 2020 compared to 76.79% at December 31, 2019 and ~~77.22%~~76.21% at ~~March 31,~~September 30, 2019. Cash and cash equivalents totaled ~~$122.30~~$154.22 million at ~~March 31,~~September 30, 2020 compared to $83.37 million at December 31, 2019 and ~~$67.68~~$127.49 million at ~~March 31,~~September 30, 2019. The largest contributors to the increase in cash and cash equivalents was higher deposit balances due to both individual and business customers’ propensity to save during times of uncertainty. At ~~March 31,~~September 30, 2020, the Consolidated Statements of Financial Condition was rate sensitive by ~~$224.39~~$309.13 million more assets than liabilities scheduled to reprice within one year, or approximately ~~1.08%~~1.09%. Management believes that the present funding sources provide adequate liquidity to meet our cash flow needs.

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 ~~$657~~$737 million.

RESULTS OF OPERATIONS

Net income available to common shareholders for the three and nine month ~~period~~periods ended ~~March 31,~~September 30, 2020 was ~~$16.41~~$20.06 million and $54.97 million, compared to ~~$22.20~~$24.44 million and $70.02 million for the same ~~period~~periods in 2019. Diluted net income per common share was ~~$0.64~~$0.78 and $2.14 for the three and nine month ~~period~~periods ended ~~March 31,~~September 30, 2020, compared to ~~$0.86~~$0.95 and $2.72 for the same ~~period~~periods in 2019. Return on average common shareholders’ equity was ~~7.81%~~8.52% for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, compared to ~~11.61%~~11.83% in 2019. The return on total average assets was ~~1.00%~~1.05% for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, compared to ~~1.43%~~1.45% in 2019.

Net income decreased for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 compared to the first ~~three~~nine months of 2019. ~~Noninterest~~Net interest income decreased and the provision for loan and lease losses increased which was offset by an increase in ~~the provision for loan and lease losses and~~ noninterest ~~expense.~~income. Details of the changes in the various components of net income are discussed further below.

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NET INTEREST INCOME

The following tables provide an analysis of net interest income and illustrates the interest income earned and interest expense charged for each major component of interest earning assets and interest bearing liabilities. Yields/rates are computed on a tax-equivalent basis, using a 21% rate. Nonaccrual loans and leases are included in the average loan and lease balance outstanding.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY

INTEREST RATES AND INTEREST DIFFERENTIAL


												Three Months Ended																												Three Months Ended
		March 31, 2020										December 31, 2019												March 31, 2019									September 30, 2020							June 30, 2020	September 30, 2019
(Dollars in thousands)	(Dollars in thousands)	Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate		(Dollars in thousands)	Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate
ASSETS	ASSETS																			ASSETS
Investment securities available-for-sale:	Investment securities available-for-sale:																			Investment securities available-for-sale:
Taxable	Taxable	$	973,421	$	5,550	2.29	%	$	982,839	$	5,189	2.09	%	$	909,422	$	5,515	2.46	%	Taxable	$	1,012,703	$	4,103	1.61	%	$	995,776	$	4,487	1.81	%	$	959,104	$	5,056	2.09		%
Tax exempt⁽¹⁾	Tax exempt⁽¹⁾	57,219		325		2.28	%	62,078		365		2.33	%	78,171		472		2.45	%	Tax exempt⁽¹⁾	45,077		257		2.26	%	49,534		286		2.32	%	65,146		388		2.36		%
Mortgages held for sale	Mortgages held for sale	11,294		96		3.42	%	21,489		192		3.54	%	8,826		101		4.64	%	Mortgages held for sale	26,327		186		2.81	%	27,016		198		2.95	%	19,888		190		3.79		%

Loans and leases, net of unearned discount⁽¹⁾	Loans and leases, net of unearned discount⁽¹⁾	5,098,397		61,520		4.85	%	5,046,639		63,159		4.97	%	4,858,183		62,677		5.23	%	Loans and leases, net of unearned discount⁽¹⁾	5,669,615		58,210		4.08	%	5,565,160		58,700		4.24	%	5,091,358		66,712		5.20		%
Other investments	Other investments	41,463		346		3.36	%	145,893		798		2.17	%	42,095		438		4.22	%	Other investments	87,998		289		1.31	%	89,525		316		1.42	%	54,768		497		3.60		%
Total earning assets⁽¹⁾	Total earning assets⁽¹⁾	6,181,794		67,837		4.41	%	6,258,938		69,703		4.42	%	5,896,697		69,203		4.76	%	Total earning assets⁽¹⁾	6,841,720		63,045		3.67	%	6,727,011		63,987		3.83	%	6,190,264		72,843		4.67		%
Cash and due from banks	Cash and due from banks	65,407						73,438						63,886						Cash and due from banks	72,474						73,523						66,046
Reserve for loan and lease losses	Reserve for loan and lease losses	(112,239)						(110,209)						(101,697)						Reserve for loan and lease losses	(134,824)						(124,186)						(106,559)
Other assets	Other assets	476,159						486,308						431,500						Other assets	502,172						509,058						471,129
Total assets	Total assets	$	6,611,121					$	6,708,475					$	6,290,386					Total assets	$	7,281,542					$	7,185,406					$	6,620,880

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY																					LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits	Interest-bearing deposits	$	4,076,270	$	10,851	1.07	%	$	4,170,250	$	12,523	1.19	%	$	3,934,921	$	11,470	1.18	%	Interest-bearing deposits	$	4,225,299	$	6,532	0.62	%	$	4,248,478	$	8,265	0.78	%	$	4,174,746	$	13,524	1.29		%
Short-term borrowings	Short-term borrowings	202,545		254		0.50	%	183,244		170		0.37	%	251,379		931		1.50	%	Short-term borrowings	187,912		83		0.18	%	191,411		90		0.19	%	188,562		293		0.62		%
Subordinated notes	Subordinated notes	58,764		884		6.05	%	58,764		907		6.12	%	58,764		928		6.40	%	Subordinated notes	58,764		824		5.58	%	58,764		835		5.71	%	58,764		914		6.17		%
Long-term debt and mandatorily redeemable securities	Long-term debt and mandatorily redeemable securities	77,973		853		4.40	%	71,428		647		3.59	%	70,481		744		4.28	%	Long-term debt and mandatorily redeemable securities	81,528		610		2.98	%	81,766		659		3.24	%	71,304		750		4.17		%
Total interest-bearing liabilities	Total interest-bearing liabilities	4,415,552		12,842		1.17	%	4,483,686		14,247		1.26	%	4,315,545		14,073		1.32	%	Total interest-bearing liabilities	4,553,503		8,049		0.70	%	4,580,419		9,849		0.86	%	4,493,376		15,481		1.37		%
Noninterest-bearing deposits	Noninterest-bearing deposits	1,196,106						1,244,173						1,124,441						Noninterest-bearing deposits	1,664,135						1,562,100						1,188,645
Other liabilities	Other liabilities	131,858						136,169						73,183						Other liabilities	149,978						151,281						119,125
Shareholders’ equity	Shareholders’ equity	844,724						824,361						775,657						Shareholders’ equity	876,992						862,209						809,279
Noncontrolling interests	Noncontrolling interests	22,881						20,086						1,560						Noncontrolling interests	36,934						29,397						10,455
Total liabilities and equity	Total liabilities and equity	$	6,611,121					$	6,708,475					$	6,290,386					Total liabilities and equity	$	7,281,542					$	7,185,406					$	6,620,880
Less: Fully tax-equivalent adjustments	Less: Fully tax-equivalent adjustments			(151)						(160)						(182)				Less: Fully tax-equivalent adjustments			(128)						(137)						(167)
Net interest income/margin (GAAP-derived)⁽¹⁾	Net interest income/margin (GAAP-derived)⁽¹⁾			$	54,844	3.57	%			$	55,296	3.51	%			$	54,948	3.78	%	Net interest income/margin (GAAP-derived)⁽¹⁾			$	54,868	3.19	%			$	54,001	3.23	%			$	57,195	3.67		%
Fully tax-equivalent adjustments	Fully tax-equivalent adjustments			151						160						182				Fully tax-equivalent adjustments			128						137						167
Net interest income/margin - FTE⁽¹⁾	Net interest income/margin - FTE⁽¹⁾			$	54,995	3.58	%			$	55,456	3.52	%			$	55,130	3.79	%	Net interest income/margin - FTE⁽¹⁾			$	54,996	3.20	%			$	54,138	3.24	%			$	57,362	3.68		%

(1) See “Reconciliation of Non-GAAP Financial Measures” at the end of this section for additional information on this performance measure/ratio.	(1) See “Reconciliation of Non-GAAP Financial Measures” at the end of this section for additional information on this performance measure/ratio.																																					(1) See “Reconciliation of Non-GAAP Financial Measures” at the end of this section for additional information on this performance measure/ratio.

Quarter Ended ~~March 31,~~September 30, 2020 compared to the Quarter Ended ~~March 31,~~September 30, 2019

The taxable-equivalent net interest income for the three months ended ~~March 31,~~September 30, 2020 was $55.00 million, a decrease of ~~0.24%~~4.12% over the same period in 2019. The net interest margin on a fully taxable-equivalent basis was ~~3.58%~~3.20% for the three months ended ~~March 31,~~September 30, 2020, compared to ~~3.79%~~3.68% for the three months ended ~~March 31,~~September 30, 2019.

During the three month period ended ~~March 31,~~September 30, 2020, average earning assets increased ~~$285.10~~$651.46 million, up ~~4.83%~~10.52% over the comparable period in 2019. Average interest-bearing liabilities increased ~~$100.01~~$60.13 million or ~~2.32%~~1.34%. The yield on average earning assets decreased 35100 basis points to ~~4.41%~~3.67% from ~~4.76%~~4.67% primarily due to lower rates on loans and leases and investment securities. Total cost of average interest-bearing liabilities decreased 1567 basis points to ~~1.17%~~0.70% from ~~1.32%~~1.37% as a result of a lower interest rate environment during 2020. The result to the net interest margin, or the ratio of net interest income to average earning assets, was a decrease of 2148 basis points.

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The largest contributor to the reduced yield on average earning assets for the three months ended ~~March 31,~~September 30, 2020, compared to the three months ended ~~March 31,~~September 30, 2019, was a decrease in yields on net loans and leases of 38112 basis points primarily due to market conditions as a result of several Federal Reserve interest rate decreases during the second half of 2019 and first three months of 2020. The yield on net loans and leases was also ~~positively~~negatively impacted by ~~one~~a net six basis ~~point~~points due to PPP loans which earn interest at 1.00% and negatively impacted by four basis points due to net interest ~~recoveries~~reversals of ~~$0.09~~$0.42 million in the ~~first~~third quarter of 2020 vs. net interest recoveries of $0.08 million in the ~~first~~third quarter of 2019. Average net loans and leases increased ~~$240.21~~$578.26 million or ~~4.94%~~11.36% with the largest ~~increases occurring within~~increase due to average PPP loans of $578.36 million in the ~~construction equipment~~commercial and ~~commercial real estate portfolios as a result of market demand.~~agricultural loan portfolio. Total average investment securities increased ~~$43.05~~$33.53 million or ~~4.36%~~3.27%. Average mortgages held for sale increased ~~$2.47~~$6.44 million or ~~27.96%~~32.38%. Average other investments, which include federal funds sold, time deposits with other banks, Federal Reserve Bank excess balances, Federal Reserve Bank and Federal Home Loan Bank (FHLB) stock and commercial paper ~~decreased $0.63~~increased $33.23 million or ~~1.50%~~60.67% from the ~~first~~third quarter of 2019.

Average interest-bearing deposits increased ~~$141.35~~$50.55 million or ~~3.59%~~1.21% for the ~~first~~third quarter of 2020 over the same period in 2019 primarily due to ~~organic customer growth.~~consumer savings levels. The effective rate paid on average interest-bearing deposits decreased 1167 basis points to ~~1.07%~~0.62% from ~~1.18%~~1.29%. The decrease in the average cost of interest-bearing deposits was primarily the result of lower rates and a shift in the deposit mix from the ~~first~~third quarter of 2019. Average noninterest-bearing deposits grew $475.49 million or 40.00% for the third quarter of 2020 over the same period in 2019 primarily due to PPP loan fundings in business accounts.

Average short-term borrowings decreased ~~$48.83~~$0.65 million or ~~19.43%~~0.34% for the ~~first~~third quarter of 2020 compared to the same period in 2019. Interest paid on short-term borrowings decreased ~~100~~44 basis points. Interest paid on subordinated notes decreased 3559 basis points during the ~~first~~third quarter of 2020 from the same period a year ago due to a variable rate on one traunche. Average long-term debt and mandatorily redeemable securities balances increased ~~$7.49~~$10.22 million or ~~10.63%~~14.34%. Interest paid on long-term debt and mandatorily redeemable securities ~~increased 12~~decreased 119 basis points during the ~~first~~third quarter of 2020 from the same period in 2019 primarily due to ~~higher~~lower rates on mandatorily redeemable securities.



	Nine Months Ended
	September 30, 2020										September 30, 2019
(Dollars in thousands)	Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate
ASSETS
Investment securities available-for-sale:
Taxable	$	994,035	$	14,140	1.90	%	$	932,779	$	15,757	2.26	%
Tax exempt⁽¹⁾	50,590		868		2.29	%	71,684		1,297		2.42	%
Mortgages held for sale	21,563		480		2.97	%	13,616		418		4.10	%
Loans and leases, net of unearned discount⁽¹⁾	5,445,213		178,430		4.38	%	4,984,498		194,954		5.23	%
Other investments	73,050		951		1.74	%	50,109		1,434		3.83	%
Total earning assets⁽¹⁾	6,584,451		194,869		3.95	%	6,052,686		213,860		4.72	%
Cash and due from banks	70,475						65,801
Reserve for loan and lease losses	(123,790)						(103,699)
Other assets	495,820						452,759
Total assets	$	7,026,956					$	6,467,547

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits	$	4,183,502	$	25,648	0.82	%	$	4,083,140	$	37,972	1.24	%
Short-term borrowings	193,934		427		0.29	%	213,551		1,764		1.10	%
Subordinated notes	58,764		2,543		5.78	%	58,764		2,770		6.30	%
Long-term debt and mandatorily redeemable securities	80,427		2,122		3.52	%	71,034		2,258		4.25	%
Total interest-bearing liabilities	4,516,627		30,740		0.91	%	4,426,489		44,764		1.35	%
Noninterest-bearing deposits	1,474,807						1,147,195
Other liabilities	144,393						97,096
Shareholders’ equity	861,366						791,438
Noncontrolling interests	29,763						5,329
Total liabilities and equity	$	7,026,956					$	6,467,547
Less: Fully tax-equivalent adjustments			(416)						(526)
Net interest income/margin (GAAP-derived)⁽¹⁾			$	163,713	3.32	%			$	168,570	3.72	%
Fully tax-equivalent adjustments			416						526
Net interest income/margin - FTE⁽¹⁾			$	164,129	3.33	%			$	169,096	3.74	%

(1) See “Reconciliation of Non-GAAP Financial Measures” at the end of this section for additional information on this performance measure/ratio.

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Nine Months Ended September 30, 2020 compared to the Nine Months Ended September 30, 2019

The taxable-equivalent net interest income for the nine months ended September 30, 2020 was $164.13 million, a decrease of 2.94% over the comparable period in 2019. The net interest margin on a fully taxable-equivalent basis was 3.33% compared to a net interest margin of 3.74% for the same period in 2019.

During the nine month period ended September 30, 2020, average earning assets increased $531.77 million or 8.79% over the comparable period in 2019. Average interest-bearing liabilities increased $90.14 million or 2.04%. The yield on average earning assets decreased 77 basis points to 3.95% from 4.72% primarily due to lower rates on loans and leases and taxable investment securities available-for-sale. The total cost of average interest-bearing liabilities decreased 44 basis points to 0.91% from 1.35%. The result to the net interest margin, or the ratio of net interest income to average earning assets, was a decrease of 41 basis points.

The largest contributor to the lower yield on average earning assets for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was a decrease in yields on net loans and leases of 85 basis points primarily due to market conditions as a result of several Federal Reserve interest rate decreases during the second half of 2019 and first three months of 2020. The yield on net loans and leases was also negatively impacted by a net five basis points due to PPP loan balances that earn interest at 1.00% and negatively impacted by one basis point due to net interest reversals of $0.60 million in 2020 vs. net interest recoveries of $0.15 million in 2019. Average net loans and leases increased $460.72 million or 9.24% primarily due to average PPP loan balances of $339.24 million in the commercial and agricultural portfolio and also due to increases in the commercial real estate portfolio as a result of market demand. Total average investment securities increased $40.16 million or 4.00%. Average mortgages held for sale increased $7.95 million or 58.37%. Average other investments, which include federal funds sold, time deposits with other banks, Federal Reserve bank excess balances, Federal Reserve Bank and FHLB stock and commercial paper, increased $22.94 million or 45.78%.

Average interest-bearing deposits increased $100.36 million or 2.46% for the first nine months of 2020 over the same period in 2019 largely due to consumer savings levels. The effective rate paid on average interest-bearing deposits decreased 42 basis points to 0.82% compared to 1.24%. The decrease in the average cost of interest-bearing deposits was primarily the result of lower rates and a shift in the deposit mix. Average noninterest-bearing deposits grew $327.61 million or 28.56% for the first nine months of 2020 over the same period in 2019 primarily due to PPP loan fundings in business accounts.

Average short-term borrowings decreased $19.62 million or 9.19% for the first nine months of 2020 compared to the same period in 2019. Interest paid on short-term borrowings decreased 81 basis points. The decrease in short-term borrowings was primarily the result of lower borrowings with the FHLB. Interest paid on subordinated notes decreased 52 basis points due to a variable rate associated with one traunche. Average long-term debt and mandatorily redeemable securities increased $9.39 million or 13.22%. Interest paid on long-term debt and mandatorily redeemable securities decreased 73 basis points due to lower rates on mandatorily redeemable securities.

Reconciliation of Non-GAAP Financial Measures

The accounting and reporting policies of 1st Source conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures are used by management to evaluate and measure the Company’s performance. 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.

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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.


			Three Months Ended																			Three Months Ended												Nine Months Ended
(Dollars in thousands)	(Dollars in thousands)					March 31, 2020			December 31, 2019			March 31, 2019			(Dollars in thousands)							September 30, 2020			June 30, 2020	September 30, 2019						September 30, 2020	September 30, 2019
Calculation of Net Interest Margin	Calculation of Net Interest Margin														Calculation of Net Interest Margin
(A)	(A)	Interest income (GAAP)	$	67,686		$	69,543		$	69,021			(A)	Interest income (GAAP)		$	62,917		$	63,850		$	72,676			$	194,453		$	213,334
		Fully tax-equivalent adjustments:												Fully tax-equivalent adjustments:
(B)	(B)	- Loans and leases	90			92			95				(B)	- Loans and leases		78			83			95				251			283
(C)	(C)	- Tax-exempt investment securities	61			68			87				(C)	- Tax-exempt investment securities		50			54			72				165			243
(D)	(D)	Interest income - FTE (A+B+C)	67,837			69,703			69,203				(D)	Interest income - FTE (A+B+C)		63,045			63,987			72,843				194,869			213,860
(E)	(E)	Interest expense (GAAP)	12,842			14,247			14,073				(E)	Interest expense (GAAP)		8,049			9,849			15,481				30,740			44,764
(F)	(F)	Net interest income (GAAP) (A–E)	54,844			55,296			54,948				(F)	Net interest income (GAAP) (A–E)		54,868			54,001			57,195				163,713			168,570
(G)	(G)	Net interest income - FTE (D–E)	54,995			55,456			55,130				(G)	Net interest income - FTE (D–E)		54,996			54,138			57,362				164,129			169,096
(H)	(H)	Annualization factor	4.022			3.967			4.056				(H)	Annualization factor		3.978			4.022			3.967				1.336			1.337
(I)	(I)	Total earning assets	$	6,181,794		$	6,258,938		$	5,896,697			(I)	Total earning assets		$	6,841,720		$	6,727,011		$	6,190,264			$	6,584,451		$	6,052,686
		Net interest margin (GAAP-derived) (F*H)/I	3.57		%	3.51		%	3.78		%			Net interest margin (GAAP-derived) (F*H)/I		3.19		%	3.23		%	3.67		%		3.32		%	3.72		%
		Net interest margin - FTE (G*H)/I	3.58		%	3.52		%	3.79		%			Net interest margin - FTE (G*H)/I		3.20		%	3.24		%	3.68		%		3.33		%	3.74		%

PROVISION AND RESERVE FOR LOAN AND LEASE LOSSES

The provision for loan and lease losses for the three and nine months ended ~~March 31,~~September 30, 2020 was ~~$11.35~~$9.30 million and $31.03 million compared to a provision for loan and lease losses in the three and nine months ended ~~March 31,~~September 30, 2019 of ~~$4.92~~$3.72 million and $12.88 million. Net charge-offs of ~~$1.81~~$3.77 million or ~~0.14%~~0.26% of average loans and leases were recorded for the ~~first~~third quarter 2020, compared to net ~~charge-offs~~recoveries of ~~$3.54~~$0.31 million or ~~0.30%~~0.02% of average loans and leases for the same quarter a year ago.

~~Table~~ Year-to-date net charge-offs of ~~Contents~~

$5.47 million or 0.13% of average loans and leases have been recorded in 2020, compared to net charge-offs of $4.41 million or 0.12% of average loans and leases through September 30, 2019.

The provision for the three months ended ~~March 31,~~September 30, 2020 was principally driven by increases in special attention ~~outstandings~~loan balances and ~~exposures in special attention credits. In addition, increased uncertainty~~nonperforming loans, most of which were in the bus segment of the auto and light truck portfolio. There was a decline of $65.29 million in outstanding loan ~~portfolio and in specific portfolio segments~~balances this quarter following strong growth last quarter related to ~~COVID-19 concerns~~the PPP loan program. The Bank funded $597 million under this program, which carries a 100% SBA guarantee and a ~~charge-off in~~debt forgiveness component by the ~~construction equipment portfolio contributed~~CARES Act. We established a small reserve against this pool of loans to ~~the higher provision, as well as~~cover procedural and other unanticipated risks. We continued to ~~support loan growth during the quarter. Loan outstandings went up by $44 million in the first quarter.~~have COVID-19 related downgrades this quarter, including one large-dollar commercial account plus numerous additional accounts with less exposure. There were 2936 accounts greater than $100,000 downgraded to special attention this quarter, ~~compared~~31 of which were in the bus segment of the auto and light truck portfolio. This compares to 21 downgraded last quarter, eight of which were bus-related, and 40 accounts in total downgraded for all of 2019. The largest was unrelated to COVID-19, a construction equipment relationship for which we also have a sizeable impairment. COVID-19 related downgrades to special attention included a total of 26 accounts aggregating $12.33 million, of which 15 accounts aggregating $11.88 million were greater than $100,000. Most of these customers were granted payment deferrals. The initial wave of customers experiencing difficulties related to shutdowns imposed to reduce the spread of the coronavirus were primarily in the transportation (including auto rental and ~~hospitality~~bus) and hotel industries. COVID-19 related loan modifications to these industries are discussed in the “COVID-19 Impact” section above. We extended PPP loans to 44 of our special attention customers aggregating $21.65 million. The construction equipment account downgraded in the first quarter which had a sizeable impairment reserve continues to have a similar impairment reserve this quarter.

We continue to evaluate risks which may impact our loan portfolios. AsDuring the first quarter of 2020, as a result of the coronavirus pandemic and resultant business shutdowns and unemployment spikes, we reviewed our loan portfolio segments, assessing the likely impact of COVID-19 on each segment and established specific qualitative adjustment factors. During the third quarter, we reviewed these factors and increased them in the bus segment of the auto and light truck portfolio and the non-owner occupied commercial real estate portfolio, which includes hotels, strip malls and office buildings. We remain concerned that geopolitical events, particularly in the aftermath of the pandemic, will have the potential to further negatively impact the U.S. economy. ~~Current~~Congress has not been able to come to agreement on further stimulus and the impending election further adds to the uncertainty. Additional current concerns include slower growth projections for world economies and the sharp decline in global trade growth exacerbated by trade supply concerns raised during the pandemic and ongoing tariff disputes, particularly between China and the U.S. Political uncertainty continues in Latin America, with governments facing increased pressures with the pandemic and ongoing corruption scandals, fueling U.S. border concerns. Concerns continue to be heightened globally due to actual and potential terrorist attacks.

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Another area of concern continues to be our aircraft portfolio where we have a collateral concentration and $177 million in foreign exposure. The majority of our foreign exposure is in Mexico and Brazil. As we ended 2019, the Brazilian economy was on a path of gradual improvement and Mexico’s economy, although stronger, was beginning to exhibit some weaknesses. Now, ~~in light of~~considering the pandemic, both are projected to contract in 2020. We continue to monitor individual customer performance and assess risks in the portfolio as a whole.

On ~~March 31,~~September 30, 2020, 30 day and over loan and lease delinquencies as a percentage of loan and lease ~~outstandings~~balances were ~~0.24%~~0.29%, compared to ~~0.31%~~0.47% on ~~March 31,~~September 30, 2019. The reserve for loan and lease losses as a percentage of loans and leases outstanding at the end of the period was ~~2.35%~~2.43% compared to ~~2.07%~~2.14% one year ago. The reserve as a percentage of loans and leases outstanding, net of PPP loans, was 2.69%. The increase in the reserve as a percent of loans and leases outstanding was primarily due to higher special attention loan outstanding balances and qualitative adjustment factors related to COVID-19 concerns. A summary of loan and lease loss experience during the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 is located in Note 5 of the Consolidated Financial Statements.

A loan or lease is considered impaired, based on current information and events, if it is probable that we 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. We evaluate loans and leases exceeding $100,000 for impairment and establish 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. A summary of impaired loans as of ~~March 31,~~September 30, 2020 and December 31, 2019 is reflected in Note 4 of the Consolidated Financial Statements.

Current Expected Credit Losses (CECL)

As permitted by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), we opted to delay adoption of CECL until the earlier of the end of the coronavirus national emergency or December 31, 2020. We will recognize a one-time cumulative effect adjustment through retained earnings of $2.58 million to increase the allowance for credit losses as of January 1, 2020. As of ~~March 31,~~September 30, 2020, we estimate an additional increase to the allowance for credit losses of between $2$0 million and ~~$10~~$2 million which will be recognized through earnings after adoption. We believe that as of ~~March 31,~~September 30, 2020, a ~~sizeable~~ forecast adjustment is necessary as well as qualitative factor adjustments for portfolio segments most severely impacted by the COVID-19 business shutdowns. Given the ~~shelter in place orders, resultant~~ business shutdowns and skyrocketing unemployment experienced due to the shelter in place orders during the first and second quarter, we project the next twelve-month period as the most adverse and applied a more severe forecast adjustment. Furthermore, we reviewed portfolio segments on a granular level, adjusting for greater loss potential in segments immediately impacted such as transportation and ~~hospitality,~~hotels, as evidenced by deferral ~~requests.~~requests and increasing special attention loan balances and nonperforming loans. Additionally, the forecast factor adjustment and the life of loan methodology have a more significant impact on longer duration portfolios.

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NONPERFORMING ASSETS

The following table shows nonperforming assets.


(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		December 31, 2019		March 31, 2019		(Dollars in thousands)	September 30, 2020		December 31, 2019		September 30, 2019
Loans and leases past due 90 days or more	Loans and leases past due 90 days or more	$	191	$	309	$	178	Loans and leases past due 90 days or more	$	81	$	309	$	311
Nonaccrual loans and leases	Nonaccrual loans and leases	26,301		9,789		13,622		Nonaccrual loans and leases	70,595		9,789		10,188
Other real estate	Other real estate	362		522		417		Other real estate	303		522		629
Repossessions	Repossessions	9,020		8,623		10,411		Repossessions	4,639		8,623		6,610
Equipment owned under operating leases	Equipment owned under operating leases	—		—		64		Equipment owned under operating leases	136		—		—
Total nonperforming assets	Total nonperforming assets	$	35,874	$	19,243	$	24,692	Total nonperforming assets	$	75,754	$	19,243	$	17,738

Nonperforming assets as a percentage of loans and leases were ~~0.68%~~1.33% at ~~March 31,~~September 30, 2020, 0.37% at December 31, 2019, and ~~0.49%~~0.34% at ~~March~~September 30, 2019. Excluding PPP loans, nonperforming assets as a percentage of loan and leases were 1.48% at September 30, 2020, 0.37% at December 31, 2019, and 0.34% at September 30, 2019. Nonperforming assets totaled ~~$35.87~~$75.75 million at ~~March 31,~~September 30, 2020, an increase of ~~86.43%~~293.67% from the $19.24 million reported at December 31, 2019, and a ~~45.29%~~327.07% increase from the ~~$24.69~~$17.74 million reported at ~~March 31,~~September 30, 2019. The increase in nonperforming assets during the first ~~three~~nine months of 2020 was related to higher nonaccrual loans and leases. The increase in nonperforming assets at ~~March 31,~~September 30, 2020 from ~~March 31,~~September 30, 2019 also occurred ~~primarily~~ in nonaccrual loans and leases.

The increase in nonaccrual loans and leases at ~~March 31,~~September 30, 2020 from December 31, 2019 and September 30, 2019 occurred primarily in the auto and light truck and construction equipment ~~commercial and agricultural and aircraft~~ portfolios. During the first ~~quarter~~nine months of 2020, ~~one relationship~~two relationships of ~~$14.95~~a combined $18.21 million ~~primarily within~~of auto rental loan balances in the auto and light truck portfolio and two relationships of a combined $19.10 million in the construction equipment portfolio went into nonaccrual. ~~The increase~~Additionally, during the third quarter of 2020, $14.76 million of bus loan balances in ~~nonaccrual loans and leases at March 31, 2020 from March 31, 2019 occurred primarily in the construction equipment, medium and heavy duty truck and aircraft portfolios offset by a decrease in the~~our auto and light truck ~~portfolio.~~portfolio were placed in nonaccrual. A summary of nonaccrual loans and leases and past due aging for the period ended ~~March 31,~~September 30, 2020 and December 31, 2019 is located in Note 4 of the Consolidated Financial Statements.

Other real estate is the result of foreclosing on real estate in the local market for which we have a current appraisal and are well secured. Other real estate ~~increased~~decreased over the past year due to ~~current foreclosures outpacing~~ sales of existing ~~properties.~~properties outpacing current foreclosures.

Repossessions consisted mainly of aircraft and auto and light trucks. 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, unless the equipment is in the process of immediate sale. Any subsequent fair value write-downs or write-ups, to the extent of previous write-downs, are included in noninterest expense. The decrease in repossession balances at September 30, 2020 compared to December 31, 2019 was primarily the result of the sale of a repossessed aircraft and the write-down of one aircraft.

The following table shows a summary of other real estate and repossessions.


(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		December 31, 2019		March 31, 2019		(Dollars in thousands)	September 30, 2020		December 31, 2019		September 30, 2019
Commercial and agricultural	Commercial and agricultural	$	—	$	—	$	22	Commercial and agricultural	$	—	$	—	$	—
Auto and light truck	Auto and light truck	1,165		1,865		5,293		Auto and light truck	714		1,865		2,153
Medium and heavy duty truck	Medium and heavy duty truck	—		—		—		Medium and heavy duty truck	—		—		—
Aircraft	Aircraft	7,808		6,707		4,400		Aircraft	3,750		6,707		4,400
Construction equipment	Construction equipment	35		35		603		Construction equipment	152		35		—
Commercial real estate	Commercial real estate	303		303		—		Commercial real estate	303		303		303
Residential real estate and home equity	Residential real estate and home equity	59		219		417		Residential real estate and home equity	—		219		326
Consumer	Consumer	12		16		93		Consumer	23		16		57
Total	Total	$	9,382	$	9,145	$	10,828	Total	$	4,942	$	9,145	$	7,239

For financial statement purposes, nonaccrual loans and leases are included in loan and lease outstandings, whereas repossessions and other real estate are included in other assets.

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NONINTEREST INCOME

The following table shows the details of noninterest income.


		Three Months Ended March 31,													Three Months Ended September 30,									Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		$ Change	% Change		(Dollars in thousands)	2020		2019		$ Change	% Change		2020		2019		$ Change	% Change
Noninterest income:	Noninterest income:								Noninterest income:
Trust and wealth advisory	Trust and wealth advisory	$	4,848	$	4,858	(10)	(0.21)	%	Trust and wealth advisory	$	5,153	$	4,982	171	3.43%		$	15,590	$	15,423	167	1.08	%
Service charges on deposit accounts	Service charges on deposit accounts	2,605		2,498		107	4.28	%	Service charges on deposit accounts	2,336		2,892		(556)	(19.23)%		6,851		8,175		(1,324)	(16.20)	%
Debit card	Debit card	3,373		3,220		153	4.75	%	Debit card	4,019		3,727		292	7.83%		10,993		10,616		377	3.55	%
Mortgage banking	Mortgage banking	2,336		936		1,400	NM		Mortgage banking	6,474		1,362		5,112	NM		12,125		3,297		8,828	NM
Insurance commissions	Insurance commissions	1,881		2,174		(293)	(13.48)	%	Insurance commissions	1,825		1,603		222	13.85%		5,401		5,295		106	2.00	%
Equipment rental	Equipment rental	6,630		7,982		(1,352)	(16.94)	%	Equipment rental	5,593		7,578		(1,985)	(26.19)%		18,213		23,369		(5,156)	(22.06)	%
Gains on investment securities available-for-sale	Gains on investment securities available-for-sale	280		—		280	NM		Gains on investment securities available-for-sale	—		—		—	NM		279		—		279	NM
Other	Other	2,669		2,456		213	8.67	%	Other	2,641		3,621		(980)	(27.06)%		8,452		9,378		(926)	(9.87)	%
Total noninterest income	Total noninterest income	$	24,622	$	24,124	498	2.06	%	Total noninterest income	$	28,041	$	25,765	2,276	8.83	%	$	77,904	$	75,553	2,351	3.11	%

NM = Not Meaningful

Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) ~~were flat~~increased slightly during the three and nine months ended ~~March 31,~~September 30, 2020 compared with the same ~~period~~periods a year ago. 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 ~~March 31,~~September 30, 2020, December 31, 2019, and ~~March 31,~~September 30, 2019 was ~~$3.78~~$4.30 billion, $4.48 billion, and ~~$4.18~~$4.24 billion, respectively. ~~The decrease in assets under management as of March 31, 2020 was the result of market changes during the end of the quarter.~~

Service charges on deposit accounts ~~increased~~decreased for the three and nine months ended ~~March 31,~~September 30, 2020 over the comparable ~~period~~periods in 2019. The ~~increase~~decrease in service charges on deposit accounts primarily reflects a ~~higher~~lower volume of nonsufficient fund transactions and ~~increased business~~reduced ATM fees. Higher deposit ~~account fees.~~balances from elevated consumer savings levels in conjunction with the pandemic resulted in fewer overdrawn accounts.

Debit card income ~~improved~~increased in the three and nine months ended ~~March 31,~~September 30, 2020 over the same ~~period~~periods a year ago. The majority of the improvement in debit card income was the result of an increased volume of debit card transactions in 2020.

Mortgage banking income increased in the three and nine months ended ~~March 31,~~September 30, 2020 as compared to the same ~~period~~periods in 2019. The year-to-date increase was primarily caused by ~~increased gains~~better margins on a higher volume of loan sales as a result of more loans originated for the secondary market offset by higher mortgage servicing rights amortization ~~expense.~~expense and $0.81 million of impairment charges on mortgage servicing rights.

Insurance commissions were ~~lower~~higher during the three and nine months ended ~~March 31,~~September 30, 2020 ~~over~~compared to the same ~~period~~periods a year ago. The ~~decrease in insurance commissions~~increase was primarily due to new business offset by a reduction in contingent commissions received.

Equipment rental income decreased for the three and nine months ended ~~March 31,~~September 30, 2020 over the comparable ~~period~~periods in 2019. The decrease was the result of reduced leasing volume primarily in the construction equipment, aircraft and auto and light truck portfolios resulting in the average equipment rental portfolio decreasing by ~~16.80%~~21% over the same period a year ago.

Gains on investment securities available-for-sale during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were primarily from the sale of corporate securities in managing portfolio risk.

Other income ~~increased~~decreased for the three and nine months ended ~~March 31,~~September 30, 2020 ~~over the comparable periods in 2019.~~compared to one year ago. The ~~increase~~decrease was primarily a result of lower claim proceeds from bank owned life insurance, reduced rental income on a repossessed asset, and a decrease in customer swap fees offset by higher partnership investment ~~gains and increased brokerage fees and commissions offset by lower customer swap fees.~~gains.

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NONINTEREST EXPENSE

The following table shows the details of noninterest expense.


		Three Months Ended March 31,													Three Months Ended September 30,									Nine Months Ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		$ Change	% Change		(Dollars in thousands)	2020		2019		$ Change	% Change		2020		2019		$ Change	% Change
Noninterest expense:	Noninterest expense:								Noninterest expense:
Salaries and employee benefits	Salaries and employee benefits	$	24,401	$	23,495	906	3.86	%	Salaries and employee benefits	$	25,609	$	24,434	1,175	4.81	%	$	74,009	$	71,716	2,293	3.20	%
Net occupancy	Net occupancy	2,721		2,772		(51)	(1.84)	%	Net occupancy	2,512		2,635		(123)	(4.67)	%	7,737		7,888		(151)	(1.91)	%
Furniture and equipment	Furniture and equipment	6,407		6,024		383	6.36	%	Furniture and equipment	6,247		6,027		220	3.65	%	18,912		18,340		572	3.12	%
Depreciation – leased equipment	Depreciation – leased equipment	5,427		6,524		(1,097)	(16.81)	%	Depreciation – leased equipment	4,694		6,198		(1,504)	(24.27)	%	15,263		19,122		(3,859)	(20.18)	%
Professional fees	Professional fees	1,442		1,598		(156)	(9.76)	%	Professional fees	2,041		1,603		438	27.32	%	4,741		4,907		(166)	(3.38)	%
Supplies and communication	Supplies and communication	1,634		1,493		141	9.44	%	Supplies and communication	1,305		1,643		(338)	(20.57)	%	4,329		4,744		(415)	(8.75)	%
FDIC and other insurance	FDIC and other insurance	288		645		(357)	(55.35)	%	FDIC and other insurance	868		260		608	NM		1,755		1,513		242	15.99	%
Business development and marketing	Business development and marketing	1,359		949		410	43.20	%	Business development and marketing	923		1,844		(921)	(49.95)	%	3,403		4,471		(1,068)	(23.89)	%
Loan and lease collection and repossession	Loan and lease collection and repossession	763		1,361		(598)	(43.94)	%	Loan and lease collection and repossession	1,054		697		357	51.22	%	2,655		2,288		367	16.04	%
Other	Other	2,093		343		1,750	NM		Other	1,790		1,765		25	1.42	%	5,599		4,674		925	19.79	%
Total noninterest expense	Total noninterest expense	$	46,535	$	45,204	1,331	2.94	%	Total noninterest expense	$	47,043	$	47,106	(63)	(0.13)	%	$	138,403	$	139,663	(1,260)	(0.90)	%

NM = Not Meaningful

Salaries and employee benefits increased during the three and nine months ended ~~March 31,~~September 30, 2020 compared to the same ~~period~~periods in 2019. The increase was mainly due to higher base salaries as a result of normal merit increases and a slight increase in average staffing levels along with a rise in ~~group insurance claims~~commission compensation primarily in our residential mortgage area offset by a decrease in group insurance claims and incentive ~~compensation as compared to the same period in 2019.~~compensation.

Net occupancy expense decreased during the three and nine months ended ~~March 31,~~September 30, 2020 compared to the same ~~period~~periods a year ago. The decrease ~~for 2020~~ was primarily ~~attributable~~due to lower repair ~~and utility~~ expenses ~~and reduced snow removal costs~~ offset by ~~higher~~increased building depreciation.

Furniture and equipment expense, including depreciation, ~~increased~~rose during the three and nine months ended ~~March 31,~~September 30, 2020 compared to the same ~~period~~periods a year ago. Furniture and equipment expense was higher in 2020 mainly due to higher computer processing charges and increased software maintenance costs offset by a reduction in equipment depreciation.

Depreciation on leased equipment decreased for the three and nine months ended ~~March 31,~~September 30, 2020 compared to the same ~~period~~periods in 2019. Depreciation on leased equipment correlates with the decrease in equipment rental income.

Professional fees ~~decreased~~increased during the ~~first~~third quarter of 2020 compared to the ~~same period a year ago. The decrease was mainly due to lower legal fees and reduced utilization of consulting services offset by an increase in board of director fees.~~

~~Supplies and communication increased during the first~~third quarter of ~~2020 compared to the same period a year ago. The increase resulted primarily from higher postage~~2019 and ~~shipping expenses.~~

FDIC and other insurance was lower during the three months ended March 31, 2020 compared to the same period in 2019. The decrease in 2020 was mainly due to $0.45 million in FDIC insurance premium credits receiveddecreased in the first ~~quarter of 2020.~~

~~Business development and marketing expense increased during the first quarter~~nine months of 2020 compared to the same period a year ago. The increase during the ~~first~~third quarter was mainly due to higher ~~marketing promotions~~legal fees and utilization of consulting services. The decrease in the first nine months was mainly due to reduced utilization of consulting services offset by an increase in legal fees and board of director fees.

Supplies and communication decreased during the third quarter and first nine months of 2020 compared to the same periods a year ago. The decrease resulted primarily from lower printing costs and reduced telephone line and equipment expenses.

FDIC and other insurance was higher during the three and nine months ended September 30, 2020 compared to the same periods in 2019. The increase in 2020 was mainly due to FDIC insurance premium credits recognized starting third quarter 2019 and ending second quarter 2020.

Business development and marketing expense decreased during the third quarter and first ~~quarter~~nine months of ~~2019.~~2020 compared to the same periods a year ago. The decrease during 2020 was primarily due to lower business development expense as a result of fewer business entertainment and travel opportunities tied to COVID-19 precautions.

Loan and lease collection and repossession expense ~~decreased~~increased during the three and nine months ended September 30, 2020 compared to the same periods in 2019. The increase was mainly due to higher collection expenses related to the repossession of an aircraft, fewer gains on the sale of repossessed assets, and a $0.60 million valuation adjustment on a repossessed aircraft during the third quarter 2020 offset by lower valuation adjustments on repossessed assets during the first nine months of 2020 compared to 2019.

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Other expenses was relatively flat during the third quarter of 2020 compared to the same period in 2019 and increased during the first nine months of 2020 compared to the same period in 2019. The ~~decrease was mainly due to fewer valuation adjustments on repossessed assets offset by reduced gains on the sale of repossessed assets.~~

~~Other expenses increased~~increase during the ~~three~~first nine months ~~ended March 31, 2020 compared to~~was primarily the ~~same period in 2019. During the first three months~~result of ~~2020, reduced~~lower gains on the sale of fixed assets, a rise in the provision for unfunded loan commitments and a higher provision for interest rate swaps with customers and ~~an increase in the provision for unfunded loan commitments were offset by higher gains on the sale~~a write down of operating lease ~~equipment.~~equipment of $0.45 million offset by lower employee training expenses due to COVID-19 travel precautions and a trust loss recovery of $0.17 million.

INCOME TAXES

The provision for income taxes for the three and nine month ~~period~~periods ended ~~March 31,~~September 30, 2020 was ~~$5.16~~$6.51 million and $17.19 million, compared to ~~$6.75~~$7.69 million and $21.52 million for the same ~~period~~periods in 2019. The effective tax rate was ~~23.91%~~24.50% and ~~23.33%~~23.92% for the quarter ended ~~March 31,~~September 30, 2020 and 2019, respectively and 23.81% and 23.50% for the first nine months ended September 30, 2020 and 2019, respectively. The increase in the quarterly effective tax rate was ~~slightly higher in 2020 compared to 2019~~ due to ~~higher combined~~a slight increase in the tax provision for state ~~taxes in 2020.~~income taxes.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risks faced by 1st Source since December 31, 2019. For information regarding our market risk, refer to 1st Source’s Annual Report on Form 10-K for the year ended December 31, 2019.

ITEM 4.

CONTROLS AND PROCEDURES

As of the end of the period covered by this report an evaluation was carried out, 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 ~~March 31,~~September 30, 2020, 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 ~~first~~third fiscal quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings.

1st Source and its subsidiaries are involved in various legal proceedings incidental to the conduct of our businesses. Management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations.

ITEM 1A. Risk Factors.

1st Source has made the following addition to the risk factors disclosed in Item 1A of Part 1 of its Annual Report on Form 10-K for the year ended December 31, 2019.

We may be adversely affected by the world-wide coronavirus (COVID-19) pandemic.

The coronavirus (COVID-19) outbreak may have an adverse impact on certain of our customers directly or indirectly. Entire industries within our loan and lease portfolio such as ~~motor coach, shuttle bus~~buses, auto rental and ~~auto rental~~hotels have been impacted due to reduced demand related to quarantines and travel restrictions. Other industries within our loan and lease portfolio or the communities we serve are likely to experience similar disruptions and economic hardships as the current coronavirus pandemic persists. In addition, such events could affect the stability of our deposit base, lead to mass layoffs and furloughs which could impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, result in lost revenue or cause us to incur additional expenses.

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Additionally, the Federal Reserve has reduced interest rates substantially in an attempt to boost consumer spending due to the coronavirus pandemic which could have a sustained negative impact on our results of operations. The U.S. Congress has also passed a massive stimulus package (the “Coronavirus Aid, Relief, and Economic Security Act”) intended to provide relief to consumers and small businesses, however the effectiveness of this package could be disrupted by operational challenges in successfully implementing all of its provisions in a timely manner and could ultimately prove to be insufficient in scale.

~~Although~~Even with operational precautions we maintain contingency and disaster recovery plans for pandemic outbreaks, we created a dedicated executive COVID-19 response team that is closely monitoring developments and providing guidance for additional precautions and initiatives. We have established separate teams within departments to help ensure that infection will not spread across entire departments. We are encouraging virtual meetings and conference calls in place of in-person meetings, including our annual shareholder meeting which will be held virtually this year. Employees with health conditions putting them at higher risk of adverse effects from coronavirus infection are working remotely. Additionally, travel has been restricted. We are promotingimplemented such as mask utilization, social distancing ~~frequent hand washing~~ and thorough disinfection of ~~all surfaces. Our banking center lobbies have been closed except for advance appointments only. Banking center drive-ups, ATMs and online/mobile banking services continue to operate.~~

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~~Even with precautions,~~surfaces, the continued spread or prolonged impact of the coronavirus could negatively impact the availability of key personnel or significant numbers of our staff, who are necessary to conduct our business. Such a spread or outbreak could also impact the business and operations of third party service providers who perform critical services for our business. Similarly, the adverse impacts already seen by our commercial and retail customers from the pandemic, may be exacerbated or more prolonged than we currently anticipate. If the coronavirus spreads or the containment and mitigation response is unsuccessful for a prolonged period of time, we could experience a material adverse effect on our business, financial condition, and results of operations.

ITEM 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds~~Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES


Period	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
~~January~~July 01 - 31, 2020	—	$	—	—	859,374
~~February 01 - 29, 2020~~	—	—		—	~~859,374~~
~~March~~August 01 - 31, 2020	—	—		—	859,374
September 01 - 30, 2020	—	—		—	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.

ITEM 3. Defaults Upon Senior Securities.

None

ITEM 4. Mine Safety Disclosures.

None

ITEM 5. Other Information.

None

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ITEM 6. ~~Exhibits~~Exhibits.

The following exhibits are filed with this report:


~~3(b)~~						~~By-Laws of Registrant, as amended March 20, 2020, filed herewith.~~

31.1						Certification of Chief Executive Officer required by Rule 13a-14(a).

31.2						Certification of Chief Financial Officer required by Rule 13a-14(a).

32.1						Certification pursuant to 18 U.S.C. Section 1350 of Chief Executive Officer.

32.2						Certification pursuant to 18 U.S.C. Section 1350 of 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)

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SIGNATURES

Pursuant to the requirements 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

DATE

~~April 23,~~October 22, 2020

/s/ CHRISTOPHER J. MURPHY III

Christopher J. Murphy III
Chairman of the Board, President and CEO

DATE

~~April 23,~~October 22, 2020

/s/ ANDREA G. SHORT

Andrea G. Short
Treasurer and Chief Financial Officer
Principal Accounting Officer

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