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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
OR
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number 0-6233
source-20200331_g1.jpg
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,IN 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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock - without par valueSRCEThe 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 filerx 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 — 25,535,63425,553,644 shares




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EXHIBITS 
 
 
 
 

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1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited - Dollars in thousands)
March 31,
2020
December 31,
2019
September 30,
2020
December 31,
2019
ASSETSASSETS  ASSETS  
Cash and due from banksCash 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 banksFederal funds sold and interest bearing deposits with other banks49,543  16,150  Federal funds sold and interest bearing deposits with other banks91,641 16,150 
Investment securities available-for-saleInvestment securities available-for-sale1,057,169  1,040,583  Investment securities available-for-sale1,083,427 1,040,583 
Other investmentsOther investments28,414  28,414  Other investments27,674 28,414 
Mortgages held for saleMortgages held for sale13,449  20,277  Mortgages held for sale20,990 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 agriculturalCommercial and agricultural1,166,462  1,132,791  Commercial and agricultural1,681,519 1,132,791 
Auto and light truckAuto and light truck577,757  588,807  Auto and light truck527,582 588,807 
Medium and heavy duty truckMedium and heavy duty truck278,076  294,824  Medium and heavy duty truck271,248 294,824 
AircraftAircraft773,132  784,040  Aircraft806,162 784,040 
Construction equipmentConstruction equipment718,307  705,451  Construction equipment723,596 705,451 
Commercial real estateCommercial real estate930,757  908,177  Commercial real estate961,550 908,177 
Residential real estate and home equityResidential real estate and home equity545,606  532,003  Residential real estate and home equity519,881 532,003 
ConsumerConsumer139,417  139,434  Consumer135,498 139,434 
Total loans and leasesTotal loans and leases5,129,514  5,085,527  Total loans and leases5,627,036 5,085,527 
Reserve for loan and lease lossesReserve for loan and lease losses(120,798) (111,254) Reserve for loan and lease losses(136,817)(111,254)
Net loans and leasesNet loans and leases5,008,716  4,974,273  Net loans and leases5,490,219 4,974,273 
Equipment owned under operating leases, netEquipment owned under operating leases, net101,238  111,684  Equipment owned under operating leases, net79,703 111,684 
Net premises and equipmentNet premises and equipment52,431  52,219  Net premises and equipment49,933 52,219 
Goodwill and intangible assetsGoodwill and intangible assets83,964  83,971  Goodwill and intangible assets83,953 83,971 
Accrued income and other assetsAccrued income and other assets267,438  227,990  Accrued income and other assets300,834 227,990 
Total assetsTotal assets$6,735,118  $6,622,776  Total assets$7,290,949 $6,622,776 
LIABILITIESLIABILITIES  LIABILITIES  
Deposits:Deposits:  Deposits:  
Noninterest-bearing demandNoninterest-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 demandInterest-bearing demand1,591,419  1,677,200  Interest-bearing demand1,885,771 1,677,200 
SavingsSavings840,606  814,794  Savings992,320 814,794 
TimeTime1,624,559  1,648,498  Time1,297,996 1,648,498 
Total interest-bearing depositsTotal interest-bearing deposits4,056,584  4,140,492  Total interest-bearing deposits4,176,087 4,140,492 
Total depositsTotal deposits5,275,911  5,357,326  Total deposits5,896,855 5,357,326 
Short-term borrowings:Short-term borrowings:  Short-term borrowings:  
Federal funds purchased and securities sold under agreements to repurchaseFederal funds purchased and securities sold under agreements to repurchase135,942  120,459  Federal funds purchased and securities sold under agreements to repurchase158,834 120,459 
Other short-term borrowingsOther short-term borrowings146,903  25,434  Other short-term borrowings6,740 25,434 
Total short-term borrowingsTotal short-term borrowings282,845  145,893  Total short-term borrowings165,574 145,893 
Long-term debt and mandatorily redeemable securitiesLong-term debt and mandatorily redeemable securities81,877  71,639  Long-term debt and mandatorily redeemable securities81,659 71,639 
Subordinated notesSubordinated notes58,764  58,764  Subordinated notes58,764 58,764 
Accrued expenses and other liabilitiesAccrued expenses and other liabilities158,419  140,518  Accrued expenses and other liabilities173,082 140,518 
Total liabilitiesTotal liabilities5,857,816  5,774,140  Total liabilities6,375,934 5,774,140 
SHAREHOLDERS’ EQUITYSHAREHOLDERS’ EQUITY  SHAREHOLDERS’ EQUITY  
Preferred stock; 0 par valuePreferred stock; 0 par value  Preferred stock; 0 par value  
Authorized 10,000,000 shares; NaN issued or outstandingAuthorized 10,000,000 shares; NaN issued or outstanding—  —  Authorized 10,000,000 shares; NaN issued or outstanding
Common stock; 0 par valueCommon 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, 2019436,538  436,538  
Authorized 40,000,000 shares; issued 28,205,674 at September 30, 2020 and December 31, 2019Authorized 40,000,000 shares; issued 28,205,674 at September 30, 2020 and December 31, 2019436,538 436,538 
Retained earningsRetained earnings472,911  463,269  Retained earnings497,419 463,269 
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 incomeAccumulated other comprehensive income17,651  5,172  Accumulated other comprehensive income19,658 5,172 
Total shareholders’ equityTotal shareholders’ equity850,897  828,277  Total shareholders’ equity877,754 828,277 
Noncontrolling interestsNoncontrolling interests$26,405  $20,359  Noncontrolling interests37,261 20,359 
Total equityTotal equity$877,302  $848,636  Total equity915,015 848,636 
Total liabilities and equityTotal 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.
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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,
20202019 2020201920202019
Interest income:Interest income:  Interest income:    
Loans and leasesLoans and leases$61,526  $62,683  Loans and leases$58,318 $66,807 $178,659 $195,089 
Investment securities, taxableInvestment securities, taxable5,550  5,515  Investment securities, taxable4,103 5,056 14,140 15,757 
Investment securities, tax-exemptInvestment securities, tax-exempt264  385  Investment securities, tax-exempt207 316 703 1,054 
OtherOther346  438  Other289 497 951 1,434 
Total interest incomeTotal interest income67,686  69,021  Total interest income62,917 72,676 194,453 213,334 
Interest expense:Interest expense:  Interest expense:    
DepositsDeposits10,851  11,470  Deposits6,532 13,524 25,648 37,972 
Short-term borrowingsShort-term borrowings254  931  Short-term borrowings83 293 427 1,764 
Subordinated notesSubordinated notes884  928  Subordinated notes824 914 2,543 2,770 
Long-term debt and mandatorily redeemable securitiesLong-term debt and mandatorily redeemable securities853  744  Long-term debt and mandatorily redeemable securities610 750 2,122 2,258 
Total interest expenseTotal interest expense12,842  14,073  Total interest expense8,049 15,481 30,740 44,764 
Net interest incomeNet interest income54,844  54,948  Net interest income54,868 57,195 163,713 168,570 
Provision for loan and lease lossesProvision for loan and lease losses11,353  4,918  Provision for loan and lease losses9,303 3,717 31,031 12,882 
Net interest income after provision for loan and lease lossesNet interest income after provision for loan and lease losses43,491  50,030  Net interest income after provision for loan and lease losses45,565 53,478 132,682 155,688 
Noninterest income:Noninterest income:  Noninterest income:    
Trust and wealth advisoryTrust and wealth advisory4,848  4,858  Trust and wealth advisory5,153 4,982 15,590 15,423 
Service charges on deposit accountsService charges on deposit accounts2,605  2,498  Service charges on deposit accounts2,336 2,892 6,851 8,175 
Debit cardDebit card3,373  3,220  Debit card4,019 3,727 10,993 10,616 
Mortgage bankingMortgage banking2,336  936  Mortgage banking6,474 1,362 12,125 3,297 
Insurance commissionsInsurance commissions1,881  2,174  Insurance commissions1,825 1,603 5,401 5,295 
Equipment rentalEquipment rental6,630  7,982  Equipment rental5,593 7,578 18,213 23,369 
Gains on investment securities available-for-saleGains on investment securities available-for-sale280  —  Gains on investment securities available-for-sale279 
OtherOther2,669  2,456  Other2,641 3,621 8,452 9,378 
Total noninterest incomeTotal noninterest income24,622  24,124  Total noninterest income28,041 25,765 77,904 75,553 
Noninterest expense:Noninterest expense:  Noninterest expense:    
Salaries and employee benefitsSalaries and employee benefits24,401  23,495  Salaries and employee benefits25,609 24,434 74,009 71,716 
Net occupancyNet occupancy2,721  2,772  Net occupancy2,512 2,635 7,737 7,888 
Furniture and equipmentFurniture and equipment6,407  6,024  Furniture and equipment6,247 6,027 18,912 18,340 
Depreciation – leased equipmentDepreciation – leased equipment5,427  6,524  Depreciation – leased equipment4,694 6,198 15,263 19,122 
Professional feesProfessional fees1,442  1,598  Professional fees2,041 1,603 4,741 4,907 
Supplies and communicationSupplies and communication1,634  1,493  Supplies and communication1,305 1,643 4,329 4,744 
FDIC and other insuranceFDIC and other insurance288  645  FDIC and other insurance868 260 1,755 1,513 
Business development and marketingBusiness development and marketing1,359  949  Business development and marketing923 1,844 3,403 4,471 
Loan and lease collection and repossessionLoan and lease collection and repossession763  1,361  Loan and lease collection and repossession1,054 697 2,655 2,288 
OtherOther2,093  343  Other1,790 1,765 5,599 4,674 
Total noninterest expenseTotal noninterest expense46,535  45,204  Total noninterest expense47,043 47,106 138,403 139,663 
Income before income taxesIncome before income taxes21,578  28,950  Income before income taxes26,563 32,137 72,183 91,578 
Income tax expenseIncome tax expense5,160  6,754  Income tax expense6,509 7,689 17,185 21,517 
Net incomeNet income16,418  22,196  Net income20,054 24,448 54,998 70,061 
Net (income) loss attributable to noncontrolling interests(5) —  
Net loss (income) attributable to noncontrolling interestsNet loss (income) attributable to noncontrolling interests(10)(25)(42)
Net income available to common shareholdersNet 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 shareBasic 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 shareDiluted net income per common share$0.64  $0.86  Diluted net income per common share$0.78 $0.95 $2.14 $2.72 
Cash dividendsCash dividends$0.29  $0.27  Cash dividends$0.28 $0.27 $0.85 $0.81 
Basic weighted average common shares outstandingBasic weighted average common shares outstanding25,523,356  25,759,186  Basic weighted average common shares outstanding25,552,374 25,520,035 25,538,910 25,630,771 
Diluted weighted average common shares outstandingDiluted weighted average common shares outstanding25,523,356  25,759,186  Diluted weighted average common shares outstanding25,552,374 25,520,035 25,538,910 25,630,771 
The accompanying notes are a part of the unaudited consolidated financial statements.
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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,
20202019 2020201920202019
Net incomeNet 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 securities16,717  9,573  
Unrealized (depreciation) appreciation of available-for-sale securitiesUnrealized (depreciation) appreciation of available-for-sale securities(303)2,920 19,360 20,161 
Reclassification adjustment for realized gains included in net incomeReclassification adjustment for realized gains included in net income(280) —  Reclassification adjustment for realized gains included in net income(279)
Income tax effectIncome tax effect(3,958) (2,305) Income tax effect73 (703)(4,595)(4,855)
Other comprehensive income, net of tax12,479  7,268  
Other comprehensive (loss) income, net of taxOther comprehensive (loss) income, net of tax(230)2,217 14,486 15,306 
Comprehensive incomeComprehensive income$28,897  $29,464  Comprehensive income19,824 26,665 $69,484 $85,367 
Comprehensive (income) loss attributable to noncontrolling interests(5) —  
Comprehensive loss (income) attributable to noncontrolling interestsComprehensive loss (income) attributable to noncontrolling interests(10)(25)(42)
Comprehensive income available to common shareholdersComprehensive 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.

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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’ EquityNoncontrolling InterestsTotal 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 ($0.27 per share)— — (6,905)— — (6,905)— (6,905)
Contributions from noncontrolling interests— — — — — 9,879 9,879 
Distributions to noncontrolling interests— — — — — (38)(38)
Balance at September 30, 2019$— $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— — — — — 
Common stock dividend ($0.28 per share)— — (7,182)— — (7,182)— (7,182)
Contributions from noncontrolling interests— — — — — 928 928 
Distributions to noncontrolling interests— — — — — (321)(321)
Balance at September 30, 2020$— $436,538 $497,419 $(75,861)$19,658 $877,754 $37,261 $915,015 

Three Months EndedNine Months Ended
Preferred
Stock
Common
Stock
Retained
Earnings
Cost of
Common
Stock
in Treasury
Accumulated
Other
Comprehensive
Income (Loss), Net
Total Shareholders’ EquityNoncontrolling InterestsTotal EquityPreferred
Stock
Common
Stock
Retained
Earnings
Cost of
Common
Stock
in Treasury
Accumulated
Other
Comprehensive
Income (Loss), Net
Total Shareholders’ EquityNoncontrolling InterestsTotal Equity
Balance at January 1, 2019Balance 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 adjustmentCumulative-effect adjustment—  —  (301) —  —  (301) —  (301) Cumulative-effect adjustment— — (301)— (301)— (301)
Balance at January 1, 2019, adjustedBalance 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 incomeNet income—  —  22,196  —  —  22,196  —  22,196  Net income— — 70,019 — — 70,019 42 70,061 
Other comprehensive incomeOther 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 awardsIssuance 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 treasuryCost 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 ($0.81 per share)— — (20,824)— — (20,824)— (20,824)
Contributions from noncontrolling interestsContributions from noncontrolling interests—  —  —  —  —  —  1,171  1,171  Contributions from noncontrolling interests— — — — — 18,363 18,363 
Balance at March 31, 2019$—  $436,538  $414,428  $(69,136) $(3,408) $778,422  $2,679  781,101  
Distributions to noncontrolling interestsDistributions to noncontrolling interests— — — — — — (38)(38)
Balance at September 30, 2019Balance at September 30, 2019$— $436,538 $448,715 $(76,716)$4,630 $813,167 $19,875 833,042 
Balance at January 1, 2020Balance at January 1, 2020$—  $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 incomeNet income—  —  16,413  —  —  16,413   16,418  Net income— — 54,973 — — 54,973 25 54,998 
Other comprehensive incomeOther 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 awardsIssuance 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 treasuryCost of 0 shares of common stock acquired for treasury—  —  —  —  —  —  —  —  Cost of 0 shares of common stock acquired for treasury— — — — — 
Common stock dividend ($0.29 per share)—  —  (7,409) —  —  (7,409) —  (7,409) 
Common stock dividend ($0.85 per share)Common stock dividend ($0.85 per share)— — (21,757)— — (21,757)— (21,757)
Contributions from noncontrolling interestsContributions from noncontrolling interests—  —  —  —  —  —  6,140  6,140  Contributions from noncontrolling interests— — — — — 17,369 17,369 
Distributions to noncontrolling interestsDistributions to noncontrolling interests—  —  —  —  —  —  (99) (99) Distributions to noncontrolling interests— — — — — (492)(492)
Balance at March 31, 2020$—  $436,538  $472,911  $(76,203) $17,651  $850,897  $26,405  $877,302  
Balance at September 30, 2020Balance at September 30, 2020$— $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,
20202019 20202019
Operating activities:Operating activities:  Operating activities:  
Net incomeNet 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 lossesProvision for loan and lease losses11,353  4,918  Provision for loan and lease losses31,031 12,882 
Depreciation of premises and equipmentDepreciation of premises and equipment1,435  1,466  Depreciation of premises and equipment4,255 4,412 
Depreciation of equipment owned and leased to othersDepreciation of equipment owned and leased to others5,427  6,524  Depreciation of equipment owned and leased to others15,263 19,122 
Stock-based compensationStock-based compensation736  673  Stock-based compensation2,377 2,069 
Amortization of investment securities premiums and accretion of discounts, netAmortization of investment securities premiums and accretion of discounts, net717  824  Amortization of investment securities premiums and accretion of discounts, net4,238 2,857 
Amortization of mortgage servicing rightsAmortization of mortgage servicing rights409  233  Amortization of mortgage servicing rights1,757 879 
Mortgage servicing rights impairmentsMortgage servicing rights impairments808 
Amortization of right of use assetsAmortization of right of use assets704  785  Amortization of right of use assets2,115 2,348 
Deferred income taxesDeferred income taxes(2,941) 444  Deferred income taxes(10,509)(4,586)
Gains on investment securities available-for-saleGains on investment securities available-for-sale(280) —  Gains on investment securities available-for-sale(279)
Originations of loans held for sale, net of principal collectedOriginations 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 saleProceeds from the sales of loans held for sale41,699  22,534  Proceeds from the sales of loans held for sale258,253 85,400 
Net gain on sale of loans held for saleNet 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 repossessionsNet 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 equipmentNet gain on sale of premises and equipment—  (1,288) Net gain on sale of premises and equipment(1,289)
Change in interest receivableChange in interest receivable(702) (2,696) Change in interest receivable(2,440)(1,717)
Change in interest payableChange in interest payable(199) 2,427  Change in interest payable(6,271)5,885 
Change in other assetsChange in other assets(826) 1,115  Change in other assets2,312 7,889 
Change in other liabilitiesChange in other liabilities(6,237) (4,735) Change in other liabilities(2,906)8,763 
OtherOther486  598  Other1,049 1,348 
Net change in operating activitiesNet change in operating activities33,305  35,397  Net change in operating activities97,012 113,086 
Investing activities:Investing activities:  Investing activities:  
Proceeds from sales of investment securities available-for-saleProceeds from sales of investment securities available-for-sale5,578  —  Proceeds from sales of investment securities available-for-sale8,403 
Proceeds from maturities and paydowns of investment securities available-for-saleProceeds from maturities and paydowns of investment securities available-for-sale121,353  28,840  Proceeds from maturities and paydowns of investment securities available-for-sale301,050 128,257 
Purchases of investment securities available-for-salePurchases 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 investmentsNet change in partnership investments(12,904) (3,171) Net change in partnership investments(31,298)(29,823)
Net change in other investmentsNet change in other investments740 
Loans sold or participated to othersLoans sold or participated to others2,863  2,862  Loans sold or participated to others10,722 50,140 
Proceeds from principal payments on direct finance leasesProceeds from principal payments on direct finance leases9,682  15,238  Proceeds from principal payments on direct finance leases35,384 56,798 
Proceeds from PPP lender origination feesProceeds from PPP lender origination fees19,375 
Net change in loans and leasesNet 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 leasesNet change in equipment owned under operating leases5,019  (3,678) Net change in equipment owned under operating leases16,691 (3,975)
Purchases of premises and equipmentPurchases of premises and equipment(1,659) (2,821) Purchases of premises and equipment(1,988)(6,091)
Proceeds from disposal of premises and equipmentProceeds from disposal of premises and equipment12  3,426  Proceeds from disposal of premises and equipment19 3,427 
Proceeds from sales of other real estate and repossessionsProceeds from sales of other real estate and repossessions764  4,044  Proceeds from sales of other real estate and repossessions6,303 9,522 
Net change in investing activitiesNet 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 accountsNet change in demand deposits and savings accounts(57,476) (95,505) Net change in demand deposits and savings accounts890,031 17,518 
Net change in time depositsNet change in time deposits(23,939) 97,274  Net change in time deposits(350,502)251,839 
Net change in short-term borrowingsNet change in short-term borrowings136,952  56,044  Net change in short-term borrowings19,681 (2,193)
Proceeds from issuance of long-term debtProceeds from issuance of long-term debt10,000  —  Proceeds from issuance of long-term debt10,000 
Payments on long-term debtPayments on long-term debt(1,917) (1,718) Payments on long-term debt(2,710)(2,499)
Stock issued under stock purchase plansStock issued under stock purchase plans39 49 
Acquisition of treasury stockAcquisition of treasury stock—  (7,258) Acquisition of treasury stock(15,085)
Net change in noncontrolling interestsNet change in noncontrolling interests6,041  1,171  Net change in noncontrolling interests16,877 18,325 
Cash dividends paid on common stockCash dividends paid on common stock(7,614) (7,174) Cash dividends paid on common stock(22,376)(21,409)
Net change in financing activitiesNet change in financing activities62,047  42,834  Net change in financing activities561,040 246,545 
Net change in cash and cash equivalentsNet change in cash and cash equivalents38,934  (31,398) Net change in cash and cash equivalents70,851 28,406 
Cash and cash equivalents, beginning of yearCash and cash equivalents, beginning of year83,365  99,079  Cash and cash equivalents, beginning of year83,365 99,079 
Cash and cash equivalents, end of periodCash 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 assetsLoans 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 PlanCommon stock matching contribution to Employee Stock Ownership and Profit Sharing Plan622  300  Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan622 300 
Right of use assets obtained in exchange for lease obligationsRight of use assets obtained in exchange for lease obligations31  1,058  Right of use assets obtained in exchange for lease obligations253 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 MarchOctober 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 assessingcontinuing 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 assessinghas assessed ASU 2020-01 and itsdoes 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 assessinghas assessed ASU 2019-12 and itsdoes not expect it to have a material impact on its accounting and disclosure.disclosures.
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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 afterupon 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 CostGross Unrealized GainsGross Unrealized LossesFair Value
March 31, 2020    
U.S. Treasury and Federal agencies securities$525,959  $11,488  $(26) $537,421  
U.S. States and political subdivisions securities79,724  1,370  (80) 81,014  
Mortgage-backed securities — Federal agencies382,200  10,483  (374) 392,309  
Corporate debt securities45,337  593  (205) 45,725  
Foreign government and other securities700  —  —  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 securities83,566  1,048  (109) 84,505  
Mortgage-backed securities — Federal agencies372,458  3,948  (1,017) 375,389  
Corporate debt securities52,151  890  (16) 53,025  
Foreign government and other securities700  —  —  700  
Total debt securities available-for-sale$1,033,771  $8,424  $(1,612) $1,040,583  
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(Dollars in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
September 30, 2020    
U.S. Treasury and Federal agencies securities$557,262 $10,954 $(208)$568,008 
U.S. States and political subdivisions securities66,323 2,423 (13)68,733 
Mortgage-backed securities — Federal agencies392,427 11,154 (91)403,490 
Corporate debt securities40,822 1,674 42,496 
Foreign government and other securities700 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 securities83,566 1,048 (109)84,505 
Mortgage-backed securities — Federal agencies372,458 3,948 (1,017)375,389 
Corporate debt securities52,151 890 (16)53,025 
Foreign government and other securities700 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 CostFair Value(Dollars in thousands)Amortized CostFair Value
Due in one year or lessDue 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 yearsDue after one year through five years462,563  473,762  Due after one year through five years454,199 468,075 
Due after five years through ten yearsDue after five years through ten years19,769  20,253  Due after five years through ten years83,702 83,903 
Due after ten yearsDue after ten years580  534  Due after ten years580 571 
Mortgage-backed securitiesMortgage-backed securities382,200  392,309  Mortgage-backed securities392,427 403,490 
Total debt securities available-for-saleTotal 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 609600 securities, 7035 of which were in an unrealized loss position.
Less than 12 Months12 months or LongerTotal Less than 12 Months12 months or LongerTotal
(Dollars in thousands) (Dollars in thousands) Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses(Dollars in thousands) Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
March 31, 2020      
September 30, 2020September 30, 2020      
U.S. Treasury and Federal agencies securitiesU.S. Treasury and Federal agencies securities$25,129  $(26) $—  $—  $25,129  $(26) U.S. Treasury and Federal agencies securities$47,792 $(208)$$$47,792 $(208)
U.S. States and political subdivisions securitiesU.S. States and political subdivisions securities2,337  (80) —  —  2,337  (80) U.S. States and political subdivisions securities857 (13)857 (13)
Mortgage-backed securities - Federal agenciesMortgage-backed securities - Federal agencies13,989  (101) 16,447  (273) 30,436  (374) Mortgage-backed securities - Federal agencies45,256 (85)3,245 (6)48,501 (91)
Corporate debt securitiesCorporate debt securities12,530  (179) 3,059  (26) 15,589  (205) Corporate debt securities
Foreign government and other securitiesForeign government and other securities500  —  —  —  500  —  Foreign government and other securities200 200 
Total debt securities available-for-saleTotal 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, 2019December 31, 2019      December 31, 2019      
U.S. Treasury and Federal agencies securitiesU.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 securitiesU.S. States and political subdivisions securities9,283  (107) 1,042  (2) 10,325  (109) U.S. States and political subdivisions securities9,283 (107)1,042 (2)10,325 (109)
Mortgage-backed securities - Federal agenciesMortgage-backed securities - Federal agencies81,951  (383) 51,165  (634) 133,116  (1,017) Mortgage-backed securities - Federal agencies81,951 (383)51,165 (634)133,116 (1,017)
Corporate debt securitiesCorporate debt securities—  —  8,091  (16) 8,091  (16) Corporate debt securities8,091 (16)8,091 (16)
Foreign government and other securitiesForeign government and other securities—  —  —  —  —  —  Foreign government and other securities
Total debt securities available-for-saleTotal 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)
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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.
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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)20202019(Dollars in thousands)2020201920202019
Gross realized gainsGross realized gains$280  $—  Gross realized gains$$$285 $
Gross realized lossesGross realized losses—  —  Gross realized losses(6)
OTTI lossesOTTI losses—  —  OTTI losses
Net realized gains (losses)Net realized gains (losses)$280  $—  Net realized gains (losses)$$$279 $
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).
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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) 1-67-12Total
March 31, 2020   
Commercial and agricultural$1,110,313  $56,149  $1,166,462  
Auto and light truck559,395  18,362  577,757  
Medium and heavy duty truck277,056  1,020  278,076  
Aircraft751,689  21,443  773,132  
Construction equipment670,176  48,131  718,307  
Commercial real estate905,605  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 truck569,234  19,573  588,807  
Medium and heavy duty truck293,736  1,088  294,824  
Aircraft764,564  19,476  784,040  
Construction equipment668,076  37,375  705,451  
Commercial real estate888,154  20,023  908,177  
Total$4,264,697  $149,393  $4,414,090  
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 Credit Quality Grades
(Dollars in thousands) 1-67-12Total
September 30, 2020   
Commercial and agricultural$1,617,272 $64,247 $1,681,519 
Auto and light truck470,744 56,838 527,582 
Medium and heavy duty truck269,070 2,178 271,248 
Aircraft782,656 23,506 806,162 
Construction equipment671,254 52,342 723,596 
Commercial real estate932,782 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 truck569,234 19,573 588,807 
Medium and heavy duty truck293,736 1,088 294,824 
Aircraft764,564 19,476 784,040 
Construction equipment668,076 37,375 705,451 
Commercial real estate888,154 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) PerformingNonperformingTotal(Dollars in thousands) PerformingNonperformingTotal
March 31, 2020   
September 30, 2020September 30, 2020   
Residential real estate and home equityResidential real estate and home equity$543,513  $2,093  $545,606  Residential real estate and home equity$518,127 $1,754 $519,881 
ConsumerConsumer138,986  431  139,417  Consumer135,074 424 135,498 
TotalTotal$682,499  $2,524  $685,023  Total$653,201 $2,178 $655,379 
December 31, 2019December 31, 2019   December 31, 2019   
Residential real estate and home equityResidential real estate and home equity$529,557  $2,446  $532,003  Residential real estate and home equity$529,557 $2,446 $532,003 
ConsumerConsumer138,951  483  139,434  Consumer138,951 483 139,434 
TotalTotal$668,508  $2,929  $671,437  Total$668,508 $2,929 $671,437 
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The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.
(Dollars in thousands) (Dollars in thousands) Current30-59 Days Past Due60-89 Days Past Due90 Days or More Past Due and AccruingTotal
Accruing 
Loans
NonaccrualTotal
Financing
Receivables
(Dollars in thousands) Current30-59 Days Past Due60-89 Days Past Due90 Days or More Past Due and AccruingTotal
Accruing 
Loans
NonaccrualTotal
Financing
Receivables
March 31, 2020       
September 30, 2020September 30, 2020       
Commercial and agriculturalCommercial 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 truckAuto and light truck575,110  1,684  110  —  576,904  853  577,757  Auto and light truck488,688 682 302 — 489,672 37,910 527,582 
Medium and heavy duty truckMedium and heavy duty truck277,042  14  —  —  277,056  1,020  278,076  Medium and heavy duty truck270,211 93 — 270,304 944 271,248 
AircraftAircraft765,861  2,135  3,130  —  771,126  2,006  773,132  Aircraft793,451 6,837 3,921 — 804,209 1,953 806,162 
Construction equipmentConstruction equipment699,932  2,557  338  —  702,827  15,480  718,307  Construction equipment697,020 1,633 321 — 698,974 24,622 723,596 
Commercial real estateCommercial real estate929,323  67  —  —  929,390  1,367  930,757  Commercial real estate959,816 173 — 959,989 1,561 961,550 
Residential real estate and home equityResidential real estate and home equity542,382  1,086  45  162  543,675  1,931  545,606  Residential real estate and home equity517,233 875 19 80 518,207 1,674 519,881 
ConsumerConsumer138,346  531  109  30  139,016  401  139,417  Consumer134,222 779 73 135,075 423 135,498 
TotalTotal$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, 2019December 31, 2019       December 31, 2019       
Commercial and agriculturalCommercial and agricultural$1,131,704  $118  $—  $—  $1,131,822  $969  $1,132,791  Commercial and agricultural$1,131,704 $118 $$— $1,131,822 $969 $1,132,791 
Auto and light truckAuto and light truck586,212  1,268  77  —  587,557  1,250  588,807  Auto and light truck586,212 1,268 77 — 587,557 1,250 588,807 
Medium and heavy duty truckMedium and heavy duty truck293,736  14  —  —  293,750  1,074  294,824  Medium and heavy duty truck293,736 14 — 293,750 1,074 294,824 
AircraftAircraft772,846  7,026  3,293  —  783,165  875  784,040  Aircraft772,846 7,026 3,293 — 783,165 875 784,040 
Construction equipmentConstruction equipment702,671  819  609  —  704,099  1,352  705,451  Construction equipment702,671 819 609 — 704,099 1,352 705,451 
Commercial real estateCommercial real estate906,468  58  —  —  906,526  1,651  908,177  Commercial real estate906,468 58 — 906,526 1,651 908,177 
Residential real estate and home equityResidential real estate and home equity528,844  561  152  257  529,814  2,189  532,003  Residential real estate and home equity528,844 561 152 257 529,814 2,189 532,003 
ConsumerConsumer138,132  632  187  54  139,005  429  139,434  Consumer138,132 632 187 54 139,005 429 139,434 
TotalTotal$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 
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The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.
(Dollars in thousands) (Dollars in thousands) Recorded InvestmentUnpaid Principal BalanceRelated Reserve(Dollars in thousands) Recorded InvestmentUnpaid Principal BalanceRelated Reserve
March 31, 2020   
September 30, 2020September 30, 2020   
With no related reserve recorded:With no related reserve recorded:   With no related reserve recorded:   
Commercial and agriculturalCommercial and agricultural$208  $208  $—  Commercial and agricultural$768 $768 $— 
Auto and light truckAuto and light truck158  158  —  Auto and light truck20,094 20,094 — 
Medium and heavy duty truckMedium and heavy duty truck1,008  1,008  —  Medium and heavy duty truck830 830 — 
AircraftAircraft1,965  1,965  —  Aircraft1,953 1,953 — 
Construction equipmentConstruction equipment1,057  1,057  —  Construction equipment5,312 5,312 — 
Commercial real estateCommercial real estate1,209  1,209  —  Commercial real estate1,354 1,354 — 
Residential real estate and home equityResidential real estate and home equity—  —  —  Residential real estate and home equity— 
ConsumerConsumer—  —  —  Consumer— 
Total with no related reserve recordedTotal with no related reserve recorded5,605  5,605  —  Total with no related reserve recorded30,311 30,311 — 
With a reserve recorded:With a reserve recorded:   With a reserve recorded:   
Commercial and agriculturalCommercial and agricultural2,678  2,678  711  Commercial and agricultural6,647 6,647 1,554 
Auto and light truckAuto and light truck500  500  73  Auto and light truck16,980 16,980 7,517 
Medium and heavy duty truckMedium and heavy duty truck—  —  —  Medium and heavy duty truck114 114 34 
AircraftAircraft—  —  —  Aircraft
Construction equipmentConstruction equipment14,341  14,341  8,318  Construction equipment12,910 12,910 7,966 
Commercial real estateCommercial real estate—  —  —  Commercial real estate
Residential real estate and home equityResidential real estate and home equity335  337  115  Residential real estate and home equity331 333 111 
ConsumerConsumer—  —  —  Consumer
Total with a reserve recordedTotal with a reserve recorded17,854  17,856  9,217  Total with a reserve recorded36,982 36,984 17,182 
Total impaired loansTotal impaired loans$23,459  $23,461  $9,217  Total impaired loans$67,293 $67,295 $17,182 
December 31, 2019December 31, 2019   December 31, 2019   
With no related reserve recorded:With no related reserve recorded:   With no related reserve recorded:   
Commercial and agriculturalCommercial and agricultural$218  $218  $—  Commercial and agricultural$218 $218 $— 
Auto and light truckAuto and light truck853  853  —  Auto and light truck853 853 — 
Medium and heavy duty truckMedium and heavy duty truck1,074  1,074  —  Medium and heavy duty truck1,074 1,074 — 
AircraftAircraft875  875  —  Aircraft875 875 — 
Construction equipmentConstruction equipment615  615  —  Construction equipment615 615 — 
Commercial real estateCommercial real estate1,487  1,487  —  Commercial real estate1,487 1,487 — 
Residential real estate and home equityResidential real estate and home equity—  —  —  Residential real estate and home equity— 
ConsumerConsumer—  —  —  Consumer— 
Total with no related reserve recordedTotal with no related reserve recorded5,122  5,122  —  Total with no related reserve recorded5,122 5,122 — 
With a reserve recorded:With a reserve recorded:   With a reserve recorded:   
Commercial and agriculturalCommercial and agricultural10,366  10,366  3,003  Commercial and agricultural10,366 10,366 3,003 
Auto and light truckAuto and light truck278  278  30  Auto and light truck278 278 30 
Medium and heavy duty truckMedium and heavy duty truck—  —  —  Medium and heavy duty truck
AircraftAircraft—  —  —  Aircraft
Construction equipmentConstruction equipment736  736  75  Construction equipment736 736 75 
Commercial real estateCommercial real estate—  —  —  Commercial real estate
Residential real estate and home equityResidential real estate and home equity337  339  117  Residential real estate and home equity337 339 117 
ConsumerConsumer—  —  —  Consumer
Total with a reserve recordedTotal with a reserve recorded11,717  11,719  3,225  Total with a reserve recorded11,717 11,719 3,225 
Total impaired loansTotal impaired loans$16,839  $16,841  $3,225  Total impaired loans$16,839 $16,841 $3,225 
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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,
20202019 2020201920202019
(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 agriculturalCommercial and agricultural$7,807  $102  $2,821  $—  Commercial and agricultural$8,989 $$5,177 $68 $7,393 $139 $4,026 $81 
Auto and light truckAuto and light truck743  —  5,003  —  Auto and light truck32,369 1,793 14,632 3,196 
Medium and heavy duty truckMedium and heavy duty truck1,025  —  54  —  Medium and heavy duty truck985 1,011 205 
AircraftAircraft1,781  —  5,445  —  Aircraft1,957 593 2,015 2,542 
Construction equipmentConstruction equipment7,778   1,929  —  Construction equipment15,543 1,838 12,541 1,728 
Commercial real estateCommercial real estate1,372  —  1,859  —  Commercial real estate1,306 1,595 1,235 1,763 
Residential real estate and home equityResidential real estate and home equity336   343   Residential real estate and home equity332 340 334 11 341 14 
ConsumerConsumer—  —  —  —  Consumer
TotalTotal$20,842  $110  $17,454  $ Total$61,481 $$11,336 $72 $39,161 $154 $13,801 $95 
There were 0 loan and lease modifications classified as a troubled debt restructuringrestructurings (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 andwere 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 TDRsPerforming TDRs$335  $10,238  Performing TDRs$331 $10,238 
Nonperforming TDRsNonperforming TDRs480  486  Nonperforming TDRs14,503 486 
Total TDRsTotal 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
AircraftConstruction
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
AircraftConstruction
equipment
Commercial
real estate
Residential
real estate
and home
equity
ConsumerTotal
March 31, 2020         
September 30, 2020September 30, 2020         
Balance, beginning of periodBalance, 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-offsCharge-offs529  34  —  586  1,432   13  243  2,838  Charge-offs182 4,382 21 36 61 210 4,892 
RecoveriesRecoveries166  82  —  448  211  15  27  80  1,029  Recoveries231 263 191 347 15 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 (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 periodBalance, 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, 2019September 30, 2019         
Balance, beginning of periodBalance, 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-offsCharge-offs79  409  —  3,000  195  —  21  250  3,954  Charge-offs83 61 65 19 705 937 
RecoveriesRecoveries34   —  185  104    75  419  Recoveries438 57 614 17 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)(549)(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 periodBalance, 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
AircraftConstruction
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-offs753 4,416 840 1,582 37 74 640 8,342 
Recoveries533 403 694 937 43 31 233 2,874 
Net charge-offs (recoveries)220 4,013 146 645 (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-offs171 527 1,132 3,066 215 25 1,268 6,404 
Recoveries500 86 916 136 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
AircraftConstruction
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
AircraftConstruction
equipment
Commercial
real estate
Residential
real estate
and home
equity
Consumer
loans
Total
March 31, 2020         
September 30, 2020September 30, 2020         
Reserve for loan and lease lossesReserve for loan and lease losses         Reserve for loan and lease losses         
Ending balance, individually evaluated for impairmentEnding balance, individually evaluated for impairment$711  $73  $—  $—  $8,318  $—  $115  $—  $9,217  Ending balance, individually evaluated for impairment$1,554 $7,517 $34 $$7,966 $$111 $$17,182 
Ending balance, collectively evaluated for impairmentEnding balance, collectively evaluated for impairment22,468  15,398  4,356  30,069  14,375  19,588  3,793  1,534  111,581  Ending balance, collectively evaluated for impairment23,516 17,732 4,423 32,245 14,837 21,749 3,621 1,512 119,635 
Total reserve for loan and lease lossesTotal reserve for loan and lease losses$23,179  $15,471  $4,356  $30,069  $22,693  $19,588  $3,908  $1,534  $120,798  Total reserve for loan and lease losses$25,070 $25,249 $4,457 $32,245 $22,803 $21,749 $3,732 $1,512 $136,817 
Recorded investment in loansRecorded investment in loans         Recorded investment in loans         
Ending balance, individually evaluated for impairmentEnding balance, individually evaluated for impairment$2,886  $658  $1,008  $1,965  $15,398  $1,209  $335  $—  $23,459  Ending balance, individually evaluated for impairment$7,415 $37,074 $944 $1,953 $18,222 $1,354 $331 $$67,293 
Ending balance, collectively evaluated for impairmentEnding balance, collectively evaluated for impairment1,163,576  577,099  277,068  771,167  702,909  929,548  545,271  139,417  5,106,055  Ending balance, collectively evaluated for impairment1,674,104 490,508 270,304 804,209 705,374 960,196 519,550 135,498 5,559,743 
Total recorded investment in loansTotal 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, 2019December 31, 2019         December 31, 2019         
Reserve for loan and lease lossesReserve for loan and lease losses         Reserve for loan and lease losses         
Ending balance, individually evaluated for impairmentEnding balance, individually evaluated for impairment$3,003  $30  $—  $—  $75  $—  $117  $—  $3,225  Ending balance, individually evaluated for impairment$3,003 $30 $$$75 $$117 $$3,225 
Ending balance, collectively evaluated for impairmentEnding balance, collectively evaluated for impairment20,668  14,370  4,612  31,058  14,045  18,350  3,492  1,434  108,029  Ending balance, collectively evaluated for impairment20,668 14,370 4,612 31,058 14,045 18,350 3,492 1,434 108,029 
Total reserve for loan and lease lossesTotal reserve for loan and lease losses$23,671  $14,400  $4,612  $31,058  $14,120  $18,350  $3,609  $1,434  $111,254  Total reserve for loan and lease losses$23,671 $14,400 $4,612 $31,058 $14,120 $18,350 $3,609 $1,434 $111,254 
Recorded investment in loansRecorded investment in loans         Recorded investment in loans         
Ending balance, individually evaluated for impairmentEnding balance, individually evaluated for impairment$10,584  $1,131  $1,074  $875  $1,351  $1,487  $337  $—  $16,839  Ending balance, individually evaluated for impairment$10,584 $1,131 $1,074 $875 $1,351 $1,487 $337 $$16,839 
Ending balance, collectively evaluated for impairmentEnding balance, collectively evaluated for impairment1,122,207  587,676  293,750  783,165  704,100  906,690  531,666  139,434  5,068,688  Ending balance, collectively evaluated for impairment1,122,207 587,676 293,750 783,165 704,100 906,690 531,666 139,434 5,068,688 
Total recorded investment in loansTotal 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)20202019(Dollars in thousands)2020201920202019
Direct finance leases:Direct finance leases:Direct finance leases:
Interest income on lease receivableInterest 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 paymentsIncome related to lease payments$6,630  $7,982  Income related to lease payments$5,593 $7,578 $18,213 $23,369 
Depreciation expenseDepreciation expense5,427  6,524  Depreciation expense4,694 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)20202019(Dollars in thousands)2020201920202019
Mortgage servicing rights:Mortgage servicing rights:  Mortgage servicing rights:    
Balance at beginning of periodBalance at beginning of period$4,200  $4,283  Balance at beginning of period$4,294 $4,141 $4,200 $4,283 
AdditionsAdditions362  197  Additions897 318 2,094 703 
AmortizationAmortization(409) (233) Amortization(654)(352)(1,757)(879)
SalesSales—  —  Sales
Carrying value before valuation allowance at end of periodCarrying value before valuation allowance at end of period4,153  4,247  Carrying value before valuation allowance at end of period4,537 4,107 4,537 4,107 
Valuation allowance:Valuation allowance:  Valuation allowance:    
Balance at beginning of periodBalance at beginning of period—  —  Balance at beginning of period(546)
Impairment recoveries—  —  
Impairment chargesImpairment charges(262)(808)
Balance at end of periodBalance at end of period$—  $—  Balance at end of period$(808)$$(808)$
Net carrying value of mortgage servicing rights at end of periodNet 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 periodFair 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, 2020December 31, 2019(Dollars in thousands)September 30, 2020December 31, 2019
Amounts of commitments:Amounts of commitments:Amounts of commitments:
Loan commitments to extend creditLoan commitments to extend credit$1,053,202  $1,095,054  Loan commitments to extend credit$1,121,554 $1,095,054 
Standby letters of creditStandby letters of credit$26,148  $27,549  Standby letters of credit$25,231 $27,549 
Commercial and similar letters of creditCommercial 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 derivativesLiability derivatives  Asset derivativesLiability derivatives
(Dollars in thousands)(Dollars in thousands)Notional or contractual amountStatement of Financial Condition classificationFair valueStatement of Financial Condition classificationFair value(Dollars in thousands)Notional or contractual amountStatement of Financial Condition classificationFair valueStatement of Financial Condition classificationFair value
March 31, 2020     
September 30, 2020September 30, 2020     
Interest rate swap contractsInterest 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 commitmentsLoan commitments73,794  Mortgages held for sale1,381  N/A—  Loan commitments51,834 Mortgages held for sale2,477 N/A
Forward contracts - mortgage loanForward contracts - mortgage loan29,637  N/A—  Mortgages held for sale358  Forward contracts - mortgage loan57,187 N/AMortgages held for sale75 
TotalTotal$1,176,991   $53,866   $53,740  Total$1,248,514  $55,504  $54,063 
December 31, 2019December 31, 2019     December 31, 2019     
Interest rate swap contractsInterest 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 commitmentsLoan commitments9,950  Mortgages held for sale185  N/A—  Loan commitments9,950 Mortgages held for sale185 N/A
Forward contracts - mortgage loanForward contracts - mortgage loan23,632  N/A—  Mortgages held for sale38  Forward contracts - mortgage loan23,632 N/AMortgages held for sale38 
TotalTotal$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 classification20202019(Dollars in thousands)Statement of Income classification2020201920202019
Interest rate swap contractsInterest rate swap contractsOther expense$(519) $(57) Interest rate swap contractsOther expense$50 $(129)$(583)$(378)
Interest rate swap contractsInterest rate swap contractsOther income91  279  Interest rate swap contractsOther income23 272 560 1,056 
Loan commitmentsLoan commitmentsMortgage banking1,196  77  Loan commitmentsMortgage banking1,406 (6)2,292 86 
Forward contracts - mortgage loanForward contracts - mortgage loanMortgage banking(320) 10  Forward contracts - mortgage loanMortgage banking26 157 (37)118 
TotalTotal $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 ConditionGross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)(Dollars in thousands)Gross Amounts of Recognized AssetsGross Amounts Offset in the Statement of Financial ConditionNet Amounts of Assets Presented in the Statement of Financial ConditionFinancial InstrumentsCash Collateral ReceivedNet Amount(Dollars in thousands)Gross Amounts of Recognized AssetsGross Amounts Offset in the Statement of Financial ConditionNet Amounts of Assets Presented in the Statement of Financial ConditionFinancial InstrumentsCash Collateral ReceivedNet Amount
March 31, 2020      
September 30, 2020September 30, 2020      
Interest rate swapsInterest rate swaps$53,595  $1,110  $52,485  $—  $—  $52,485  Interest rate swaps$57,457 $4,430 $53,027 $$$53,027 
December 31, 2019December 31, 2019      December 31, 2019      
Interest rate swapsInterest rate swaps$22,279  $304  $21,975  $—  $—  $21,975  Interest rate swaps$22,279 $304 $21,975 $$$21,975 
 The following table shows the offsetting of financial liabilities and derivative liabilities.
Gross Amounts Not Offset in the Statement of Financial ConditionGross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)(Dollars in thousands)Gross Amounts of Recognized LiabilitiesGross Amounts Offset in the Statement of Financial ConditionNet Amounts of Liabilities Presented in the Statement of Financial ConditionFinancial InstrumentsCash Collateral PledgedNet Amount(Dollars in thousands)Gross Amounts of Recognized LiabilitiesGross Amounts Offset in the Statement of Financial ConditionNet Amounts of Liabilities Presented in the Statement of Financial ConditionFinancial InstrumentsCash Collateral PledgedNet Amount
March 31, 2020      
September 30, 2020September 30, 2020      
Interest rate swapsInterest rate swaps$54,492  $1,110  $53,382  $53,114  $—  $268  Interest rate swaps$58,418 $4,430 $53,988 $53,891 $$97 
Repurchase agreementsRepurchase agreements135,942  —  135,942  135,942  —  —  Repurchase agreements158,834 — 158,834 158,834 — — 
TotalTotal$190,434  $1,110  $189,324  $189,056  $—  $268  Total$217,252 $4,430 $212,822 $212,725 $$97 
December 31, 2019December 31, 2019      December 31, 2019      
Interest rate swapsInterest rate swaps$22,656  $304  $22,352  $23,482  $—  $(1,130) Interest rate swaps$22,656 $304 $22,352 $23,482 $$(1,130)
Repurchase agreementsRepurchase agreements120,459  —  120,459  120,459  —  —  Repurchase agreements120,459 — 120,459 120,459 — — 
TotalTotal$143,115  $304  $142,811  $143,941  $—  $(1,130) Total$143,115 $304 $142,811 $143,941 $$(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, 2020December 31, 2019(Dollars in thousands)September 30, 2020December 31, 2019
Investment carrying amountInvestment carrying amount$18,075  $19,843  Investment carrying amount$47,719 $19,843 
Unfunded capital and other commitmentsUnfunded capital and other commitments11,969  17,420  Unfunded capital and other commitments41,409 17,420 
Maximum exposure to lossMaximum exposure to loss41,269  37,904  Maximum exposure to loss43,329 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 NotesInterest RateMaturity Date(Dollars in thousands)Amount of Subordinated NotesInterest RateMaturity Date
June 2007 issuance (1)June 2007 issuance (1)$41,238  7.22 %6/15/2037June 2007 issuance (1)$41,238 7.22 %6/15/2037
August 2007 issuance (2)August 2007 issuance (2)17,526  2.22 %9/15/2037August 2007 issuance (2)17,526 1.73 %9/15/2037
TotalTotal$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)20202019(Dollars in thousands - except per share amounts)2020201920202019
Distributed earnings allocated to common stockDistributed 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 stockUndistributed earnings allocated to common stock8,941  15,102  Undistributed earnings allocated to common stock12,755 17,402 32,941 48,827 
Net earnings allocated to common stockNet earnings allocated to common stock16,340  22,068  Net earnings allocated to common stock19,921 24,297 54,655 69,618 
Net earnings allocated to participating securitiesNet earnings allocated to participating securities73  128  Net earnings allocated to participating securities137 141 318 401 
Net income allocated to common stock and participating securitiesNet 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 shareWeighted average shares outstanding for basic earnings per common share25,523,356  25,759,186  Weighted average shares outstanding for basic earnings per common share25,552,374 25,520,035 25,538,910 25,630,771 
Dilutive effect of stock compensationDilutive effect of stock compensation—  —  Dilutive effect of stock compensation
Weighted average shares outstanding for diluted earnings per common shareWeighted average shares outstanding for diluted earnings per common share25,523,356  25,759,186  Weighted average shares outstanding for diluted earnings per common share25,552,374 25,520,035 25,538,910 25,630,771 
Basic earnings per common shareBasic 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 shareDiluted 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 threenine 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 threenine 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 3.733.60 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)20202019Affected Line Item in the Statements of Income2020201920202019Affected Line Item in the Statements of Income
Realized gains included in net incomeRealized gains included in net income$280  $—  Gains on investment securities available-for-sale$$$279 $Gains on investment securities available-for-sale
280  —  Income before income taxes 279 Income before income taxes
Tax effectTax effect(67) —  Income tax expenseTax effect(65)Income tax expense
Net of taxNet of tax$213  $—  Net incomeNet of tax$$$214 $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, 2020September 30, 2020    
Mortgages held for sale reported at fair valueMortgages 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, 2019December 31, 2019    December 31, 2019    
Mortgages held for sale reported at fair valueMortgages 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 1Level 2Level 3Total(Dollars in thousands)Level 1Level 2Level 3Total
March 31, 2020    
September 30, 2020September 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 securitiesU.S. Treasury and Federal agencies securities$82,813  $454,608  $—  $537,421  U.S. Treasury and Federal agencies securities$76,298 $491,710 $$568,008 
U.S. States and political subdivisions securitiesU.S. States and political subdivisions securities—  75,719  5,295  81,014  U.S. States and political subdivisions securities65,468 3,265 68,733 
Mortgage-backed securities — Federal agenciesMortgage-backed securities — Federal agencies—  392,309  —  392,309  Mortgage-backed securities — Federal agencies403,490 403,490 
Corporate debt securitiesCorporate debt securities—  45,725  —  45,725  Corporate debt securities42,496 42,496 
Foreign government and other securitiesForeign government and other securities—  700  —  700  Foreign government and other securities700 700 
Total debt securities available-for-saleTotal debt securities available-for-sale82,813  969,061  5,295  1,057,169  Total debt securities available-for-sale76,298 1,003,864 3,265 1,083,427 
Mortgages held for saleMortgages held for sale—  13,449  —  13,449  Mortgages held for sale20,990 20,990 
Accrued income and other assets (interest rate swap agreements)Accrued income and other assets (interest rate swap agreements)—  52,485  —  52,485  Accrued income and other assets (interest rate swap agreements)53,027 53,027 
TotalTotal$82,813  $1,034,995  $5,295  $1,123,103  Total$76,298 $1,077,881 $3,265 $1,157,444 
Liabilities:Liabilities:    Liabilities:    
Accrued expenses and other liabilities (interest rate swap agreements)Accrued expenses and other liabilities (interest rate swap agreements)$—  $53,382  $—  $53,382  Accrued expenses and other liabilities (interest rate swap agreements)$$53,988 $$53,988 
TotalTotal$—  $53,382  $—  $53,382  Total$$53,988 $$53,988 
December 31, 2019December 31, 2019    December 31, 2019    
Assets:Assets:    Assets:    
Investment securities available-for-sale:Investment securities available-for-sale:    Investment securities available-for-sale:    
U.S. Treasury and Federal agencies securitiesU.S. Treasury and Federal agencies securities$80,393  $446,571  $—  $526,964  U.S. Treasury and Federal agencies securities$80,393 $446,571 $$526,964 
U.S. States and political subdivisions securitiesU.S. States and political subdivisions securities—  82,213  2,292  84,505  U.S. States and political subdivisions securities82,213 2,292 84,505 
Mortgage-backed securities — Federal agenciesMortgage-backed securities — Federal agencies—  375,389  —  375,389  Mortgage-backed securities — Federal agencies375,389 375,389 
Corporate debt securitiesCorporate debt securities—  53,025  —  53,025  Corporate debt securities53,025 53,025 
Foreign government and other securitiesForeign government and other securities—  700  —  700  Foreign government and other securities700 700 
Total debt securities available-for-saleTotal debt securities available-for-sale80,393  957,898  2,292  1,040,583  Total debt securities available-for-sale80,393 957,898 2,292 1,040,583 
Mortgages held for saleMortgages held for sale—  20,277  —  20,277  Mortgages held for sale20,277 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)21,975 21,975 
TotalTotal$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)$$22,352 $$22,352 
TotalTotal$—  $22,352  $—  $22,352  Total$$22,352 $$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 JanuaryJuly 1, 2020$2,2923,179 
Total gains or losses (realized/unrealized): 
Included in earnings0 
Included in other comprehensive income(17)166 
Purchases3,1000 
Issuances0 
Sales0 
Settlements0 
Maturities(80)
Transfers into Level 30 
Transfers out of Level 30 
Ending balance March 31,September 30, 2020$5,2953,265 
Beginning balance JanuaryJuly 1, 2019$1,0255,061 
Total gains or losses (realized/unrealized): 
Included in earnings0 
Included in other comprehensive income19 (12)
Purchases4,1000 
Issuances0 
Sales0 
Settlements0 
Maturities(80)
Transfers into Level 30 
Transfers out of Level 30 
Ending balance March 31,September 30, 2019$5,0644,969 
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)(Dollars in thousands)Fair ValueValuation MethodologyUnobservable InputsRange of InputsWeighted Average(Dollars in thousands)Fair ValueValuation MethodologyUnobservable InputsRange of InputsWeighted Average
March 31, 2020    
September 30, 2020September 30, 2020    
Debt securities available-for saleDebt securities available-for sale    Debt securities available-for sale    
Direct placement municipal securitiesDirect placement municipal securities$5,295  Discounted cash flowsCredit spread assumption0.95% - 3.24%1.69 %Direct placement municipal securities$3,265 Discounted cash flowsCredit spread assumption1.12% - 2.52%1.47 %
December 31, 2019December 31, 2019    December 31, 2019    
Debt securities available-for saleDebt securities available-for sale    Debt securities available-for sale    
Direct placement municipal securitiesDirect placement municipal securities$2,292  Discounted cash flowsCredit spread assumption0.12% - 2.85%Direct placement municipal securities$2,292 Discounted cash flowsCredit spread assumption0.12% - 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 - $0.00 million.
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The following table shows the carrying value of assets measured at fair value on a non-recurring basis.
(Dollars in thousands)(Dollars in thousands)Level 1Level 2Level 3Total(Dollars in thousands)Level 1Level 2Level 3Total
March 31, 2020    
September 30, 2020September 30, 2020    
Impaired loans - collateral basedImpaired loans - collateral based$—  $—  $8,639  $8,639  Impaired loans - collateral based$— $— $19,802 $19,802 
Accrued income and other assets (mortgage servicing rights)Accrued income and other assets (mortgage servicing rights)—  —  4,153  4,153  Accrued income and other assets (mortgage servicing rights)— — 3,729 3,729 
Accrued income and other assets (repossessions)Accrued income and other assets (repossessions)—  —  9,020  9,020  Accrued income and other assets (repossessions)— — 4,639 4,639 
Accrued income and other assets (other real estate)Accrued income and other assets (other real estate)—  —  362  362  Accrued income and other assets (other real estate)— — 303 303 
TotalTotal$—  $—  $22,174  $22,174  Total$— $— $28,473 $28,473 
December 31, 2019December 31, 2019    December 31, 2019    
Impaired loans - collateral basedImpaired loans - collateral based$—  $—  $8,492  $8,492  Impaired loans - collateral based$— $— $8,492 $8,492 
Accrued income and other assets (mortgage servicing rights)Accrued income and other assets (mortgage servicing rights)—  —  4,200  4,200  Accrued income and other assets (mortgage servicing rights)— — 4,200 4,200 
Accrued income and other assets (repossessions)Accrued income and other assets (repossessions)—  —  8,623  8,623  Accrued income and other assets (repossessions)— — 8,623 8,623 
Accrued income and other assets (other real estate)Accrued income and other assets (other real estate)—  —  522  522  Accrued income and other assets (other real estate)— — 522 522 
TotalTotal$—  $—  $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 ValueFair ValueValuation MethodologyUnobservable InputsRange of InputsWeighted Average(Dollars in thousands)Carrying ValueFair ValueValuation MethodologyUnobservable InputsRange of InputsWeighted Average
March 31, 2020     
September 30, 2020September 30, 2020     
Impaired loansImpaired loans$8,639  $8,639  Collateral based measurements including appraisals, trade publications, and auction valuesDiscount for lack of marketability and current conditions10% - 60%22 %Impaired loans$19,802 $19,802 Collateral based measurements including appraisals, trade publications, and auction valuesDiscount for lack of marketability and current conditions0% - 90%28 %
Mortgage servicing rightsMortgage servicing rights4,153  4,538  Discounted cash flowsConstant prepayment rate (CPR)13.3% - 23.9%17.6 %Mortgage servicing rights3,729 4,000 Discounted cash flowsConstant prepayment rate (CPR)15.3% - 24.7%21.7 %
   Discount rate9.0% - 11.9%9.3 %    Discount rate8.4% - 11.2%8.6 %
RepossessionsRepossessions9,020  9,508  Appraisals, trade publications and auction valuesDiscount for lack of marketability3% - 19%%Repossessions4,639 4,898 Appraisals, trade publications and auction valuesDiscount for lack of marketability3% - 16%%
Other real estateOther real estate362  383  AppraisalsDiscount for lack of marketability0% - 6%%Other real estate303 324 AppraisalsDiscount for lack of marketability0% - 6%%
December 31, 2019December 31, 2019     December 31, 2019     
Impaired loansImpaired loans$8,492  $8,492  Collateral based measurements including appraisals, trade publications, and auction valuesDiscount for lack of marketability and current conditions0% - 90%Impaired loans$8,492 $8,492 Collateral based measurements including appraisals, trade publications, and auction valuesDiscount for lack of marketability and current conditions0% - 90%
Mortgage servicing rightsMortgage servicing rights4,200  5,986  Discounted cash flowsConstant prepayment rate (CPR)10.2% - 28.1%Mortgage servicing rights4,200 5,986 Discounted cash flowsConstant prepayment rate (CPR)10.2% - 28.1%
   Discount rate9.3% - 12.1%    Discount rate9.3% - 12.1%
RepossessionsRepossessions8,623  9,211  Appraisals, trade publications and auction valuesDiscount for lack of marketability3% - 25%Repossessions8,623 9,211 Appraisals, trade publications and auction valuesDiscount for lack of marketability3% - 25%
Other real estateOther real estate522  564  AppraisalsDiscount for lack of marketability0% - 11%Other real estate522 564 AppraisalsDiscount for lack of marketability0% - 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 ValueFair ValueLevel 1Level 2Level 3(Dollars in thousands)Carrying or Contract ValueFair ValueLevel 1Level 2Level 3
March 31, 2020     
September 30, 2020September 30, 2020     
Assets:Assets:     Assets:     
Cash and due from banksCash and due from banks$72,756  $72,756  $72,756  $—  $—  Cash and due from banks$62,575 $62,575 $62,575 $$
Federal funds sold and interest bearing deposits with other banksFederal funds sold and interest bearing deposits with other banks49,543  49,543  49,543  —  —  Federal funds sold and interest bearing deposits with other banks91,641 91,641 91,641 
Investment securities, available-for-saleInvestment securities, available-for-sale1,057,169  1,057,169  82,813  969,061  5,295  Investment securities, available-for-sale1,083,427 1,083,427 76,298 1,003,864 3,265 
Other investmentsOther investments28,414  28,414  28,414  —  —  Other investments27,674 27,674 27,674 
Mortgages held for saleMortgages held for sale13,449  13,449  —  13,449  —  Mortgages held for sale20,990 20,990 20,990 
Loans and leases, net of reserve for loan and lease lossesLoans and leases, net of reserve for loan and lease losses5,008,716  5,052,121  —  —  5,052,121  Loans and leases, net of reserve for loan and lease losses5,490,219 5,568,395 5,568,395 
Mortgage servicing rightsMortgage servicing rights4,153  4,538  —  —  4,538  Mortgage servicing rights3,729 4,000 4,000 
Accrued interest receivableAccrued interest receivable19,827  19,827  —  19,827  —  Accrued interest receivable21,565 21,565 21,565 
Interest rate swapsInterest rate swaps52,485  52,485  —  52,485  —  Interest rate swaps53,027 53,027 53,027 
Liabilities:Liabilities:     Liabilities:     
DepositsDeposits$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 $
Short-term borrowingsShort-term borrowings282,845  282,845  135,154  147,691  —  Short-term borrowings165,574 165,574 159,822 5,752 
Long-term debt and mandatorily redeemable securitiesLong-term debt and mandatorily redeemable securities81,877  82,393  —  82,393  —  Long-term debt and mandatorily redeemable securities81,659 82,894 82,894 
Subordinated notesSubordinated notes58,764  49,893  —  49,893  —  Subordinated notes58,764 57,617 57,617 
Accrued interest payableAccrued interest payable13,719  13,719  —  13,719  —  Accrued interest payable7,647 7,647 7,647 
Interest rate swapsInterest rate swaps53,382  53,382  —  53,382  —  Interest rate swaps53,988 53,988 53,988 
Off-balance-sheet instruments *Off-balance-sheet instruments *—  283  —  283  —  Off-balance-sheet instruments *289 289 
December 31, 2019December 31, 2019     December 31, 2019     
Assets:Assets:     Assets:     
Cash and due from banksCash and due from banks$67,215  $67,215  $67,215  $—  $—  Cash and due from banks$67,215 $67,215 $67,215 $$
Federal funds sold and interest bearing deposits with other banksFederal funds sold and interest bearing deposits with other banks16,150  16,150  16,150  —  —  Federal funds sold and interest bearing deposits with other banks16,150 16,150 16,150 
Investment securities, available-for-saleInvestment securities, available-for-sale1,040,583  1,040,583  80,393  957,898  2,292  Investment securities, available-for-sale1,040,583 1,040,583 80,393 957,898 2,292 
Other investmentsOther investments28,414  28,414  28,414  —  —  Other investments28,414 28,414 28,414 
Mortgages held for saleMortgages held for sale20,277  20,277  —  20,277  —  Mortgages held for sale20,277 20,277 20,277 
Loans and leases, net of reserve for loan and lease lossesLoans and leases, net of reserve for loan and lease losses4,974,273  4,992,684  —  —  4,992,684  Loans and leases, net of reserve for loan and lease losses4,974,273 4,992,684 4,992,684 
Mortgage servicing rightsMortgage servicing rights4,200  5,986  —  —  5,986  Mortgage servicing rights4,200 5,986 5,986 
Accrued interest receivableAccrued interest receivable19,125  19,125  —  19,125  —  Accrued interest receivable19,125 19,125 19,125 
Interest rate swapsInterest rate swaps21,975  21,975  —  21,975  —  Interest rate swaps21,975 21,975 21,975 
Liabilities:Liabilities:     Liabilities:     
DepositsDeposits$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 $
Short-term borrowingsShort-term borrowings145,893  145,893  120,891  25,002  —  Short-term borrowings145,893 145,893 120,891 25,002 
Long-term debt and mandatorily redeemable securitiesLong-term debt and mandatorily redeemable securities71,639  71,084  —  71,084  —  Long-term debt and mandatorily redeemable securities71,639 71,084 71,084 
Subordinated notesSubordinated notes58,764  61,469  —  61,469  —  Subordinated notes58,764 61,469 61,469 
Accrued interest payableAccrued interest payable13,918  13,918  —  13,918  —  Accrued interest payable13,918 13,918 13,918 
Interest rate swapsInterest rate swaps22,352  22,352  —  22,352  —  Interest rate swaps22,352 22,352 22,352 
Off-balance-sheet instruments *Off-balance-sheet instruments *—  281  —  281  —  Off-balance-sheet instruments *281 281 

* 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 outstandingsbalances 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 outstandingsbalances 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 outstandingsbalances 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 decreasean 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 valueBank 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 assetsOperating lease right of use assets23,451  24,147  Operating lease right of use assets22,261 24,147 
Accrued interest receivableAccrued interest receivable19,827  19,125  Accrued interest receivable21,565 19,125 
Mortgage servicing rightsMortgage servicing rights4,153  4,200  Mortgage servicing rights3,729 4,200 
Other real estateOther real estate362  522  Other real estate303 522 
RepossessionsRepossessions9,020  8,623  Repossessions4,639 8,623 
Partnership investments carrying amountPartnership investments carrying amount71,178  61,083  Partnership investments carrying amount100,265 61,083 
All other assetsAll other assets70,167  41,516  All other assets78,134 41,516 
Total accrued income and other assetsTotal 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 approvedmodification balances in deferment as of mid-April.June 30, 2020 and September 30, 2020.
Principal-only DeferralsPrincipal and Interest DeferralsTotal Coronavirus ModificationsRecorded Investment
at March 31, 2020
COVID-19 Related Loan and Lease Modifications
(Dollars in millions)(Dollars in millions)90 Days or Less91 Days - 180 Days90 Days or Less91 Days - 180 DaysTotal Coronavirus Modifications(Dollars in millions)June 30, 2020September 30, 2020
Auto and light truck rentalAuto and light truck rental$86  $—  $28  $—  $114  $427  224 $22 
Specialty vehicle(1)
Specialty vehicle(1)
 —  51  —  53  151  
Specialty vehicle(1)
75 23 
Medium and heavy duty truckMedium and heavy duty truck12    —  22  278  Medium and heavy duty truck87 
AircraftAircraft43  16  13  —  72  773  Aircraft93 13 
ConstructionConstruction78   12  20  114  718  Construction139 — 
CommercialCommercial48  30  17  24  119  2,097  Commercial210 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 equityResidential real estate and home equity— 
ConsumerConsumer— 
Total loans and leasesTotal 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 DeferralsPrincipal and Interest DeferralsTotal Modifications in Deferment
Additional Modifications Expected(1)
Total ModificationsRecorded Investment at
September 30, 2020
Total Modifications as a % of
September 30, 2020
Balance
Auto and light truck rental$21 $$22 $16 $38 $379 10 %
Specialty vehicle(2)
11 12 23 23 46 149 31 %
Medium and heavy duty truck— — 271 %
Aircraft13 — 13 19 806 %
Construction— — — 724 — %
Commercial58 63 23 86 2,643 %
Residential real estate and home equity— — — — — 520 — %
Consumer— — — — — 135 — %
Total loans and leases55 71 126 69 195 5,627 %
PPP loans, net of unearned discount(3)
— — — — — 581 — %
Total loans and leases less PPP loans$55 $71 $126 $69 $195 $5,046 %
(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 ModificationSecond ModificationThird Modification
(Dollars in millions)ExpiredIn DefermentTotalExpired
In Deferment(1)
TotalExpired
In Deferment(1)
Total
Auto and light truck rental$255 $18 $273 $61 $$65 $— $16 $16 
Specialty vehicle(2)
88 — 88 55 16 71 — 30 30 
Medium and heavy duty truck89 — 89 — — — — 
Aircraft97 — 97 11 19 30 — — — 
Construction144 — 144 — — 
Commercial185 55 240 19 25 44 — 
Residential real estate and home equity— — — — — 
Consumer— — — — — — — 
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 2,0612020 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 One2,024 $520,583 $257,000 
Phase Two1,516 76,868 51,000 
Total3,540 $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 toIf 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.
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TableSee 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 threenine 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 firstthird 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.
ActualMinimum Capital AdequacyMinimum Capital Adequacy with Capital BufferTo Be Well Capitalized Under Prompt Corrective Action Provisions ActualMinimum Capital AdequacyMinimum Capital Adequacy with Capital BufferTo Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)(Dollars in thousands)AmountRatioAmountRatioAmountRatioAmountRatio(Dollars in thousands)AmountRatioAmountRatioAmountRatioAmountRatio
Total Capital (to Risk-Weighted Assets):Total Capital (to Risk-Weighted Assets):      Total Capital (to Risk-Weighted Assets):      
1st Source Corporation1st 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 Bank1st Source Bank830,076  13.84  479,812  8.00  629,753  10.50  599,765  10.00  1st Source Bank859,135 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 Corporation1st Source Corporation837,026  13.97  359,593  6.00  509,423  8.50  479,457  8.00  1st Source Corporation872,755 14.48 361,600 6.00 512,267 8.50 482,133 8.00 
1st Source Bank1st Source Bank754,499  12.58  359,859  6.00  509,800  8.50  479,812  8.00  1st Source Bank782,915 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 Corporation1st Source Corporation753,621  12.57  269,695  4.50  419,525  7.00  389,559  6.50  1st Source Corporation778,494 12.92 271,200 4.50 421,867 7.00 391,733 6.50 
1st Source Bank1st Source Bank728,094  12.14  269,894  4.50  419,835  7.00  389,847  6.50  1st Source Bank745,654 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 Corporation1st Source Corporation837,026  12.82  261,190  4.00  N/A  N/A326,488  5.00  1st Source Corporation872,755 12.14 287,593 4.00 N/AN/A359,492 5.00 
1st Source Bank1st Source Bank754,499  11.56  261,168  4.00  N/A  N/A326,460  5.00  1st Source Bank782,915 10.89 287,573 4.00 N/AN/A359,467 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 periodperiods 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 periodperiods in 2019. Diluted net income per common share was $0.64$0.78 and $2.14 for the three and nine month periodperiods ended March 31,September 30, 2020, compared to $0.86$0.95 and $2.72 for the same periodperiods in 2019. Return on average common shareholders’ equity was 7.81%8.52% for the threenine 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 threenine months ended March 31,September 30, 2020, compared to 1.43%1.45% in 2019.
Net income decreased for the threenine months ended March 31,September 30, 2020 compared to the first threenine months of 2019. NoninterestNet 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 EndedThree Months Ended
March 31, 2020December 31, 2019March 31, 2019September 30, 2020June 30, 2020September 30, 2019
(Dollars in thousands)(Dollars in thousands)Average
Balance
Interest Income/ExpenseYield/
Rate
Average
Balance
Interest Income/ExpenseYield/
Rate
Average
Balance
Interest Income/ExpenseYield/
Rate
(Dollars in thousands)Average
Balance
Interest Income/ExpenseYield/
Rate
Average
Balance
Interest Income/ExpenseYield/
Rate
Average
Balance
Interest Income/ExpenseYield/
Rate
ASSETSASSETSASSETS
Investment securities available-for-sale:Investment securities available-for-sale:Investment securities available-for-sale:
TaxableTaxable$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 saleMortgages held for sale11,294  96  3.42 %21,489  192  3.54 %8,826  101  4.64 %Mortgages held for sale26,327 186 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 investmentsOther investments41,463  346  3.36 %145,893  798  2.17 %42,095  438  4.22 %Other investments87,998 289 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 banksCash and due from banks65,407  73,438   63,886    Cash and due from banks72,474 73,523  66,046   
Reserve for loan and lease lossesReserve for loan and lease losses(112,239) (110,209)  (101,697)   Reserve for loan and lease losses(134,824)(124,186) (106,559)  
Other assetsOther assets476,159  486,308   431,500    Other assets502,172 509,058  471,129   
Total assetsTotal assets$6,611,121  $6,708,475   $6,290,386    Total assets$7,281,542 $7,185,406  $6,620,880   
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY     LIABILITIES AND SHAREHOLDERS’ EQUITY     
Interest-bearing depositsInterest-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 borrowingsShort-term borrowings202,545  254  0.50 %183,244  170  0.37 %251,379  931  1.50 %Short-term borrowings187,912 83 0.18 %191,411 90 0.19 %188,562 293 0.62 %
Subordinated notesSubordinated notes58,764  884  6.05 %58,764  907  6.12 %58,764  928  6.40 %Subordinated notes58,764 824 5.58 %58,764 835 5.71 %58,764 914 6.17 %
Long-term debt and mandatorily redeemable securitiesLong-term debt and mandatorily redeemable securities77,973  853  4.40 %71,428  647  3.59 %70,481  744  4.28 %Long-term debt and mandatorily redeemable securities81,528 610 2.98 %81,766 659 3.24 %71,304 750 4.17 %
Total interest-bearing liabilitiesTotal interest-bearing liabilities4,415,552  12,842  1.17 %4,483,686  14,247  1.26 %4,315,545  14,073  1.32 %Total interest-bearing liabilities4,553,503 8,049 0.70 %4,580,419 9,849 0.86 %4,493,376 15,481 1.37 %
Noninterest-bearing depositsNoninterest-bearing deposits1,196,106    1,244,173    1,124,441    Noninterest-bearing deposits1,664,135   1,562,100   1,188,645   
Other liabilitiesOther liabilities131,858    136,169    73,183    Other liabilities149,978   151,281   119,125   
Shareholders’ equityShareholders’ equity844,724    824,361    775,657    Shareholders’ equity876,992   862,209   809,279   
Noncontrolling interestsNoncontrolling interests22,881  20,086  1,560  Noncontrolling interests36,934 29,397 10,455 
Total liabilities and equityTotal 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 adjustmentsLess: 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 adjustmentsFully tax-equivalent adjustments151  160  182  Fully tax-equivalent adjustments128 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 positivelynegatively impacted by onea net six basis pointpoints due to PPP loans which earn interest at 1.00% and negatively impacted by four basis points due to net interest recoveriesreversals of $0.09$0.42 million in the firstthird quarter of 2020 vs. net interest recoveries of $0.08 million in the firstthird quarter of 2019. Average net loans and leases increased $240.21$578.26 million or 4.94%11.36% with the largest increases occurring withinincrease due to average PPP loans of $578.36 million in the construction equipmentcommercial 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 $0.63increased $33.23 million or 1.50%60.67% from the firstthird quarter of 2019.
Average interest-bearing deposits increased $141.35$50.55 million or 3.59%1.21% for the firstthird 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 firstthird 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 firstthird quarter of 2020 compared to the same period in 2019. Interest paid on short-term borrowings decreased 10044 basis points. Interest paid on subordinated notes decreased 3559 basis points during the firstthird 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 12decreased 119 basis points during the firstthird quarter of 2020 from the same period in 2019 primarily due to higherlower rates on mandatorily redeemable securities.
Nine Months Ended
September 30, 2020September 30, 2019
(Dollars in thousands)Average
Balance
Interest Income/ExpenseYield/
Rate
Average
Balance
Interest Income/ExpenseYield/
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 sale21,563 480 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 investments73,050 951 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 banks70,475 65,801   
Reserve for loan and lease losses(123,790)(103,699)  
Other assets495,820 452,759   
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 borrowings193,934 427 0.29 %213,551 1,764 1.10 %
Subordinated notes58,764 2,543 5.78 %58,764 2,770 6.30 %
Long-term debt and mandatorily redeemable securities80,427 2,122 3.52 %71,034 2,258 4.25 %
Total interest-bearing liabilities4,516,627 30,740 0.91 %4,426,489 44,764 1.35 %
Noninterest-bearing deposits1,474,807   1,147,195   
Other liabilities144,393   97,096   
Shareholders’ equity861,366   791,438   
Noncontrolling interests29,763 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 adjustments416 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 EndedThree Months EndedNine Months Ended
(Dollars in thousands)(Dollars in thousands)March 31,
2020
December 31, 2019March 31,
2019
(Dollars in thousands)September 30,
2020
June 30, 2020September 30,
2019
September 30,
2020
September 30,
2019
Calculation of Net Interest MarginCalculation of Net Interest MarginCalculation 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 leases90  92  95  (B)- Loans and leases78 83 95 251 283 
(C)(C)- Tax-exempt investment securities61  68  87  (C)- Tax-exempt investment securities50 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 factor4.022  3.967  4.056  (H)Annualization factor3.978 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)/I3.57 %3.51 %3.78 %Net interest margin (GAAP-derived) (F*H)/I3.19 %3.23 %3.67 %3.32 %3.72 %
Net interest margin - FTE (G*H)/I3.58 %3.52 %3.79 %Net interest margin - FTE (G*H)/I3.20 %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 firstthird quarter 2020, compared to net charge-offsrecoveries of $3.54$0.31 million or 0.30%0.02% of average loans and leases for the same quarter a year ago.
34

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 outstandingsloan balances and exposures in special attention credits. In addition, increased uncertaintynonperforming 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 segmentsbalances this quarter following strong growth last quarter related to COVID-19 concernsthe PPP loan program. The Bank funded $597 million under this program, which carries a 100% SBA guarantee and a charge-off indebt forgiveness component by the construction equipment portfolio contributedCARES Act. We established a small reserve against this pool of loans to the higher provision, as well ascover 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, compared31 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 hospitalitybus) 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. CurrentCongress 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 ofconsidering 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 outstandingsbalances 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 moreLoans 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 leasesNonaccrual loans and leases26,301  9,789  13,622  Nonaccrual loans and leases70,595 9,789 10,188 
Other real estateOther real estate362  522  417  Other real estate303 522 629 
RepossessionsRepossessions9,020  8,623  10,411  Repossessions4,639 8,623 6,610 
Equipment owned under operating leasesEquipment owned under operating leases—  —  64  Equipment owned under operating leases136 — — 
Total nonperforming assetsTotal 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 MarchSeptember 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 threenine 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 quarternine months of 2020, one relationshiptwo relationships of $14.95a combined $18.21 million primarily withinof 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 increaseAdditionally, during the third quarter of 2020, $14.76 million of bus loan balances in nonaccrual loans and leases at March 31, 2020 from March 31, 2019 occurred primarily in the construction equipment, medium and heavy duty truck and aircraft portfolios offset by a decrease in theour auto and light truck portfolio.portfolio were placed in nonaccrual. A summary of nonaccrual loans and leases and past due aging for the period ended March 31,September 30, 2020 and December 31, 2019 is located in Note 4 of the Consolidated Financial Statements.
Other real estate is the result of foreclosing on real estate in the local market for which we have a current appraisal and are well secured. Other real estate increaseddecreased over the past year due to current foreclosures outpacing sales of existing properties.properties outpacing current foreclosures.
Repossessions consisted mainly of aircraft and auto and light trucks. At the time of repossession, the recorded amount of the loan or lease is written down to the fair value of the equipment or vehicle by a charge to the reserve for loan and lease losses or other income, if a positive adjustment, unless the equipment is in the process of immediate sale. Any subsequent fair value write-downs or write-ups, to the extent of previous write-downs, are included in noninterest expense. The decrease in repossession balances at September 30, 2020 compared to December 31, 2019 was primarily the result of the sale of a repossessed aircraft and the write-down of one aircraft.
The following table shows a summary of other real estate and repossessions.
(Dollars in thousands)(Dollars in thousands)March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands)September 30,
2020
December 31,
2019
September 30,
2019
Commercial and agriculturalCommercial and agricultural$—  $—  $22  Commercial and agricultural$— $— $— 
Auto and light truckAuto and light truck1,165  1,865  5,293  Auto and light truck714 1,865 2,153 
Medium and heavy duty truckMedium and heavy duty truck—  —  —  Medium and heavy duty truck— — — 
AircraftAircraft7,808  6,707  4,400  Aircraft3,750 6,707 4,400 
Construction equipmentConstruction equipment35  35  603  Construction equipment152 35 — 
Commercial real estateCommercial real estate303  303  —  Commercial real estate303 303 303 
Residential real estate and home equityResidential real estate and home equity59  219  417  Residential real estate and home equity— 219 326 
ConsumerConsumer12  16  93  Consumer23 16 57 
TotalTotal$9,382  $9,145  $10,828  Total$4,942 $9,145 $7,239 
For financial statement purposes, nonaccrual loans and leases are included in loan and lease outstandings, whereas repossessions and other real estate are included in other assets.
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NONINTEREST INCOME
The following table shows the details of noninterest income.
Three Months Ended
March 31,
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands)(Dollars in thousands)20202019$ Change% Change(Dollars in thousands)20202019$ Change% Change20202019$ Change% Change
Noninterest income:Noninterest income:  Noninterest income:    
Trust and wealth advisoryTrust and wealth advisory$4,848  $4,858  (10) (0.21)%Trust and wealth advisory$5,153 $4,982 1713.43%$15,590 $15,423 167 1.08 %
Service charges on deposit accountsService charges on deposit accounts2,605  2,498  107  4.28 %Service charges on deposit accounts2,336 2,892 (556)(19.23)%6,851 8,175 (1,324)(16.20)%
Debit cardDebit card3,373  3,220  153  4.75 %Debit card4,019 3,727 2927.83%10,993 10,616 377 3.55 %
Mortgage bankingMortgage banking2,336  936  1,400  NM  Mortgage banking6,474 1,362 5,112NM12,125 3,297 8,828 NM
Insurance commissionsInsurance commissions1,881  2,174  (293) (13.48)%Insurance commissions1,825 1,603 22213.85%5,401 5,295 106 2.00 %
Equipment rentalEquipment rental6,630  7,982  (1,352) (16.94)%Equipment rental5,593 7,578 (1,985)(26.19)%18,213 23,369 (5,156)(22.06)%
Gains on investment securities available-for-saleGains on investment securities available-for-sale280  —  280  NM  Gains on investment securities available-for-sale— — NM279 — 279 NM
OtherOther2,669  2,456  213  8.67 %Other2,641 3,621 (980)(27.06)%8,452 9,378 (926)(9.87)%
Total noninterest incomeTotal 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 flatincreased slightly during the three and nine months ended March 31,September 30, 2020 compared with the same periodperiods 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 increaseddecreased for the three and nine months ended March 31,September 30, 2020 over the comparable periodperiods in 2019. The increasedecrease in service charges on deposit accounts primarily reflects a higherlower volume of nonsufficient fund transactions and increased businessreduced 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 improvedincreased in the three and nine months ended March 31,September 30, 2020 over the same periodperiods 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 periodperiods in 2019. The year-to-date increase was primarily caused by increased gainsbetter 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 $0.81 million of impairment charges on mortgage servicing rights.
Insurance commissions were lowerhigher during the three and nine months ended March 31,September 30, 2020 overcompared to the same periodperiods a year ago. The decrease in insurance commissionsincrease was primarily due to new business offset by a reduction in contingent commissions received.
Equipment rental income decreased for the three and nine months ended March 31,September 30, 2020 over the comparable periodperiods in 2019. The decrease was the result of reduced leasing volume primarily in the construction equipment, aircraft and auto and light truck portfolios resulting in the average equipment rental portfolio decreasing by 16.80%21% over the same period a year ago.
Gains on investment securities available-for-sale during the threenine months ended March 31,September 30, 2019 were primarily from the sale of corporate securities in managing portfolio risk.
Other income increaseddecreased for the three and nine months ended March 31,September 30, 2020 over the comparable periods in 2019.compared to one year ago. The increasedecrease was primarily a result of lower claim proceeds from bank owned life insurance, reduced rental income on a repossessed asset, and a decrease in customer swap fees offset by higher partnership investment gains and increased brokerage fees and commissions offset by lower customer swap fees.gains.
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NONINTEREST EXPENSE
The following table shows the details of noninterest expense.
Three Months Ended
March 31,
Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands)(Dollars in thousands)20202019$ Change% Change(Dollars in thousands)20202019$ Change% Change20202019$ Change% Change
Noninterest expense:Noninterest expense:  Noninterest expense:    
Salaries and employee benefitsSalaries 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 occupancyNet occupancy2,721  2,772  (51) (1.84)%Net occupancy2,512 2,635 (123)(4.67)%7,737 7,888 (151)(1.91)%
Furniture and equipmentFurniture and equipment6,407  6,024  383  6.36 %Furniture and equipment6,247 6,027 220 3.65 %18,912 18,340 572 3.12 %
Depreciation – leased equipmentDepreciation – leased equipment5,427  6,524  (1,097) (16.81)%Depreciation – leased equipment4,694 6,198 (1,504)(24.27)%15,263 19,122 (3,859)(20.18)%
Professional feesProfessional fees1,442  1,598  (156) (9.76)%Professional fees2,041 1,603 438 27.32 %4,741 4,907 (166)(3.38)%
Supplies and communicationSupplies and communication1,634  1,493  141  9.44 %Supplies and communication1,305 1,643 (338)(20.57)%4,329 4,744 (415)(8.75)%
FDIC and other insuranceFDIC and other insurance288  645  (357) (55.35)%FDIC and other insurance868 260 608 NM1,755 1,513 242 15.99 %
Business development and marketingBusiness development and marketing1,359  949  410  43.20 %Business development and marketing923 1,844 (921)(49.95)%3,403 4,471 (1,068)(23.89)%
Loan and lease collection and repossessionLoan and lease collection and repossession763  1,361  (598) (43.94)%Loan and lease collection and repossession1,054 697 357 51.22 %2,655 2,288 367 16.04 %
OtherOther2,093  343  1,750  NM  Other1,790 1,765 25 1.42 %5,599 4,674 925 19.79 %
Total noninterest expenseTotal 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 periodperiods 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 claimscommission 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 periodperiods a year ago. The decrease for 2020 was primarily attributabledue to lower repair and utility expenses and reduced snow removal costs offset by higherincreased building depreciation.
Furniture and equipment expense, including depreciation, increasedrose during the three and nine months ended March 31,September 30, 2020 compared to the same periodperiods 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 periodperiods in 2019. Depreciation on leased equipment correlates with the decrease in equipment rental income.
Professional fees decreasedincreased during the firstthird 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 firstthird quarter of 2020 compared to the same period a year ago. The increase resulted primarily from higher postage2019 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 quarternine months of 2020 compared to the same period a year ago. The increase during the firstthird quarter was mainly due to higher marketing promotionslegal 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 quarternine 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 decreasedincreased 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 increasedincrease during the threefirst nine months ended March 31, 2020 compared towas primarily the same period in 2019. During the first three monthsresult of 2020, reducedlower 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 salea 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 periodperiods 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 periodperiods 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 combineda 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 firstthird 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 busbuses, auto rental and auto rentalhotels 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.
AlthoughEven 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 ProceedsProceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal 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
JanuaryJuly 01 - 31, 2020— $— — 859,374 
February 01 - 29, 2020— — — 859,374 
MarchAugust 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.        ExhibitsExhibits.
The following exhibits are filed with this report:
 
 
 
 
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
104Cover 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
   
   
   
DATEApril 23,October 22, 2020 /s/ CHRISTOPHER J. MURPHY III
  Christopher J. Murphy III
Chairman of the Board, President and CEO
   
   
DATEApril 23,October 22, 2020 /s/ ANDREA G. SHORT
  Andrea G. Short
Treasurer and Chief Financial Officer
Principal Accounting Officer

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