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 ~~September~~June 30, ~~2020~~2021

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

For the transition period from to

Commission file number 0-6233

1st Source Corporation

(Exact name of registrant as specified in its charter)


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

100 North Michigan Street

South Bend,

46601

(Address of principal executive offices)

(Zip Code)

(574) 235-2000

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock - without par value

SRCE

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐

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

Number of shares of common stock outstanding as of ~~October~~July 16, ~~2020~~2021 — ~~25,553,644~~25,006,197 shares

Table of Contents

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition — ~~September 30, 2020~~June 3 0 , 2021 and December 31, ~~2019~~2020	3
	Consolidated Statements of Income — three and ~~nine~~ six months ended ~~September 30,~~J une 3 0 , 2021 and 2020 ~~and 2019~~	4
	Consolidated Statements of Comprehensive Income — three and ~~nine~~ si x months ended ~~September 30,~~June 3 0 , 2021 and 2020 ~~and 2019~~	5
	Consolidated Statements of Shareholders’ Equity — three and ~~nine~~ six months ended ~~September 30,~~June 3 0 , 2021 and 2020 ~~and 2019~~	6
	Consolidated Statements of Cash Flows — ~~nine~~six months ended ~~September 30,~~June 3 0 , 2021 and 2020 ~~and 2019~~	7
	Notes to the Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3132
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4645
Item 4.	Controls and Procedures	4645

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	4645
Item 1A.	Risk Factors	4645
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4746
Item 3.	Defaults Upon Senior Securities	4746
Item 4.	Mine Safety Disclosures	4746
Item 5.	Other Information	4746
Item 6.	Exhibits	4846

SIGNATURES			4947

EXHIBITS
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.1
	Exhibit 32.2

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1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited - Dollars in thousands)

September 30,
2020 December 31,
2019
ASSETS
Cash and due from banks $ 62,575 $ 67,215
Federal funds sold and interest bearing deposits with other banks 91,641 16,150
Investment securities available-for-sale 1,083,427 1,040,583
Other investments 27,674 28,414
Mortgages held for sale 20,990 20,277
Loans and leases, net of unearned discount:
Commercial and agricultural 1,681,519 1,132,791
Auto and light truck 527,582 588,807
Medium and heavy duty truck 271,248 294,824
Aircraft 806,162 784,040
Construction equipment 723,596 705,451
Commercial real estate 961,550 908,177
Residential real estate and home equity 519,881 532,003
Consumer 135,498 139,434
Total loans and leases 5,627,036 5,085,527
Reserve for loan and lease losses (136,817) (111,254)
Net loans and leases 5,490,219 4,974,273
Equipment owned under operating leases, net 79,703 111,684
Net premises and equipment 49,933 52,219
Goodwill and intangible assets 83,953 83,971
Accrued income and other assets 300,834 227,990
Total assets $ 7,290,949 $ 6,622,776
LIABILITIES
Deposits:
Noninterest-bearing demand $ 1,720,768 $ 1,216,834
Interest-bearing deposits:
Interest-bearing demand 1,885,771 1,677,200
Savings 992,320 814,794
Time 1,297,996 1,648,498
Total interest-bearing deposits 4,176,087 4,140,492
Total deposits 5,896,855 5,357,326
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase 158,834 120,459
Other short-term borrowings 6,740 25,434
Total short-term borrowings 165,574 145,893
Long-term debt and mandatorily redeemable securities 81,659 71,639
Subordinated notes 58,764 58,764
Accrued expenses and other liabilities 173,082 140,518
Total liabilities 6,375,934 5,774,140
SHAREHOLDERS’ EQUITY
Preferred stock; 0 par value
Authorized 10,000,000 shares; NaN issued or outstanding 0 0
Common stock; 0 par value
Authorized 40,000,000 shares; issued 28,205,674 at September 30, 2020 and December 31, 2019 436,538 436,538
Retained earnings 497,419 463,269
Cost of common stock in treasury (2,652,030 shares at September 30, 2020 and 2,696,200 shares at December 31, 2019) (75,861) (76,702)
Accumulated other comprehensive income 19,658 5,172
Total shareholders’ equity 877,754 828,277
Noncontrolling interests 37,261 20,359
Total equity 915,015 848,636
Total liabilities and equity $ 7,290,949 $ 6,622,776


	June 30, 2021		December 31, 2020
ASSETS
Cash and due from banks	$	69,101	$	74,186
Federal funds sold and interest bearing deposits with other banks	400,346		168,861
Investment securities available-for-sale	1,413,022		1,197,467
Other investments	27,429		27,429

Mortgages held for sale	6,453		12,885
Loans and leases, net of unearned discount:
Commercial and agricultural	1,125,965		1,186,118
Solar	305,250		292,604
Auto and light truck	595,326		542,369
Medium and heavy duty truck	256,169		279,172
Aircraft	883,559		861,460
Construction equipment	729,055		714,888
Commercial real estate	966,171		969,864
Residential real estate and home equity	492,552		511,379
Consumer	128,998		131,447
Total loans and leases	5,483,045		5,489,301
Allowance for loan and lease losses	(136,361)		(140,654)
Net loans and leases	5,346,684		5,348,647
Equipment owned under operating leases, net	56,011		65,040
Net premises and equipment	47,617		49,373
Goodwill and intangible assets	83,937		83,948
Accrued income and other assets	268,094		288,575
Total assets	$	7,718,694	$	7,316,411
LIABILITIES
Deposits:
Noninterest-bearing demand	$	1,851,932	$	1,636,684
Interest-bearing deposits:
Interest-bearing demand	2,318,210		2,059,139
Savings	1,182,643		1,082,848
Time	992,625		1,167,357
Total interest-bearing deposits	4,493,478		4,309,344
Total deposits	6,345,410		5,946,028
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase	167,097		143,564
Other short-term borrowings	5,247		7,077
Total short-term borrowings	172,344		150,641
Long-term debt and mandatorily redeemable securities	81,330		81,864
Subordinated notes	58,764		58,764
Accrued expenses and other liabilities	115,389		148,444
Total liabilities	6,773,237		6,385,741
SHAREHOLDERS’ EQUITY
Preferred stock; 0 par value
Authorized 10,000,000 shares; NaN issued or outstanding	0		0
Common stock; 0 par value
Authorized 40,000,000 shares; issued 28,205,674 at June 30, 2021 and December 31, 2020	436,538		436,538
Retained earnings	558,795		514,176
Cost of common stock in treasury (3,204,947 shares at June 30, 2021 and 2,816,557 shares at December 31, 2020)	(101,711)		(82,240)
Accumulated other comprehensive income	7,604		18,371
Total shareholders’ equity	901,226		886,845
Noncontrolling interests	44,231		$	43,825
Total equity	945,457		930,670
Total liabilities and equity	$	7,718,694	$	7,316,411

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
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Interest income:
Loans and leases $ 58,318 $ 66,807 $ 178,659 $ 195,089
Investment securities, taxable 4,103 5,056 14,140 15,757
Investment securities, tax-exempt 207 316 703 1,054
Other 289 497 951 1,434
Total interest income 62,917 72,676 194,453 213,334
Interest expense:
Deposits 6,532 13,524 25,648 37,972
Short-term borrowings 83 293 427 1,764
Subordinated notes 824 914 2,543 2,770
Long-term debt and mandatorily redeemable securities 610 750 2,122 2,258
Total interest expense 8,049 15,481 30,740 44,764
Net interest income 54,868 57,195 163,713 168,570
Provision for loan and lease losses 9,303 3,717 31,031 12,882
Net interest income after provision for loan and lease losses 45,565 53,478 132,682 155,688
Noninterest income:
Trust and wealth advisory 5,153 4,982 15,590 15,423
Service charges on deposit accounts 2,336 2,892 6,851 8,175
Debit card 4,019 3,727 10,993 10,616
Mortgage banking 6,474 1,362 12,125 3,297
Insurance commissions 1,825 1,603 5,401 5,295
Equipment rental 5,593 7,578 18,213 23,369
Gains on investment securities available-for-sale 0 0 279 0
Other 2,641 3,621 8,452 9,378
Total noninterest income 28,041 25,765 77,904 75,553
Noninterest expense:
Salaries and employee benefits 25,609 24,434 74,009 71,716
Net occupancy 2,512 2,635 7,737 7,888
Furniture and equipment 6,247 6,027 18,912 18,340
Depreciation – leased equipment 4,694 6,198 15,263 19,122
Professional fees 2,041 1,603 4,741 4,907
Supplies and communication 1,305 1,643 4,329 4,744
FDIC and other insurance 868 260 1,755 1,513
Business development and marketing 923 1,844 3,403 4,471
Loan and lease collection and repossession 1,054 697 2,655 2,288
Other 1,790 1,765 5,599 4,674
Total noninterest expense 47,043 47,106 138,403 139,663
Income before income taxes 26,563 32,137 72,183 91,578
Income tax expense 6,509 7,689 17,185 21,517
Net income 20,054 24,448 54,998 70,061
Net loss (income) attributable to noncontrolling interests 4 (10) (25) (42)
Net income available to common shareholders $ 20,058 $ 24,438 $ 54,973 $ 70,019
Per common share:
Basic net income per common share $ 0.78 $ 0.95 $ 2.14 $ 2.72
Diluted net income per common share $ 0.78 $ 0.95 $ 2.14 $ 2.72
Cash dividends $ 0.28 $ 0.27 $ 0.85 $ 0.81
Basic weighted average common shares outstanding 25,552,374 25,520,035 25,538,910 25,630,771
Diluted weighted average common shares outstanding 25,552,374 25,520,035 25,538,910 25,630,771


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Interest income:
Loans and leases	$	57,144	$	58,815	$	115,008	$	120,341
Investment securities, taxable	4,155		4,487		8,143		10,037
Investment securities, tax-exempt	154		232		328		496
Other	317		316		583		662
Total interest income	61,770		63,850		124,062		131,536
Interest expense:
Deposits	3,202		8,265		6,728		19,116
Short-term borrowings	29		90		65		344
Subordinated notes	814		835		1,632		1,719
Long-term debt and mandatorily redeemable securities	790		659		1,290		1,512
Total interest expense	4,835		9,849		9,715		22,691
Net interest income	56,935		54,001		114,347		108,845
(Recovery of) provision for credit losses*	(3,025)		10,375		(627)		21,728
Net interest income after provision for credit losses	59,960		43,626		114,974		87,117
Noninterest income:
Trust and wealth advisory	6,466		5,589		11,947		10,437
Service charges on deposit accounts	2,508		1,910		4,955		4,515
Debit card	4,754		3,601		8,936		6,974
Mortgage banking	2,859		3,315		6,760		5,651
Insurance commissions	1,684		1,695		3,836		3,576
Equipment rental	4,255		5,990		8,884		12,620
(Losses) gains on investment securities available-for-sale	(680)		(1)		(680)		279
Other	3,052		3,142		6,129		5,811
Total noninterest income	24,898		25,241		50,767		49,863
Noninterest expense:
Salaries and employee benefits	25,510		23,999		50,706		48,400
Net occupancy	2,527		2,504		5,246		5,225
Furniture and equipment	6,337		6,258		12,795		12,665
Depreciation – leased equipment	3,550		5,142		7,323		10,569
Professional fees	2,146		1,258		3,759		2,700
Supplies and communication	1,430		1,390		2,905		3,024
FDIC and other insurance	772		599		1,437		887
Business development and marketing	1,351		1,121		2,348		2,480
Loan and lease collection and repossession	486		838		615		1,601
Other	1,089		1,716		2,204		3,809
Total noninterest expense	45,198		44,825		89,338		91,360
Income before income taxes	39,660		24,042		76,403		45,620
Income tax expense	9,425		5,516		18,062		10,676
Net income	30,235		18,526		58,341		34,944
Net (income) loss attributable to noncontrolling interests	(12)		(24)		(13)		(29)
Net income available to common shareholders	$	30,223	$	18,502	$	58,328	$	34,915
Per common share:
Basic net income per common share	$	1.19	$	0.72	$	2.29	$	1.36
Diluted net income per common share	$	1.19	$	0.72	$	2.29	$	1.36
Cash dividends	$	0.30	$	0.28	$	0.59	$	0.57
Basic weighted average common shares outstanding	25,143,712		25,540,855		25,231,789		25,532,105
Diluted weighted average common shares outstanding	25,143,712		25,540,855		25,231,789		25,532,105

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

*ASU 2016-13 adopted during the fourth quarter of 2020 therefore June 30, 2020 provision amount reflects the incurred loss method.

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1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - Dollars in thousands)

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Net income $ 20,054 $ 24,448 $ 54,998 $ 70,061
Other comprehensive income:
Unrealized (depreciation) appreciation of available-for-sale securities (303) 2,920 19,360 20,161
Reclassification adjustment for realized gains included in net income 0 0 (279) 0
Income tax effect 73 (703) (4,595) (4,855)
Other comprehensive (loss) income, net of tax (230) 2,217 14,486 15,306
Comprehensive income 19,824 26,665 $ 69,484 $ 85,367
Comprehensive loss (income) attributable to noncontrolling interests 4 (10) (25) (42)
Comprehensive income available to common shareholders $ 19,828 $ 26,655 $ 69,459 $ 85,325


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Net income	$	30,235	$	18,526	$	58,341	$	34,944
Other comprehensive income:
Unrealized (depreciation) appreciation of available-for-sale securities	(204)		2,946		(14,862)		19,663
Reclassification adjustment for realized losses (gains) included in net income	680		1		680		(279)
Income tax effect	(115)		(710)		3,415		(4,668)
Other comprehensive income (loss), net of tax	361		2,237		(10,767)		14,716
Comprehensive income	30,596		20,763		$	47,574	$	49,660
Comprehensive (income) loss attributable to noncontrolling interests	(12)		(24)		(13)		(29)
Comprehensive income available to common shareholders	$	30,584	$	20,739	$	47,561	$	49,631

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

Table of Contents

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

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



	Three Months Ended
	Preferred Stock		Common Stock		Retained Earnings		Cost of Common Stock in Treasury		Accumulated Other Comprehensive Income (Loss), Net		Total Shareholders’ Equity		Noncontrolling Interests		Total Equity
Balance at April 1, 2020	$	—	$	436,538	$	472,911	$	(76,203)	$	17,651	$	850,897	$	26,405	$	877,302
Net income	—		—		18,502		—		—		18,502		24		18,526
Other comprehensive income	—		—		—		—		2,237		2,237		—		2,237
Issuance of 14,971 common shares under stock based compensation awards	—		—		244		281		—		525		—		525
Cost of 0 shares of common stock acquired for treasury	—		—		—		0		—		0		—		0
Common stock dividend ($0.28 per share)	—		—		(7,166)		—		—		(7,166)		—		(7,166)
Contributions from noncontrolling interests	—		—		—		—		—		0		10,301		10,301
Distributions to noncontrolling interests	—		—		—		—		—		0		(72)		(72)
Balance at June 30, 2020	$	—	$	436,538	$	484,491	$	(75,922)	$	19,888	$	864,995	$	36,658	$	901,653

Balance at April 1, 2021	$	—	$	436,538	$	535,737	$	(88,223)	$	7,243	$	891,295	$	44,464	$	935,759
Net income	—		—		30,223		—		—		30,223		12		30,235
Other comprehensive income	—		—		—		—		361		361		—		361
Issuance of 15,799 common shares under stock based compensation awards	—		—		427		289		—		716		—		716
Cost of 283,759 shares of common stock acquired for treasury	—		—		—		(13,777)		—		(13,777)		—		(13,777)
Common stock dividend ($0.30 per share)	—		—		(7,592)		—		—		(7,592)		—		(7,592)


Distributions to noncontrolling interests	—		—		—		—		—		0		(245)		(245)
Balance at June 30, 2021	$	—	$	436,538	$	558,795	$	(101,711)	$	7,604	$	901,226	$	44,231	$	945,457

Three Months Ended
Preferred
Stock Common
Stock Retained
Earnings Cost of
Common
Stock
in Treasury Accumulated
Other
Comprehensive
Income (Loss), Net Total Shareholders’ Equity Noncontrolling Interests Total Equity
Balance at July 1, 2019 $ — $ 436,538 $ 431,091 $ (75,380) $ 2,413 $ 794,662 $ 10,024 $ 804,686
Net income — — 24,438 — — 24,438 10 24,448
Other comprehensive income — — — — 2,217 2,217 — 2,217
Issuance of 3,544 common shares under stock based compensation awards — — 91 70 — 161 — 161
Cost of 30,000 shares of common stock acquired for treasury — — — (1,406) — (1,406) — (1,406)
Common stock dividend ($0.27 per share) — — (6,905) — — (6,905) — (6,905)
Contributions from noncontrolling interests — — — — — 0 9,879 9,879
Distributions to noncontrolling interests — — — — — 0 (38) (38)
Balance at September 30, 2019 $ — $ 436,538 $ 448,715 $ (76,716) $ 4,630 $ 813,167 $ 19,875 833,042
Balance at July 1, 2020 $ — $ 436,538 $ 484,491 $ (75,922) $ 19,888 $ 864,995 $ 36,658 $ 901,653
Net income (loss) — — 20,058 — — 20,058 (4) 20,054
Other comprehensive loss — — — — (230) (230) — (230)
Issuance of 3,289 common shares under stock based compensation awards — — 52 61 — 113 — 113
Cost of 0 shares of common stock acquired for treasury — — — 0 — 0 — 0
Common stock dividend ($0.28 per share) — — (7,182) — — (7,182) — (7,182)
Contributions from noncontrolling interests — — — — — 0 928 928
Distributions to noncontrolling interests — — — — — 0 (321) (321)
Balance at September 30, 2020 $ — $ 436,538 $ 497,419 $ (75,861) $ 19,658 $ 877,754 $ 37,261 $ 915,015


		Nine Months Ended																															Six Months Ended
		Preferred Stock		Common Stock		Retained Earnings		Cost of Common Stock in Treasury		Accumulated Other Comprehensive Income (Loss), Net		Total Shareholders’ Equity		Noncontrolling Interests		Total Equity
Balance at January 1, 2019		$	—	$	436,538	$	398,980	$	(62,760)	$	(10,676)	$	762,082	$	1,508	$	763,590
Cumulative-effect adjustment		—		—		(301)		—		0		(301)		—		(301)
Balance at January 1, 2019, adjusted		—		436,538		398,679		(62,760)		(10,676)		761,781		1,508		763,289
Net income		—		—		70,019		—		—		70,019		42		70,061
Other comprehensive income		—		—		—		—		15,306		15,306		—		15,306
Issuance of 50,815 common shares under stock based compensation awards		—		—		841		1,129		—		1,970		—		1,970
Cost of 325,787 shares of common stock acquired for treasury		—		—		—		(15,085)		—		(15,085)		—		(15,085)
Common stock dividend ($0.81 per share)		—		—		(20,824)		—		—		(20,824)		—		(20,824)
Contributions from noncontrolling interests		—		—		—		—		—		0		18,363		18,363
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
																			Preferred Stock		Common Stock		Retained Earnings		Cost of Common Stock in Treasury		Accumulated Other Comprehensive Income (Loss), Net		Total Shareholders’ Equity		Noncontrolling Interests		Total Equity
Balance at January 1, 2020	Balance at January 1, 2020	$	—	$	436,538	$	463,269	$	(76,702)	$	5,172	$	828,277	$	20,359	$	848,636	Balance at January 1, 2020	$	—	$	436,538	$	463,269	$	(76,702)	$	5,172	$	828,277	$	20,359	$	848,636

Net income	Net income	—		—		54,973		—		—		54,973		25		54,998		Net income	—		—		34,915		—		—		34,915		29		34,944
Other comprehensive income	Other comprehensive income	—		—		—		—		14,486		14,486		—		14,486		Other comprehensive income	—		—		—		—		14,716		14,716		—		14,716
Issuance of 44,170 common shares under stock based compensation awards		—		—		934		841		—		1,775		—		1,775
Issuance of 40,881 common shares under stock based compensation awards																		Issuance of 40,881 common shares under stock based compensation awards	—		—		882		780		—		1,662		—		1,662
Cost of 0 shares of common stock acquired for treasury	Cost of 0 shares of common stock acquired for treasury	—		—		—		0		—		0		—		0		Cost of 0 shares of common stock acquired for treasury	—		—		—		0		—		0		—		0
Common stock dividend ($0.85 per share)		—		—		(21,757)		—		—		(21,757)		—		(21,757)
Common stock dividend ($0.57 per share)																		Common stock dividend ($0.57 per share)	—		—		(14,575)		—		—		(14,575)		—		(14,575)
Contributions from noncontrolling interests																		Contributions from noncontrolling interests	—		—		—		—		—		0		16,441		16,441
Distributions to noncontrolling interests																		Distributions to noncontrolling interests	—		—		—		—		—		0		(171)		(171)
Balance at June 30, 2020																		Balance at June 30, 2020	$	—	$	436,538	$	484,491	$	(75,922)	$	19,888	$	864,995	$	36,658	901,653

Balance at January 1, 2021																		Balance at January 1, 2021	$	—	$	436,538	$	514,176	$	(82,240)	$	18,371	$	886,845	$	43,825	$	930,670

Net income																		Net income	—		—		58,328		—		—		58,328		13		58,341
Other comprehensive loss																		Other comprehensive loss	—		—		—		—		(10,767)		(10,767)		—		(10,767)
Issuance of 50,826 common shares under stock based compensation awards																		Issuance of 50,826 common shares under stock based compensation awards	—		—		1,271		927		—		2,198		—		2,198
Cost of 439,216 shares of common stock acquired for treasury																		Cost of 439,216 shares of common stock acquired for treasury	—		—		—		(20,398)		—		(20,398)		—		(20,398)
Common stock dividend ($0.59 per share)																		Common stock dividend ($0.59 per share)	—		—		(14,980)		—		—		(14,980)		—		(14,980)
Contributions from noncontrolling interests	Contributions from noncontrolling interests	—		—		—		—		—		0		17,369		17,369		Contributions from noncontrolling interests	—		—		—		—		—		0		887		887
Distributions to noncontrolling interests	Distributions to noncontrolling interests	—		—		—		—		—		0		(492)		(492)		Distributions to noncontrolling interests	—		—		—		—		—		0		(494)		(494)

Balance at September 30, 2020		$	—	$	436,538	$	497,419	$	(75,861)	$	19,658	$	877,754	$	37,261	$	915,015
Balance at June 30, 2021																		Balance at June 30, 2021	$	—	$	436,538	$	558,795	$	(101,711)	$	7,604	$	901,226	$	44,231	$	945,457

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)

Nine Months Ended September 30,
2020 2019
Operating activities:
Net income $ 54,998 $ 70,061
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses 31,031 12,882
Depreciation of premises and equipment 4,255 4,412
Depreciation of equipment owned and leased to others 15,263 19,122
Stock-based compensation 2,377 2,069
Amortization of investment securities premiums and accretion of discounts, net 4,238 2,857
Amortization of mortgage servicing rights 1,757 879
Mortgage servicing rights impairments 808 0
Amortization of right of use assets 2,115 2,348
Deferred income taxes (10,509) (4,586)
Gains on investment securities available-for-sale (279) 0
Originations of loans held for sale, net of principal collected (248,639) (100,903)
Proceeds from the sales of loans held for sale 258,253 85,400
Net gain on sale of loans held for sale (10,327) (1,861)
Net gain on sale of other real estate and repossessions (73) (473)
Net gain on sale of premises and equipment 0 (1,289)
Change in interest receivable (2,440) (1,717)
Change in interest payable (6,271) 5,885
Change in other assets 2,312 7,889
Change in other liabilities (2,906) 8,763
Other 1,049 1,348
Net change in operating activities 97,012 113,086
Investing activities:
Proceeds from sales of investment securities available-for-sale 8,403 0
Proceeds from maturities and paydowns of investment securities available-for-sale 301,050 128,257
Purchases of investment securities available-for-sale (337,175) (153,310)
Net change in partnership investments (31,298) (29,823)
Net change in other investments 740 0
Loans sold or participated to others 10,722 50,140
Proceeds from principal payments on direct finance leases 35,384 56,798
Proceeds from PPP lender origination fees 19,375 0
Net change in loans and leases (615,427) (386,170)
Net change in equipment owned under operating leases 16,691 (3,975)
Purchases of premises and equipment (1,988) (6,091)
Proceeds from disposal of premises and equipment 19 3,427
Proceeds from sales of other real estate and repossessions 6,303 9,522
Net change in investing activities (587,201) (331,225)
Financing activities:
Net change in demand deposits and savings accounts 890,031 17,518
Net change in time deposits (350,502) 251,839
Net change in short-term borrowings 19,681 (2,193)
Proceeds from issuance of long-term debt 10,000 0
Payments on long-term debt (2,710) (2,499)
Stock issued under stock purchase plans 39 49
Acquisition of treasury stock 0 (15,085)
Net change in noncontrolling interests 16,877 18,325
Cash dividends paid on common stock (22,376) (21,409)
Net change in financing activities 561,040 246,545
Net change in cash and cash equivalents 70,851 28,406
Cash and cash equivalents, beginning of year 83,365 99,079
Cash and cash equivalents, end of period $ 154,216 $ 127,485
Supplemental Information:
Non-cash transactions:
Loans transferred to other real estate and repossessed assets $ 2,969 $ 10,740
Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan 622 300
Right of use assets obtained in exchange for lease obligations 253 16,006


	Six Months Ended June 30,
	2021		2020
Operating activities:
Net income	$	58,341	$	34,944
Adjustments to reconcile net income to net cash provided by operating activities:
(Recovery of) provision for credit losses*	(627)		21,728
Depreciation of premises and equipment	2,675		2,847
Depreciation of equipment owned and leased to others	7,323		10,569
Stock-based compensation	1,726		1,519
Amortization of investment securities premiums and accretion of discounts, net	3,372		2,356
Amortization of mortgage servicing rights	1,109		1,103
Mortgage servicing rights impairment (recoveries) charges	(589)		546
Amortization of right of use assets	2,270		1,410
Deferred income taxes	8,343		(7,786)
Losses (gains) on investment securities available-for-sale	680		(279)
Originations of loans held for sale, net of principal collected	(135,647)		(154,212)
Proceeds from the sales of loans held for sale	145,785		142,680
Net gain on sale of loans held for sale	(3,706)		(4,699)
Net gain on sale of other real estate and repossessions	(303)		(9)


Change in interest receivable	1,104		(1,851)
Change in interest payable	(1,224)		(4,491)
Change in other assets	2,388		2,055
Change in other liabilities	(6,697)		(4,828)
Other	233		755
Net change in operating activities	86,556		44,357

Investing activities:
Proceeds from sales of investment securities available-for-sale	99,208		8,403
Proceeds from maturities and paydowns of investment securities available-for-sale	182,499		198,105
Purchases of investment securities available-for-sale	(515,496)		(204,415)
Net change in partnership investments	(13,756)		(30,356)
Net change in other investments	0		(2,205)
Loans sold or participated to others	15,903		8,004
Proceeds from principal payments on direct finance leases	20,086		25,238

Net change in loans and leases	(34,519)		(643,859)
Net change in equipment owned under operating leases	1,706		14,932
Purchases of premises and equipment	(947)		(2,126)
Proceeds from disposal of premises and equipment	28		12
Proceeds from sales of other real estate and repossessions	2,240		4,547
Net change in investing activities	(243,048)		(623,720)

Financing activities:
Net change in demand deposits and savings accounts	574,114		784,580
Net change in time deposits	(174,732)		(148,450)
Net change in short-term borrowings	21,703		31,126
Proceeds from issuance of long-term debt	0		10,000
Payments on long-term debt	(2,870)		(2,343)
Stock issued under stock purchase plans	90		39
Acquisition of treasury stock	(20,398)		0
Net change in noncontrolling interests	393		16,271
Cash dividends paid on common stock	(15,408)		(14,989)
Net change in financing activities	382,892		676,234


Net change in cash and cash equivalents	226,400		96,871
Cash and cash equivalents, beginning of year	243,047		83,365
Cash and cash equivalents, end of period	$	469,447	$	180,236
Supplemental Information:
Non-cash transactions:
Loans transferred to other real estate and repossessed assets	$	1,120	$	2,123
Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan	715		622
Right of use assets obtained in exchange for lease obligations	615		31

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

*ASU 2016-13 adopted during the fourth quarter of 2020 therefore June 30, 2020 provision amount reflects the incurred loss method.

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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~~(2020 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~~2020 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~~are capitalized. All existing deferrals will continue to be amortized over the estimated life of the lease while all new incremental direct costs ~~will be~~are expensed immediately.

Accrued interest is included in Accrued Income and Other Assets on the Consolidated Statements of Financial Condition and is excluded from the calculation of the allowance for credit losses. 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~~allowance 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.

~~Table of Contents~~

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.

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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~~an allowance for loan and lease losses estimate or a charge-off to the ~~reserve~~allowance 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~~allowance 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~~Section 4013 of the Cares Act was amended on December 27, 2020 to extend this relief until January 1, 2022. The 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. At June 30, 2021 and December 31, 2020, loan and lease modification balances related to the COVID-19 pandemic were $65 million and $129 million, respectively.

Note 2 — Recent Accounting Pronouncements

~~Nonrefundable Fees and Other Costs:~~Reference Rate Reform: In ~~October~~March 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. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company ~~is implementing a~~continues to implement its transition plan ~~to identify~~toward cessation of LIBOR and ~~modify~~the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company ~~is continuing~~expects to ~~assess~~utilize the LIBOR transition relief allowed under 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 has assessed ASU 2020-01~~as applicable, and does not expect itsuch adoption to have a material impact on its accounting and disclosures. The Company will continue to assess the impact as the reference rate transition occurs over the next two years .

Note 3 — Investment Securities Available-For-Sale

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


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2021
U.S. Treasury and Federal agencies securities	$	767,147	$	6,325	$	(3,594)	$	769,878
U.S. States and political subdivisions securities	89,938		1,761		(564)		91,135
Mortgage-backed securities — Federal agencies	517,713		8,093		(2,911)		522,895
Corporate debt securities	27,508		906		0		28,414
Foreign government and other securities	700		0		0		700
Total debt securities available-for-sale	$	1,403,006	$	17,085	$	(7,069)	$	1,413,022

December 31, 2020
U.S. Treasury and Federal agencies securities	$	610,195	$	9,521	$	(234)	$	619,482
U.S. States and political subdivisions securities	78,812		2,346		(31)		81,127
Mortgage-backed securities — Federal agencies	442,748		11,237		(196)		453,789
Corporate debt securities	40,813		1,556		0		42,369
Foreign government and other securities	700		0		0		700
Total debt securities available-for-sale	$	1,173,268	$	24,660	$	(461)	$	1,197,467

Amortized cost excludes accrued interest receivable which is included in Accrued Income and Other Assets on the Consolidated Statements of Financial Condition. At June 30, 2021 and December 31, 2020, accrued interest receivable on investment securities available-for-sale was $3.98 million and $3.84 million, respectively.

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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;At June 30, 2021 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 has assessed ASU 2019-12 and does not expect it to have a material impact on its accounting and disclosures.

~~Measurement of Credit Losses on Financial Instruments:~~ ~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~“Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments (CECL).”~~ The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the financial assets.

~~Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.~~

The FASB issued additional ASUs containing clarifying guidance, transition relief provisions and minor updates to the original ASU. These include ASU 2018-19 (issued November 2018), ASU 2019-04 (issued April 2019), ASU 2019-05 (issued May 2019), ASU 2019-10 (issued November 2019), 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 September 30, 2020, the Company estimates an additional increase to its allowance for credit losses of between $0 million and $2 million which will be recognized through earnings upon adoption.

Upon adopting ASU 2016-13, the Company will not record an allowance as of January 1, 2020 with respect to its available-for-sale debt securities as the majority of these securities are government agency-backed securities for which the risk of loss is minimal. The adoption of ASU 2016-13 is not expected to have a significant impact on the Company’s regulatory capital ratios.

~~Table of Contents~~

~~Note 3 — Investment Securities Available-For-Sale~~

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

(Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
September 30, 2020
U.S. Treasury and Federal agencies securities $ 557,262 $ 10,954 $ (208) $ 568,008
U.S. States and political subdivisions securities 66,323 2,423 (13) 68,733
Mortgage-backed securities — Federal agencies 392,427 11,154 (91) 403,490
Corporate debt securities 40,822 1,674 0 42,496
Foreign government and other securities 700 0 0 700
Total debt securities available-for-sale $ 1,057,534 $ 26,205 $ (312) $ 1,083,427
December 31, 2019
U.S. Treasury and Federal agencies securities $ 524,896 $ 2,538 $ (470) $ 526,964
U.S. States and political subdivisions securities 83,566 1,048 (109) 84,505
Mortgage-backed securities — Federal agencies 372,458 3,948 (1,017) 375,389
Corporate debt securities 52,151 890 (16) 53,025
Foreign government and other securities 700 0 0 700
Total debt securities available-for-sale $ 1,033,771 $ 8,424 $ (1,612) $ 1,040,583

~~At 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 ~~September~~June 30, ~~2020.~~2021. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Fair Value		(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	Due in one year or less	$	126,626	$	127,388	Due in one year or less	$	104,525	$	105,576
Due after one year through five years	Due after one year through five years	454,199		468,075		Due after one year through five years	633,313		638,184
Due after five years through ten years	Due after five years through ten years	83,702		83,903		Due after five years through ten years	146,985		145,918
Due after ten years	Due after ten years	580		571		Due after ten years	470		449
Mortgage-backed securities	Mortgage-backed securities	392,427		403,490		Mortgage-backed securities	517,713		522,895
Total debt securities available-for-sale	Total debt securities available-for-sale	$	1,057,534	$	1,083,427	Total debt securities available-for-sale	$	1,403,006	$	1,413,022

The following table summarizes gross unrealized losses and fair value by investment category and age. At ~~September~~June 30, ~~2020,~~2021, the Company’s available-for-sale securities portfolio consisted of ~~600~~657 securities, 35169 of which were in an unrealized loss position.

Less than 12 Months 12 months or Longer Total
(Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
September 30, 2020
U.S. Treasury and Federal agencies securities $ 47,792 $ (208) $ 0 $ 0 $ 47,792 $ (208)
U.S. States and political subdivisions securities 857 (13) 0 0 857 (13)
Mortgage-backed securities - Federal agencies 45,256 (85) 3,245 (6) 48,501 (91)
Corporate debt securities 0 0 0 0 0 0
Foreign government and other securities 200 0 0 0 200 0
Total debt securities available-for-sale $ 94,105 $ (306) $ 3,245 $ (6) $ 97,350 $ (312)
December 31, 2019
U.S. Treasury and Federal agencies securities $ 87,352 $ (171) $ 69,053 $ (299) $ 156,405 $ (470)
U.S. States and political subdivisions securities 9,283 (107) 1,042 (2) 10,325 (109)
Mortgage-backed securities - Federal agencies 81,951 (383) 51,165 (634) 133,116 (1,017)
Corporate debt securities 0 0 8,091 (16) 8,091 (16)
Foreign government and other securities 0 0 0 0 0 0
Total debt securities available-for-sale $ 178,586 $ (661) $ 129,351 $ (951) $ 307,937 $ (1,612)

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	Less than 12 Months				12 months or Longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2021
U.S. Treasury and Federal agencies securities	$	405,494	$	(3,594)	$	0	$	0	$	405,494	$	(3,594)
U.S. States and political subdivisions securities	31,702		(545)		421		(19)		32,123		(564)
Mortgage-backed securities - Federal agencies	232,737		(2,904)		550		(7)		233,287		(2,911)
Corporate debt securities	0		0		0		0		0		0
Foreign government and other securities	200		0		0		0		200		0
Total debt securities available-for-sale	$	670,133	$	(7,043)	$	971	$	(26)	$	671,104	$	(7,069)

December 31, 2020
U.S. Treasury and Federal agencies securities	$	136,534	$	(234)	$	0	$	0	$	136,534	$	(234)
U.S. States and political subdivisions securities	6,391		(30)		199		(1)		6,590		(31)
Mortgage-backed securities - Federal agencies	67,736		(187)		3,274		(9)		71,010		(196)
Corporate debt securities	0		0		0		0		0		0
Foreign government and other securities	200		0		0		0		200		0
Total debt securities available-for-sale	$	210,861	$	(451)	$	3,473	$	(10)	$	214,334	$	(461)

The ~~initial indication of potential other-than-temporary-impairment (OTTI) for debt~~Company does not consider available-for-sale 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 deemedwith unrealized losses at June 30, 2021 to be ~~other-than-temporary are reflected in earnings as realized~~experiencing credit losses ~~to the extent the impairment is related to~~and recognized no resulting allowance for credit losses. The ~~amount of impairment related~~Company does not intend to ~~other factors is recognized in other comprehensive income. In estimating OTTI losses, the Company considers among other things, (i) the length of time~~sell these investments 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~~be required to sell ~~any such securities~~these investments before a recovery of ~~cost.~~

~~At September 30, 2020,~~ the ~~Company does not have~~amortized cost basis, which may be the ~~intent to sell any~~maturity dates 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 thesecurities. The unrealized losses ~~on debt securities are due~~occurred as a result of changes in interest rates, market spreads and market conditions subsequent 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.purchase.

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 September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020		2021		2020
Gross realized gains	Gross realized gains	$	0	$	0	$	285	$	0	Gross realized gains	$	221	$	5	$	221	$	285
Gross realized losses	Gross realized losses	0		0		(6)		0		Gross realized losses	(901)		(6)		(901)		(6)
OTTI losses		0		0		0		0

Net realized gains (losses)	Net realized gains (losses)	$	0	$	0	$	279	$	0	Net realized gains (losses)	$	(680)	$	(1)	$	(680)	$	279

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, investment securities available-for-sale with carrying values of ~~$371.45~~$326.02 million and ~~$281.38~~$338.68 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.

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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~~allowance 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) 1-6 7-12 Total
September 30, 2020
Commercial and agricultural $ 1,617,272 $ 64,247 $ 1,681,519
Auto and light truck 470,744 56,838 527,582
Medium and heavy duty truck 269,070 2,178 271,248
Aircraft 782,656 23,506 806,162
Construction equipment 671,254 52,342 723,596
Commercial real estate 932,782 28,768 961,550
Total $ 4,743,778 $ 227,879 $ 4,971,657
December 31, 2019
Commercial and agricultural $ 1,080,933 $ 51,858 $ 1,132,791
Auto and light truck 569,234 19,573 588,807
Medium and heavy duty truck 293,736 1,088 294,824
Aircraft 764,564 19,476 784,040
Construction equipment 668,076 37,375 705,451
Commercial real estate 888,154 20,023 908,177
Total $ 4,264,697 $ 149,393 $ 4,414,090
*Paycheck Protection Program (PPP) loans are included in the Commercial and agricultural category in the Grades 1-6 column above.

For residential real estate and home equity and consumer loans, credit quality is based on the aging status of the loan and by payment activity. ~~The following table shows the recorded investment in residential real estate and home equity and consumer loans by performing or nonperforming status.~~ Nonperforming loans are those loans which are on nonaccrual status or are 90 days or more past due.

(Dollars in thousands) Performing Nonperforming Total
September 30, 2020
Residential real estate and home equity $ 518,127 $ 1,754 $ 519,881
Consumer 135,074 424 135,498
Total $ 653,201 $ 2,178 $ 655,379
December 31, 2019
Residential real estate and home equity $ 529,557 $ 2,446 $ 532,003
Consumer 138,951 483 139,434
Total $ 668,508 $ 2,929 $ 671,437
Below is a summary of the Company’s loan and lease portfolio segments and a discussion of the risk characteristics relevant to each portfolio segment.

Commercial and agricultural – loans are to entities within the Company’s local market communities. Loans are for business or agri-business purposes and include working capital lines of credit secured by accounts receivable and inventory that are generally renewable annually and term loans secured by equipment with amortizations based on the expected life of the underlying collateral, generally three to seven years. These loans are typically further supported by personal guarantees. Commercial exposure is to a wide range of industries and services. Risks in this sector are also varied and are most impacted by general economic conditions. Risk mitigants include appropriate underwriting and monitoring and, when appropriate, government guarantees, including SBA and FSA. This portfolio sector also includes PPP loans, which are fully guaranteed by the SBA. Total PPP loan originations during the six months ended June 30, 2021 and the full year of 2020 amounted to $261.46 million and $597.45 million, respectively. As of June 30, 2021, PPP loan balances were $315.09 million which is net of an unearned discount of $12.97 million. Previously, solar loans and leases had been included in this portfolio segment but after a reevaluation of credit risk characteristics and outstanding balance levels, it was determined that they should be removed and placed into a separate and unique segment.

Solar – loans are for the purpose of financing solar related projects and may include construction draw notes, operating loans, letters of credit and may entail a tax equity structure. Collateral in a multi-state area includes tangible assets of the borrower, assignment of intangible assets including power purchase agreements, and pledges of permits and licenses. Financing is provided to qualified borrowers throughout the continental United States with an emphasis on the region east of the Rocky Mountains.

Auto and light truck – loans are secured by vehicles and borrowers are nationwide. The portfolio consists of multiple industries: auto rental, auto leasing and specialty vehicle which includes bus, funeral car and step van. Borrowers in the auto rental segment are primarily independent auto rental entities with on-airport and off-airport locations, and some insurance replacement business. Loan amortizations are relatively short, generally eighteen months, but up to four years. Auto leasing customers lease to businesses and the Company takes assignment of the lease stream and places its lien on the vehicles. Terms are generally longer than the auto rental sector, three to seven years and match the underlying lease stream. Risks in both these segments include economic risks and collateral risks, principally used vehicle values. The bus segment is secured primarily by motor coaches and some shuttle buses. Risks include lack of well-established mechanisms for disposition of collateral, such as auctions that are key to disposition of autos. Loans in the portfolio generally carry personal guarantees and remain stressed as various sports and entertainment venues begin returning to normal operations.

Medium and heavy duty truck – loans and full-service truck leases are secured by heavy-duty trucks, commonly Class 8 trucks, and are generally personally guaranteed. In addition to economic risks, collateral risk is significant. Financing is generally at full cost, plus additional expenditures to get the vehicle operational, such as taxes, insurance and fees. It takes three to four years of debt amortization to reach an equity position in the collateral.

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Aircraft – loans are to domestic and foreign borrowers with the domestic segment further divided into 2 pools: 1) personal and business use, and 2) dealers and operators. The Company’s focus for the foreign sector is Latin America, principally Mexico and Brazil. Loans are primarily secured by new and used business jets and helicopters, with appropriate advances, amortizations of ten to fifteen years, and are generally guaranteed by individuals or businesses. The most significant risk in the Aircraft portfolio is collateral risk - volatility in underlying values and maintenance concerns. The portfolio is subject to national and global economic risks.

Construction equipment – loans are to borrowers throughout the United States secured by specific equipment. The borrowers include highway and road builders, asphalt producers and pavers, suppliers of aggregate products, site developers, frac sand operations, general construction equipment dealers and operators, crane rental entities, forestry, and mining operations. Generally, loans include personal or business guarantees. The construction equipment industry is heavily dependent on the U.S. economy and the global economy. Market growth is reliant on investments from public and private sectors into urbanization and infrastructure projects.

Commercial real estate – loans are generally to entities within the local market communities served by the Company with advances generally within regulatory guidelines. Historically, the Company’s exposure to commercial real estate had been primarily to the less risky owner-occupied segment although growth in recent years has been in the non-owner-occupied segment which now accounts for slightly less than half of the portfolio. The non-owner-occupied segment includes hotels, apartment complexes and warehousing facilities. There is limited exposure to development or construction loans. Many commercial real estate loans carry personal guarantees. Additional risks in the commercial real estate portfolio stem from geographical concentration in northern Indiana and southwest Michigan and general economic conditions.

Residential real estate and home equity – loans predominantly include one-to-four family mortgages to borrowers in the Company’s local market communities and are appropriately underwritten and secured by residential real estate.

Consumer – loans are to individuals in the Company’s local markets and auto loans are generally secured by personal vehicles and appropriately underwritten.

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The following table shows the amortized cost of loans and leases, segregated by portfolio segment, credit quality rating and year of origination as of June 30, 2021.


	Term Loans and Leases by Origination Year
(Dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and agricultural
Grades 1-6	$	320,190	$	220,668	$	76,769	$	71,174	$	43,172	$	27,097	$	332,570	$	0	$	1,091,640
Grades 7-12	2,590		114		3,572		3,076		2,597		574		21,802		0		34,325
Total commercial and agricultural	322,780		220,782		80,341		74,250		45,769		27,671		354,372		0		1,125,965
Solar
Grades 1-6	91,799		63,530		82,802		19,223		36,085		3,912		0		0		297,351
Grades 7-12	0		1,170		5,992		737		0		0		0		0		7,899
Total solar	91,799		64,700		88,794		19,960		36,085		3,912		0		0		305,250
Auto and light truck
Grades 1-6	202,315		179,286		99,119		35,712		16,803		1,999		0		0		535,234
Grades 7-12	6,700		20,446		15,441		8,766		7,026		1,713		0		0		60,092
Total auto and light truck	209,015		199,732		114,560		44,478		23,829		3,712		0		0		595,326
Medium and heavy duty truck
Grades 1-6	32,301		80,533		74,482		34,486		21,740		11,265		0		0		254,807
Grades 7-12	0		0		817		0		0		545		0		0		1,362
Total medium and heavy duty truck	32,301		80,533		75,299		34,486		21,740		11,810		0		0		256,169
Aircraft
Grades 1-6	196,414		366,731		119,642		73,317		70,297		43,872		8,302		0		878,575
Grades 7-12	0		711		0		456		541		3,276		0		0		4,984
Total aircraft	196,414		367,442		119,642		73,773		70,838		47,148		8,302		0		883,559
Construction equipment
Grades 1-6	157,460		252,593		146,405		70,080		25,482		9,998		14,700		3,930		680,648
Grades 7-12	283		30,799		5,884		6,926		92		81		1,288		3,054		48,407
Total construction equipment	157,743		283,392		152,289		77,006		25,574		10,079		15,988		6,984		729,055
Commercial real estate
Grades 1-6	96,690		191,491		190,544		159,532		159,826		136,537		474		0		935,094
Grades 7-12	2,403		8,577		7,252		2,310		6,674		3,861		0		0		31,077
Total commercial real estate	99,093		200,068		197,796		161,842		166,500		140,398		474		0		966,171
Residential real estate and home equity
Performing	48,300		127,369		50,995		15,015		15,211		104,952		124,741		4,847		491,430
Nonperforming	0		0		0		21		0		815		196		90		1,122
Total residential real estate and home equity	48,300		127,369		50,995		15,036		15,211		105,767		124,937		4,937		492,552
Consumer
Performing	32,251		32,947		24,760		12,531		4,118		1,355		20,530		0		128,492
Nonperforming	0		0		58		53		232		6		157		0		506
Total consumer	$	32,251	$	32,947	$	24,818	$	12,584	$	4,350	$	1,361	$	20,687	$	0	$	128,998

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The following table shows the ~~recorded investment~~amortized cost of loans and leases, segregated by ~~class, with delinquency aging~~portfolio segment, credit quality rating and ~~nonaccrual status.~~year of origination as of December 31, 2020.


																	Term Loans and Leases by Origination Year
(Dollars in thousands)	(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Total Accruing Loans		Nonaccrual		Total Financing Receivables		(Dollars in thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
September 30, 2020
Commercial and agricultural	Commercial and agricultural	$	1,679,388	$	49	$	574	$	—	$	1,680,011	$	1,508	$	1,681,519	Commercial and agricultural
Grades 1-6																Grades 1-6	$	525,816	$	103,120	$	114,251	$	56,007	$	22,023	$	19,790	$	291,990	$	0	$	1,132,997
Grades 7-12																Grades 7-12	6,788		1,699		4,726		3,507		1,200		2,134		33,067		0		53,121
Total commercial and agricultural																Total commercial and agricultural	532,604		104,819		118,977		59,514		23,223		21,924		325,057		0		1,186,118
Solar																Solar
Grades 1-6																Grades 1-6	141,089		90,435		20,160		36,909		4,011		0		0		0		292,604
Grades 7-12																Grades 7-12	0		0		0		0		0		0		0		0		0
Total solar																Total solar	141,089		90,435		20,160		36,909		4,011		0		0		0		292,604
Auto and light truck	Auto and light truck	488,688		682		302		—		489,672		37,910		527,582		Auto and light truck
Grades 1-6																Grades 1-6	248,932		141,841		52,749		24,101		4,210		608		0		0		472,441
Grades 7-12																Grades 7-12	19,113		27,136		12,796		8,612		2,250		21		0		0		69,928
Total auto and light truck																Total auto and light truck	268,045		168,977		65,545		32,713		6,460		629		0		0		542,369
Medium and heavy duty truck	Medium and heavy duty truck	270,211		93		0		—		270,304		944		271,248		Medium and heavy duty truck
Grades 1-6																Grades 1-6	92,698		88,314		44,205		31,773		15,644		4,840		0		0		277,474
Grades 7-12																Grades 7-12	0		978		0		0		632		88		0		0		1,698
Total medium and heavy duty truck																Total medium and heavy duty truck	92,698		89,292		44,205		31,773		16,276		4,928		0		0		279,172
Aircraft	Aircraft	793,451		6,837		3,921		—		804,209		1,953		806,162		Aircraft
Grades 1-6																Grades 1-6	429,283		153,358		93,042		95,457		43,972		20,966		6,370		0		842,448
Grades 7-12																Grades 7-12	11,519		2,561		479		596		2,187		1,670		0		0		19,012
Total aircraft																Total aircraft	440,802		155,919		93,521		96,053		46,159		22,636		6,370		0		861,460
Construction equipment	Construction equipment	697,020		1,633		321		—		698,974		24,622		723,596		Construction equipment
Grades 1-6																Grades 1-6	311,174		180,550		96,320		42,713		12,624		5,722		17,502		737		667,342
Grades 7-12																Grades 7-12	17,518		13,743		10,642		398		237		85		2,988		1,935		47,546
Total construction equipment																Total construction equipment	328,692		194,293		106,962		43,111		12,861		5,807		20,490		2,672		714,888
Commercial real estate	Commercial real estate	959,816		173		0		—		959,989		1,561		961,550		Commercial real estate
Grades 1-6																Grades 1-6	190,725		204,477		173,847		175,009		69,022		122,762		373		0		936,215
Grades 7-12																Grades 7-12	9,518		7,990		5,173		6,684		1,762		2,522		0		0		33,649
Total commercial real estate																Total commercial real estate	200,243		212,467		179,020		181,693		70,784		125,284		373		0		969,864
Residential real estate and home equity	Residential real estate and home equity	517,233		875		19		80		518,207		1,674		519,881		Residential real estate and home equity
Performing																Performing	133,829		65,690		18,194		22,929		41,847		86,106		135,255		5,703		509,553
Nonperforming																Nonperforming	0		0		21		14		0		1,435		247		109		1,826
Total residential real estate and home equity																Total residential real estate and home equity	133,829		65,690		18,215		22,943		41,847		87,541		135,502		5,812		511,379
Consumer	Consumer	134,222		779		73		1		135,075		423		135,498		Consumer
Total		$	5,540,029	$	11,121	$	5,210	$	81	$	5,556,441	$	70,595	$	5,627,036

December 31, 2019
Commercial and agricultural		$	1,131,704	$	118	$	0	$	—	$	1,131,822	$	969	$	1,132,791
Auto and light truck		586,212		1,268		77		—		587,557		1,250		588,807
Medium and heavy duty truck		293,736		14		0		—		293,750		1,074		294,824
Aircraft		772,846		7,026		3,293		—		783,165		875		784,040
Construction equipment		702,671		819		609		—		704,099		1,352		705,451
Commercial real estate		906,468		58		0		—		906,526		1,651		908,177
Residential real estate and home equity		528,844		561		152		257		529,814		2,189		532,003
Consumer		138,132		632		187		54		139,005		429		139,434
Total		$	5,060,613	$	10,496	$	4,318	$	311	$	5,075,738	$	9,789	$	5,085,527
Performing																Performing	43,824		34,409		18,904		7,005		2,259		793		23,869		0		131,063
Nonperforming																Nonperforming	2		99		78		36		8		2		159		0		384
Total consumer																Total consumer	$	43,826	$	34,508	$	18,982	$	7,041	$	2,267	$	795	$	24,028	$	0	$	131,447

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The following table shows ~~impaired~~the amortized cost of loans and leases, segregated by ~~class,~~portfolio segment, with delinquency aging and ~~the corresponding reserve for impaired loan~~nonaccrual status.


(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Total Accruing Loans		Nonaccrual		Total Financing Receivables
June 30, 2021
Commercial and agricultural	$	1,121,691	$	423	$	0	$	—	$	1,122,114	$	3,851	$	1,125,965
Solar	305,250		0		0		—		305,250		0		305,250
Auto and light truck	557,402		266		0		—		557,668		37,658		595,326
Medium and heavy duty truck	255,624		0		0		—		255,624		545		256,169
Aircraft	879,744		0		3,104		—		882,848		711		883,559
Construction equipment	718,581		369		0		—		718,950		10,105		729,055
Commercial real estate	964,492		45		224		—		964,761		1,410		966,171
Residential real estate and home equity	491,304		110		16		26		491,456		1,096		492,552
Consumer	128,121		286		85		18		128,510		488		128,998
Total	$	5,422,209	$	1,499	$	3,429	$	44	$	5,427,181	$	55,864	$	5,483,045

December 31, 2020
Commercial and agricultural	$	1,180,151	$	34	$	0	$	—	$	1,180,185	$	5,933	$	1,186,118
Solar	292,604		0		0		—		292,604		0		292,604
Auto and light truck	504,659		560		205		—		505,424		36,945		542,369
Medium and heavy duty truck	278,452		0		0		—		278,452		720		279,172
Aircraft	860,632		0		0		—		860,632		828		861,460
Construction equipment	701,124		1,093		298		—		702,515		12,373		714,888
Commercial real estate	968,370		0		0		—		968,370		1,494		969,864
Residential real estate and home equity	508,532		782		239		108		509,661		1,718		511,379
Consumer	130,458		504		101		7		131,070		377		131,447
Total	$	5,424,982	$	2,973	$	843	$	115	$	5,428,913	$	60,388	$	5,489,301

Accrued interest receivable on loans and ~~lease losses.~~

(Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Reserve
September 30, 2020
With no related reserve recorded:
Commercial and agricultural $ 768 $ 768 $ —
Auto and light truck 20,094 20,094 —
Medium and heavy duty truck 830 830 —
Aircraft 1,953 1,953 —
Construction equipment 5,312 5,312 —
Commercial real estate 1,354 1,354 —
Residential real estate and home equity 0 0 —
Consumer 0 0 —
Total with no related reserve recorded 30,311 30,311 —
With a reserve recorded:
Commercial and agricultural 6,647 6,647 1,554
Auto and light truck 16,980 16,980 7,517
Medium and heavy duty truck 114 114 34
Aircraft 0 0 0
Construction equipment 12,910 12,910 7,966
Commercial real estate 0 0 0
Residential real estate and home equity 331 333 111
Consumer 0 0 0
Total with a reserve recorded 36,982 36,984 17,182
Total impaired loans $ 67,293 $ 67,295 $ 17,182
December 31, 2019
With no related reserve recorded:
Commercial and agricultural $ 218 $ 218 $ —
Auto and light truck 853 853 —
Medium and heavy duty truck 1,074 1,074 —
Aircraft 875 875 —
Construction equipment 615 615 —
Commercial real estate 1,487 1,487 —
Residential real estate and home equity 0 0 —
Consumer 0 0 —
Total with no related reserve recorded 5,122 5,122 —
With a reserve recorded:
Commercial and agricultural 10,366 10,366 3,003
Auto and light truck 278 278 30
Medium and heavy duty truck 0 0 0
Aircraft 0 0 0
Construction equipment 736 736 75
Commercial real estate 0 0 0
Residential real estate and home equity 337 339 117
Consumer 0 0 0
Total with a reserve recorded 11,717 11,719 3,225
Total impaired loans $ 16,839 $ 16,841 $ 3,225

~~Table of Contents~~

leases at June 30, 2021 and December 31, 2020 was $15.15 million and $16.39 million, respectively.

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by ~~class.~~portfolio segment for the three and six months ended June 30, 2020.


		Three Months Ended September 30,														Nine Months Ended September 30,
		2020						2019						2020							2019			Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
(Dollars in thousands)	(Dollars in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		(Dollars in thousands)	Average Recorded Investment			Interest Income		Average Recorded Investment		Interest Income
Commercial and agricultural	Commercial and agricultural	$	8,989	$	1	$	5,177	$	68	$	7,393	$	139	$	4,026	$	81	Commercial and agricultural	$	5,381		$	35	$	6,594	$	138
Solar																		Solar	0			0		0		0
Auto and light truck	Auto and light truck	32,369		0		1,793		0		14,632		0		3,196		0		Auto and light truck	10,783			0		5,763		0
Medium and heavy duty truck	Medium and heavy duty truck	985		0		0		0		1,011		0		205		0		Medium and heavy duty truck	1,023			0		1,024		0
Aircraft	Aircraft	1,957		0		593		0		2,015		0		2,542		0		Aircraft	2,307			0		2,044		0
Construction equipment	Construction equipment	15,543		0		1,838		0		12,541		4		1,728		0		Construction equipment	14,302			0		11,040		4
Commercial real estate	Commercial real estate	1,306		0		1,595		0		1,235		0		1,763		0		Commercial real estate	1,028			0		1,200		0
Residential real estate and home equity	Residential real estate and home equity	332		4		340		4		334		11		341		14		Residential real estate and home equity	334			4		335		7
Consumer	Consumer	0		0		0		0		0		0		0		0		Consumer	0			0		0		0
Total	Total	$	61,481	$	5	$	11,336	$	72	$	39,161	$	154	$	13,801	$	95	Total	$	35,158		$	39	$	28,000	$	149

There were 0 loan and lease modifications classified as troubled debt restructurings (TDR) during the three and six months ended ~~September~~June 30, ~~2020 and~~2021. There were 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~~TDRs during the three and six months ended ~~September~~June 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.2020. 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~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~one modification during the three and nine months ended September 30, 2019~~2020 that resulted in an interest rate below market rate. ~~Consequently, the financial impact~~

Table of ~~the modification was immaterial.~~Contents

There were 0 TDRs which had payment defaults within the twelve months following modification during the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. There were 0 TDRs which had a payment default within the twelve months following modification during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and 1 TDR which had a payment default within the twelve months following modification during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. 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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


(Dollars in thousands)	(Dollars in thousands)	September 30, 2020		December 31, 2019		(Dollars in thousands)	June 30, 2021		December 31, 2020
Performing TDRs	Performing TDRs	$	331	$	10,238	Performing TDRs	$	324	$	330
Nonperforming TDRs	Nonperforming TDRs	14,503		486		Nonperforming TDRs	8,819		11,156
Total TDRs	Total TDRs	$	14,834	$	10,724	Total TDRs	$	9,143	$	11,486

Note 5 — ~~Reserve~~Allowance for Credit Losses

Allowance for Loan and Lease Losses

The ~~reserve~~allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolios utilizing guidance in Accounting Standards Codification (ASC) Topic 326. As permitted under The Cares Act, the Company adopted ASU 2016-13 on December 31, 2020. Therefore, the June 30, 2020 provision for credit losses and other allowance for loan and lease loss ~~methodology has been consistently applied~~disclosures for ~~several years, with enhancements instituted periodically. Reserve ratios are reviewed quarterly~~the three and ~~revised periodically~~six months ended June 30, 2020 were calculated under the incurred loss method.

The determination of the allowance requires significant judgment to ~~reflect recent loss history~~estimate credit losses measured on a collective pool basis when similar risk characteristics exist, and ~~to incorporate current risks~~for loans evaluated individually. In determining the allowance, the Company estimates expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate. The allowance estimate considers relevant available information, from internal and ~~trends which may not be recognized in historical data. As~~external sources relating to the historical ~~charge-off~~loss experience, current conditions, and reasonable and supportable forecasts for the Company’s outstanding loan and lease balances. The allowance is an estimation that reflects management’s evaluation of expected losses related to the Company’s financial assets measured at amortized cost. To ensure that the allowance is maintained at an adequate level, a detailed analysis is ~~updated,~~performed on a quarterly basis and an appropriate provision is made to adjust 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. allowance.

The Company ~~adjusts~~categorizes its loan portfolios into 9 segments based on similar risk characteristics. Loans within each segment are collectively evaluated using either: 1) a cohort cumulative loss rate methodology (“cohort”) or, 2) the ~~calculated historical based ratio as a result~~probability of default (“PD”)/loss given default (“LGD”) methodology (PD/LGD).

The following table shows 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 Michiganchanges in the ~~business banking~~allowance for loan and ~~commercial real estate portfolios~~lease losses, segregated by portfolio segment, for the three months ended June 30, 2021 and ~~by collateral concentration in~~2020.



(Dollars in thousands)	Commercial and agricultural		Solar		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer		Total
June 30, 2021
Balance, beginning of period	$	15,451	$	5,758	$	29,343	$	6,271	$	35,219	$	16,309	$	24,334	$	5,163	$	1,702	$	139,550
Charge-offs	285		0		367		0		0		0		0		37		105		794
Recoveries	141		0		136		0		241		0		4		10		98		630
Net charge-offs (recoveries)	144		0		231		0		(241)		0		(4)		27		7		164
Provision (recovery of provision)	(475)		109		(1,891)		(383)		(159)		1,599		(1,760)		(70)		5		(3,025)
Balance, end of period	$	14,832	$	5,867	$	27,221	$	5,888	$	35,301	$	17,908	$	22,578	$	5,066	$	1,700	$	136,361

June 30, 2020
Balance, beginning of period*	$	20,283	$	2,896	$	15,471	$	4,356	$	30,069	$	22,693	$	19,588	$	3,908	$	1,534	$	120,798
Charge-offs	42		0		0		0		254		129		0		0		187		612
Recoveries	136		0		58		0		55		379		13		3		78		722
Net charge-offs (recoveries)	(94)		0		(58)		0		199		(250)		(13)		(3)		109		(110)
Provision (recovery of provision)*	4,682		1,052		1,842		293		1,231		929		335		(90)		101		10,375
Balance, end of period*	$	25,059	$	3,948	$	17,371	$	4,649	$	31,101	$	23,872	$	19,936	$	3,821	$	1,526	$	131,283

*ASU 2016-13 adopted during the ~~specialty finance portfolios and exposure to foreign markets by geographic risk.~~fourth quarter of 2020 therefore amounts during the second quarter of 2020 reflect the incurred loss method.

Table of Contents

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~~allowance for loan and lease losses, segregated by ~~class,~~portfolio segment, for the ~~three~~six months ended ~~September~~June 30, 2021 and 2020.


(Dollars in thousands)	Commercial and agricultural		Solar		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer		Total
June 30, 2021
Balance, beginning of period	$	16,680	$	5,549	$	28,926	$	6,400	$	34,053	$	19,166	$	22,758	$	5,374	$	1,748	$	140,654
Charge-offs	286		0		4,653		0		0		8		0		42		257		5,246
Recoveries	518		0		185		0		360		254		19		11		233		1,580
Net charge-offs (recoveries)	(232)		0		4,468		0		(360)		(246)		(19)		31		24		3,666
Provision (recovery of provision)	(2,080)		318		2,763		(512)		888		(1,504)		(199)		(277)		(24)		(627)
Balance, end of period	$	14,832	$	5,867	$	27,221	$	5,888	$	35,301	$	17,908	$	22,578	$	5,066	$	1,700	$	136,361

June 30, 2020
Balance, beginning of period*	$	20,926	$	2,745	$	14,400	$	4,612	$	31,058	$	14,120	$	18,350	$	3,609	$	1,434	$	111,254
Charge-offs	571		0		34		0		840		1,561		1		13		430		3,450
Recoveries	302		0		140		0		503		590		28		30		158		1,751
Net charge-offs (recoveries)	269		0		(106)		0		337		971		(27)		(17)		272		1,699
Provision (recovery of provision)*	4,402		1,203		2,865		37		380		10,723		1,559		195		364		21,728
Balance, end of period*	$	25,059	$	3,948	$	17,371	$	4,649	$	31,101	$	23,872	$	19,936	$	3,821	$	1,526	$	131,283

*ASU 2016-13 adopted during the fourth quarter of 2020 ~~and 2019.~~

(Dollars in thousands) Commercial and
agricultural Auto and
light truck Medium and
heavy duty truck Aircraft Construction
equipment Commercial
real estate Residential
real estate
and home
equity Consumer Total
September 30, 2020
Balance, beginning of period $ 29,007 $ 17,371 $ 4,649 $ 31,101 $ 23,872 $ 19,936 $ 3,821 $ 1,526 $ 131,283
Charge-offs 182 4,382 0 0 21 36 61 210 4,892
Recoveries 231 263 0 191 347 15 1 75 1,123
Net charge-offs (recoveries) (49) 4,119 0 (191) (326) 21 60 135 3,769
Provision (recovery of provision) (3,986) 11,997 (192) 953 (1,395) 1,834 (29) 121 9,303
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 $ 19,052 $ 16,341 $ 4,671 $ 31,918 $ 12,284 $ 15,757 $ 3,518 $ 1,370 $ 104,911
Charge-offs 83 61 0 65 19 0 4 705 937
Recoveries 438 57 0 614 17 6 40 78 1,250
Net charge-offs (recoveries) (355) 4 0 (549) 2 (6) (36) 627 (313)
Provision (recovery of provision) 2,823 (610) (87) (429) 370 970 12 668 3,717
Balance, end of period $ 22,230 $ 15,727 $ 4,584 $ 32,038 $ 12,652 $ 16,733 $ 3,566 $ 1,411 $ 108,941

therefore amounts during the first six months of 2020 reflect the incurred loss method.

The ~~following table shows~~allowance for credit losses decreased during the ~~changes in~~second quarter of 2021 as we reduced qualitative adjustments related to COVID-19 and revised our forecast adjustment to reflect stronger economic growth than previously anticipated and the ~~reserve~~positive impact of financial stimulus funds on our customer’s liquidity positions. The allowance for loan and lease losses ~~segregated by class,~~increased during the first quarter of 2021 for the ~~nine~~most concerning portfolio segment, the bus segment of the auto and light truck portfolio, due to downward migration in credit quality and increased risk as a result of the pandemic. Increases in the allowance for the remainder of the portfolios were driven by loan growth. Likewise, decreases in the allowance in other portfolio segments were due to decreases in loan balances. The impact of adopting ASC 326 is included in the beginning balance (December 31, 2020) of each loan segment.

Commercial and agricultural – loan balances decreased during the quarter due to a $128.75 million net decrease in PPP loans which exceeded loan originations from core business products. Allowances established for new loans were more than offset by allowances released as a result of reducing the COVID-19 related adjustment and revising the forecast adjustment. Minimal allowances were established for PPP loans, which have negligible risk. For the six months ended ~~September~~June 30, ~~2020~~2021, allowances were released primarily as a result of paydowns exceeding loan originations on core business products, and ~~2019.~~to a lesser extent, from adjustments made to qualitative factors and the forecast adjustment.

(Dollars in thousands) Commercial and
agricultural loans Auto and
light truck Medium and
heavy duty truck Aircraft Construction
equipment Commercial
real estate Residential
real estate
and home
equity Consumer
loans Total
September 30, 2020
Balance, beginning of period $ 23,671 $ 14,400 $ 4,612 $ 31,058 $ 14,120 $ 18,350 $ 3,609 $ 1,434 $ 111,254
Charge-offs 753 4,416 0 840 1,582 37 74 640 8,342
Recoveries 533 403 0 694 937 43 31 233 2,874
Net charge-offs (recoveries) 220 4,013 0 146 645 (6) 43 407 5,468
Provision (recovery of provision) 1,619 14,862 (155) 1,333 9,328 3,393 166 485 31,031
Balance, end of period $ 25,070 $ 25,249 $ 4,457 $ 32,245 $ 22,803 $ 21,749 $ 3,732 $ 1,512 $ 136,817
September 30, 2019
Balance, beginning of period $ 17,063 $ 14,689 $ 4,303 $ 33,047 $ 10,922 $ 15,705 $ 3,425 $ 1,315 $ 100,469
Charge-offs 171 527 1,132 3,066 215 0 25 1,268 6,404
Recoveries 500 86 0 916 136 66 46 244 1,994
Net charge-offs (recoveries) (329) 441 1,132 2,150 79 (66) (21) 1,024 4,410
Provision (recovery of provision) 4,838 1,479 1,413 1,141 1,809 962 120 1,120 12,882
Balance, end of period $ 22,230 $ 15,727 $ 4,584 $ 32,038 $ 12,652 $ 16,733 $ 3,566 $ 1,411 $ 108,941
Solar – allowance increased slightly for the quarter and year-to-date to accommodate the limited loan growth in this portfolio segment. For the second quarter, the increase was somewhat offset by revising the forecast adjustment. A COVID-19 adjustment was not established for this portfolio as it was deemed to not be materially impacted by the pandemic.

Auto and light truck – allowance decreased for the quarter due to eliminating the COVID-19 adjustment for the auto rental and leasing segments and revising the forecast adjustment. The COVID-19 adjustment was maintained for the bus segment which was significantly impacted by the pandemic and continues to face substantial uncertainty. The increase in the allowance year-to-date is due to loan growth in the auto rental and leasing segments and credit deterioration in the bus segment, partially offset by revisions to the COVID-19 qualitative adjustments and the forecast factors.

Medium and heavy duty truck – allowance decrease was principally attributable to a decline in loan balances during the periods and, during the second quarter, was also impacted by revising the forecast adjustment.

Aircraft – the allowance decrease was attributable to the impact of revisions to the forecast factors more than offsetting the increase in the allowance related to loan growth in the foreign segment. Year-to-date, the increase in the allowance was principally impacted by loan growth in both the foreign and domestic sector, somewhat offset by the forecast adjustment.

Construction equipment – allowance increase for the second quarter was driven by loan growth and a slight increase in impairments on a loan individually evaluated offset by the impact of the forecast adjustment. Year-to-date, the decrease is driven by lower total impairments on loans evaluated individually and the forecast adjustment.

Commercial real estate – allowance decrease was due to a slight decline in outstanding loan balances and the impacts from revising the forecast adjustment and reducing the COVID-19 adjustments for commercial real estate segments, except for the hotel segment where we maintained the COVID-19 adjustment as the hospitality industry continues to be concerning. For the six months ended June 30, 2021, the decrease is due to adjustments to the COVID-19 factors and the forecast adjustment more than offsetting increases in the allowance due to loan growth and credit deterioration in a hotel sector loan.

Table of Contents

Residential real estate and home equity – allowance decreased during the second quarter due to the impact of revising the forecast adjustment more than increasing the allowances for portfolio growth. Year-to-date, the decrease in the allowance is due to the impact of the forecast adjustment; during the first six months of 2021, there was a slight decline in portfolio outstanding balances.

Consumer – segment saw a slight increase in the allowance for the second quarter as the impact of loan growth more than offset the forecast adjustment. Year-to-date, the decrease in the allowance is due to the impact of the forecast adjustment and lower outstanding loan balances.

Economic Outlook

As of June 30, 2021, the impact of the COVID-19 pandemic continues to adversely affect the loan and lease portfolios; however, the outlook has improved, and the forecast factor was adjusted accordingly. The forecast considers global and domestic economic effects from the ongoing pandemic as well as the potential impact of U.S. monetary and fiscal policy, which may impact clients, particularly those who continue to benefit from paycheck protection program funds or may benefit from targeted funds for struggling industry sectors such as transportation. The Company’s assumption was revised given recent strong GDP growth. The Company continues to believe that the pandemic will have an adverse impact on the loan and lease portfolio over the next two years with the impact on the portfolios being more severe in the second twelve months of the forecast period. GDP growth has exceeded expectations to date in 2021 and was a significant impetus for the forecast adjustments. Likewise, job growth and unemployment are better than the Company initially anticipated even though they are still not likely to get back to pre-shutdown levels until 2022.

As a result of the unprecedented economic uncertainty caused by the COVID-19 pandemic, the Company’s future loss estimates may vary considerably from the June 30, 2021 assumptions.

Liability for Credit Losses on Unfunded Loan Commitments

The liability for credit losses inherent in unfunded loan commitments is included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition. The following table shows the ~~reserve~~changes in the liability for credit losses on unfunded loan ~~and lease losses and recorded investment in loans and leases, segregated by class, separated between individually and collectively evaluated for impairment as~~commitments.


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2021		2020		2021		2020
Balance, beginning of period*	$	4,593	$	3,266	$	4,499	$	3,172


(Recovery of) provision*	(276)		259		(182)		353
Balance, end of period*	$	4,317	$	3,525	$	4,317	$	3,525

*ASU 2016-13 adopted during the fourth quarter of ~~September 30,~~ 2020 ~~and December 31, 2019.~~

(Dollars in thousands) Commercial and
agricultural loans Auto and
light truck Medium and
heavy duty truck Aircraft Construction
equipment Commercial
real estate Residential
real estate
and home
equity Consumer
loans Total
September 30, 2020
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment $ 1,554 $ 7,517 $ 34 $ 0 $ 7,966 $ 0 $ 111 $ 0 $ 17,182
Ending balance, collectively evaluated for impairment 23,516 17,732 4,423 32,245 14,837 21,749 3,621 1,512 119,635
Total reserve for loan and lease losses $ 25,070 $ 25,249 $ 4,457 $ 32,245 $ 22,803 $ 21,749 $ 3,732 $ 1,512 $ 136,817
Recorded investment in loans
Ending balance, individually evaluated for impairment $ 7,415 $ 37,074 $ 944 $ 1,953 $ 18,222 $ 1,354 $ 331 $ 0 $ 67,293
Ending balance, collectively evaluated for impairment 1,674,104 490,508 270,304 804,209 705,374 960,196 519,550 135,498 5,559,743
Total recorded investment in loans $ 1,681,519 $ 527,582 $ 271,248 $ 806,162 $ 723,596 $ 961,550 $ 519,881 $ 135,498 $ 5,627,036
December 31, 2019
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment $ 3,003 $ 30 $ 0 $ 0 $ 75 $ 0 $ 117 $ 0 $ 3,225
Ending balance, collectively evaluated for impairment 20,668 14,370 4,612 31,058 14,045 18,350 3,492 1,434 108,029
Total reserve for loan and lease losses $ 23,671 $ 14,400 $ 4,612 $ 31,058 $ 14,120 $ 18,350 $ 3,609 $ 1,434 $ 111,254
Recorded investment in loans
Ending balance, individually evaluated for impairment $ 10,584 $ 1,131 $ 1,074 $ 875 $ 1,351 $ 1,487 $ 337 $ 0 $ 16,839
Ending balance, collectively evaluated for impairment 1,122,207 587,676 293,750 783,165 704,100 906,690 531,666 139,434 5,068,688
Total recorded investment in loans $ 1,132,791 $ 588,807 $ 294,824 $ 784,040 $ 705,451 $ 908,177 $ 532,003 $ 139,434 $ 5,085,527

therefore second quarter 2020 amounts reflect the incurred loss method.

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, solar, 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 September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020		2021		2020
Direct finance leases:	Direct finance leases:									Direct finance leases:
Interest income on lease receivable	Interest income on lease receivable	$	1,880	$	2,280	$	6,310	$	8,699	Interest income on lease receivable	$	1,661	$	2,097	$	3,251	$	4,430

Operating leases:	Operating leases:									Operating leases:
Income related to lease payments	Income related to lease payments	$	5,593	$	7,578	$	18,213	$	23,369	Income related to lease payments	$	4,255	$	5,990	$	8,884	$	12,620
Depreciation expense	Depreciation expense	4,694		6,198		15,263		19,122		Depreciation expense	3,550		5,142		7,323		10,569

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Income related to reimbursements from lessees for personal property tax on operating leased equipment for the three months ended ~~September~~June 30, 2021 and 2020 ~~and 2019~~ was ~~$0.02~~$0.14 million and ~~$0.15~~$0.17 million, respectively and for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020 ~~and 2019~~ was ~~$0.44~~$0.38 million and ~~$0.50~~$0.42 million, respectively. Expense related to personal property tax payments on operating leased equipment for the three months ended ~~September~~June 30, 2021 and 2020 ~~and 2019~~ was ~~$0.02~~$0.14 million and ~~$0.15~~$0.17 million, respectively and for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020 ~~and 2019~~ was ~~$0.44~~$0.38 million and ~~$0.50~~$0.42 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 ~~$808.14~~$871.99 million and ~~$740.91~~$838.45 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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 September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020		2021		2020
Mortgage servicing rights:	Mortgage servicing rights:									Mortgage servicing rights:
Balance at beginning of period	Balance at beginning of period	$	4,294	$	4,141	$	4,200	$	4,283	Balance at beginning of period	$	4,787	$	4,153	$	4,616	$	4,200
Additions	Additions	897		318		2,094		703		Additions	410		835		1,171		1,197
Amortization	Amortization	(654)		(352)		(1,757)		(879)		Amortization	(519)		(694)		(1,109)		(1,103)
Sales	Sales	0		0		0		0		Sales	0		0		0		0
Carrying value before valuation allowance at end of period	Carrying value before valuation allowance at end of period	4,537		4,107		4,537		4,107		Carrying value before valuation allowance at end of period	4,678		4,294		4,678		4,294
Valuation allowance:	Valuation allowance:									Valuation allowance:
Balance at beginning of period	Balance at beginning of period	(546)		0		0		0		Balance at beginning of period	(770)		0		(812)		0
Impairment charges		(262)		0		(808)		0
Impairment recoveries (charges)										Impairment recoveries (charges)	547		(546)		589		(546)
Balance at end of period	Balance at end of period	$	(808)	$	0	$	(808)	$	0	Balance at end of period	$	(223)	$	(546)	$	(223)	$	(546)
Net carrying value of mortgage servicing rights at end of period	Net carrying value of mortgage servicing rights at end of period	$	3,729	$	4,107	$	3,729	$	4,107	Net carrying value of mortgage servicing rights at end of period	$	4,455	$	3,748	$	4,455	$	3,748
Fair value of mortgage servicing rights at end of period	Fair value of mortgage servicing rights at end of period	$	4,000	$	5,722	$	4,000	$	5,722	Fair value of mortgage servicing rights at end of period	$	4,885	$	4,023	$	4,885	$	4,023

At ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, the fair value of MSRs exceeded the carrying value reported in the Consolidated Statements of Financial Condition by ~~$0.27~~$0.43 million and ~~$1.62~~$0.28 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 ~~$0.81~~$0.78 million and ~~$0.68~~$0.81 million for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were ~~$2.31~~$1.59 million and ~~$1.93~~$1.50 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Mortgage loan contractual servicing fees are included in Mortgage Banking on the Consolidated Statements of Income.

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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)	September 30, 2020		December 31, 2019		(Dollars in thousands)	June 30, 2021		December 31, 2020
Amounts of commitments:	Amounts of commitments:					Amounts of commitments:
Loan commitments to extend credit	Loan commitments to extend credit	$	1,121,554	$	1,095,054	Loan commitments to extend credit	$	1,171,980	$	1,140,892
Standby letters of credit	Standby letters of credit	$	25,231	$	27,549	Standby letters of credit	$	28,011	$	24,884
Commercial and similar letters of credit	Commercial and similar letters of credit	$	3,526	$	2,332	Commercial and similar letters of credit	$	7,157	$	7,095

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.

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The following table shows the amounts of non-hedging derivative financial instruments.

Asset derivatives Liability derivatives
(Dollars in thousands) Notional or contractual amount Statement of Financial Condition classification Fair value Statement of Financial Condition classification Fair value
September 30, 2020
Interest rate swap contracts $ 1,139,493 Other assets $ 53,027 Other liabilities $ 53,988
Loan commitments 51,834 Mortgages held for sale 2,477 N/A 0
Forward contracts - mortgage loan 57,187 N/A 0 Mortgages held for sale 75
Total $ 1,248,514 $ 55,504 $ 54,063
December 31, 2019
Interest rate swap contracts $ 1,074,809 Other assets $ 21,975 Other liabilities $ 22,352
Loan commitments 9,950 Mortgages held for sale 185 N/A 0
Forward contracts - mortgage loan 23,632 N/A 0 Mortgages held for sale 38
Total $ 1,108,391 $ 22,160 $ 22,390

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			Asset derivatives			Liability derivatives
(Dollars in thousands)	Notional or contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification	Fair value
June 30, 2021
Interest rate swap contracts	$	1,154,431	Other assets	$	33,000	Other liabilities	$	33,709
Loan commitments	25,781		Mortgages held for sale	858		N/A	0
Forward contracts - mortgage loan	24,500		N/A	0		Mortgages held for sale	24
Total	$	1,204,712		$	33,858		$	33,733

December 31, 2020
Interest rate swap contracts	$	1,155,252	Other assets	$	46,654	Other liabilities	$	47,681
Loan commitments	32,588		Mortgages held for sale	1,487		N/A	0
Forward contracts - mortgage loan	38,310		N/A	0		Mortgages held for sale	290
Total	$	1,226,150		$	48,141		$	47,971

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 September 30,						Nine Months Ended September 30,								Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	(Dollars in thousands)	Statement of Income classification	2020		2019		2020		2019		(Dollars in thousands)	Statement of Income classification	2021		2020		2021		2020
Interest rate swap contracts	Interest rate swap contracts	Other expense	$	50	$	(129)	$	(583)	$	(378)	Interest rate swap contracts	Other expense	$	(14)	$	(114)	$	319	$	(633)
Interest rate swap contracts	Interest rate swap contracts	Other income	23		272		560		1,056		Interest rate swap contracts	Other income	152		446		238		537
Loan commitments	Loan commitments	Mortgage banking	1,406		(6)		2,292		86		Loan commitments	Mortgage banking	69		(310)		(629)		886
Forward contracts - mortgage loan	Forward contracts - mortgage loan	Mortgage banking	26		157		(37)		118		Forward contracts - mortgage loan	Mortgage banking	(311)		257		266		(63)
Total	Total		$	1,505	$	294	$	2,232	$	882	Total		$	(104)	$	279	$	194	$	727

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


								Gross Amounts Not Offset in the Statement of Financial Condition															Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount		(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
September 30, 2020
June 30, 2021														June 30, 2021
Interest rate swaps	Interest rate swaps	$	57,457	$	4,430	$	53,027	$	0	$	0	$	53,027	Interest rate swaps	$	38,069	$	5,069	$	33,000	$	0	$	0	$	33,000

December 31, 2019
December 31, 2020														December 31, 2020
Interest rate swaps	Interest rate swaps	$	22,279	$	304	$	21,975	$	0	$	0	$	21,975	Interest rate swaps	$	52,872	$	6,218	$	46,654	$	0	$	0	$	46,654

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

Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands) Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Statement of Financial Condition Net Amounts of Liabilities Presented in the Statement of Financial Condition Financial Instruments Cash Collateral Pledged Net Amount
September 30, 2020
Interest rate swaps $ 58,418 $ 4,430 $ 53,988 $ 53,891 $ 0 $ 97
Repurchase agreements 158,834 — 158,834 158,834 — —
Total $ 217,252 $ 4,430 $ 212,822 $ 212,725 $ 0 $ 97
December 31, 2019
Interest rate swaps $ 22,656 $ 304 $ 22,352 $ 23,482 $ 0 $ (1,130)
Repurchase agreements 120,459 — 120,459 120,459 — —
Total $ 143,115 $ 304 $ 142,811 $ 143,941 $ 0 $ (1,130)

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							Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount
June 30, 2021
Interest rate swaps	$	38,778	$	5,069	$	33,709	$	32,793	$	0	$	916
Repurchase agreements	167,097		—		167,097		167,097		—		—
Total	$	205,875	$	5,069	$	200,806	$	199,890	$	0	$	916

December 31, 2020
Interest rate swaps	$	53,899	$	6,218	$	47,681	$	46,978	$	0	$	703
Repurchase agreements	143,564		—		143,564		143,564		—		—
Total	$	197,463	$	6,218	$	191,245	$	190,542	$	0	$	703

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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, repurchase agreements had a remaining contractual maturity of ~~$157.83~~$165.19 million and ~~$119.45~~$141.42 million in overnight and ~~$1.00~~$1.91 million and ~~$1.01~~$2.14 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~~Tax credits from affordable housing investments and community development investments are recognized as a reduction of tax ~~expense or, for investments qualifying~~expense. Investments in renewable energy sources qualify as investment tax credits and are recognized 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~~$0.51 million and ~~$0.35~~$0.43 million for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$1.29~~$1.01 million and ~~$1.05~~$0.86 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The Company also recognized ~~$0.00~~$1.08 million and ~~$3.53~~$5.60 million of investment tax credits for the three months ended ~~September~~June 30, 2021 and 2020, respectively and ~~2019, respectively~~$3.00 million and $7.84 million ~~and $9.08 million~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, 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.

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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)	September 30, 2020		December 31, 2019		(Dollars in thousands)	June 30, 2021		December 31, 2020
Investment carrying amount	Investment carrying amount	$	47,719	$	19,843	Investment carrying amount	$	20,313	$	22,742
Unfunded capital and other commitments	Unfunded capital and other commitments	41,409		17,420		Unfunded capital and other commitments	14,575		26,716
Maximum exposure to loss	Maximum exposure to loss	43,329		37,904		Maximum exposure to loss	60,713		52,106

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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, approximately ~~$52.55~~ $53.07 million and ~~$41.24~~$53.61 million of the Company’s assets and ~~$11.17~~$3.94 million and ~~$18.68~~ $4.93 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 ~~September~~June 30, ~~2020.~~2021.

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


(Dollars in thousands)	Amount of Subordinated Notes		Interest Rate		Maturity Date
June 2007 issuance (1)	$	41,238	7.22	%	6/15/2037
August 2007 issuance (2)	17,526		1.60	%	9/15/2037
Total	$	58,764

(1) Fixed rate through life of debt.

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

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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 ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

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 September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands - except per share amounts)	(Dollars in thousands - except per share amounts)	2020		2019		2020		2019		(Dollars in thousands - except per share amounts)	2021		2020		2021		2020
Distributed earnings allocated to common stock	Distributed earnings allocated to common stock	$	7,166	$	6,895	$	21,714	$	20,791	Distributed earnings allocated to common stock	$	7,568	$	7,149	$	14,932	$	14,548
Undistributed earnings allocated to common stock	Undistributed earnings allocated to common stock	12,755		17,402		32,941		48,827		Undistributed earnings allocated to common stock	22,419		11,245		42,950		20,186
Net earnings allocated to common stock	Net earnings allocated to common stock	19,921		24,297		54,655		69,618		Net earnings allocated to common stock	29,987		18,394		57,882		34,734
Net earnings allocated to participating securities	Net earnings allocated to participating securities	137		141		318		401		Net earnings allocated to participating securities	236		108		446		181
Net income allocated to common stock and participating securities	Net income allocated to common stock and participating securities	$	20,058	$	24,438	$	54,973	$	70,019	Net income allocated to common stock and participating securities	$	30,223	$	18,502	$	58,328	$	34,915

Weighted average shares outstanding for basic earnings per common share	Weighted average shares outstanding for basic earnings per common share	25,552,374		25,520,035		25,538,910		25,630,771		Weighted average shares outstanding for basic earnings per common share	25,143,712		25,540,855		25,231,789		25,532,105
Dilutive effect of stock compensation	Dilutive effect of stock compensation	0		0		0		0		Dilutive effect of stock compensation	0		0		0		0
Weighted average shares outstanding for diluted earnings per common share	Weighted average shares outstanding for diluted earnings per common share	25,552,374		25,520,035		25,538,910		25,630,771		Weighted average shares outstanding for diluted earnings per common share	25,143,712		25,540,855		25,231,789		25,532,105

Basic earnings per common share	Basic earnings per common share	$	0.78	$	0.95	$	2.14	$	2.72	Basic earnings per common share	$	1.19	$	0.72	$	2.29	$	1.36
Diluted earnings per common share	Diluted earnings per common share	$	0.78	$	0.95	$	2.14	$	2.72	Diluted earnings per common share	$	1.19	$	0.72	$	2.29	$	1.36

Note 12 — Stock Based Compensation

As of ~~September��~~June 30, ~~2020,~~2021, 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.~~2020. 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 ~~September~~June 30, ~~2020.~~2021.

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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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. As of ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 there were 0 outstanding stock options. There were 0 stock options exercised during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. All shares issued in connection with stock option exercises are issued from available treasury stock.

As of ~~September~~June 30, ~~2020,~~2021, there was ~~$8.21~~$8.46 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 ~~3.60~~3.43 years.

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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 September 30,						Nine Months Ended September 30,								Affected Line Item in the Statements of Income				Three Months Ended June 30,						Six Months Ended June 30,		Affected Line Item in the Statements of Income
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019			Affected Line Item in the Statements of Income	(Dollars in thousands)			2021				2020			2021			2020		Affected Line Item in the Statements of Income
Realized gains included in net income		$	0	$	0	$	279	$	0	Gains on investment securities available-for-sale
Realized (losses) gains included in net income											Realized (losses) gains included in net income		$	(680)			$	(1)		$	(680)		$	279		(Losses) gains on investment securities available-for-sale
		0		0		279		0		Income before income taxes			(680)				(1)			(680)			279			Income before income taxes
Tax effect	Tax effect	0		0		(65)		0		Income tax expense	Tax effect		164				0			164			(65)			Income tax expense
Net of tax	Net of tax	$	0	$	0	$	214	$	0	Net income	Net of tax		$	(516)			$	(1)		$	(516)		$	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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. Interest and penalties are recognized through the income tax provision. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, the Company recognized 0 interest or penalties. There were 0 accrued interest and penalties at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Tax years that remain open and subject to audit include the federal ~~2016-2019~~2017-2020 years and the Indiana ~~2016-2019~~2017-2020 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.

~~Table of Contents~~

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 the customers. The Company believes the election for mortgages held for sale will reduce certain timing differences and better match changes in the value of these assets with changes in the value of derivatives or best-best efforts forward sales commitments. At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, all mortgages held for sale were carried at fair value.

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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) Fair value carrying
amount Aggregate
unpaid principal Excess of fair value carrying amount over (under) unpaid principal
September 30, 2020
Mortgages held for sale reported at fair value $ 20,990 $ 17,618 $ 3,372 (1)
December 31, 2019
Mortgages held for sale reported at fair value $ 20,277 $ 19,890 $ 387 (1)


(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Excess of fair value carrying amount over (under) unpaid principal
June 30, 2021
Mortgages held for sale reported at fair value	$	6,453	$	5,453	$	1,000	(1)

December 31, 2020
Mortgages held for sale reported at fair value	$	12,885	$	11,045	$	1,840	(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.

~~Table of Contents~~

•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.

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Interest rate swap positions, both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their basis readily observable market parameters. This valuation process considers various factors including interest rate yield curves, time value and volatility factors. Validation of third party agent valuations is accomplished by comparing those values to the Company’s swap counterparty valuations. Management believes an adjustment is required to “mid-market” valuations for derivatives tied to its performing loan portfolio to recognize the imprecision and related exposure inherent in the process of estimating expected credit losses as well as velocity of deterioration evident with systemic risks embedded in these portfolios. Any change in the mid-market derivative valuation adjustment will be recognized immediately through the Consolidated Statements of Income.

The following table shows the balance of assets and liabilities measured at fair value on a recurring basis.


(Dollars in thousands)	(Dollars in thousands)	Level 1		Level 2		Level 3		Total		(Dollars in thousands)	Level 1		Level 2		Level 3		Total
September 30, 2020
June 30, 2021										June 30, 2021
Assets:	Assets:									Assets:
Investment securities available-for-sale:	Investment securities available-for-sale:									Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities	U.S. Treasury and Federal agencies securities	$	76,298	$	491,710	$	0	$	568,008	U.S. Treasury and Federal agencies securities	$	277,079	$	492,799	$	0	$	769,878
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	0		65,468		3,265		68,733		U.S. States and political subdivisions securities	0		89,214		1,921		91,135
Mortgage-backed securities — Federal agencies	Mortgage-backed securities — Federal agencies	0		403,490		0		403,490		Mortgage-backed securities — Federal agencies	0		522,895		0		522,895
Corporate debt securities	Corporate debt securities	0		42,496		0		42,496		Corporate debt securities	0		28,414		0		28,414
Foreign government and other securities	Foreign government and other securities	0		700		0		700		Foreign government and other securities	0		700		0		700
Total debt securities available-for-sale	Total debt securities available-for-sale	76,298		1,003,864		3,265		1,083,427		Total debt securities available-for-sale	277,079		1,134,022		1,921		1,413,022

Mortgages held for sale	Mortgages held for sale	0		20,990		0		20,990		Mortgages held for sale	0		6,453		0		6,453
Accrued income and other assets (interest rate swap agreements)	Accrued income and other assets (interest rate swap agreements)	0		53,027		0		53,027		Accrued income and other assets (interest rate swap agreements)	0		33,000		0		33,000
Total	Total	$	76,298	$	1,077,881	$	3,265	$	1,157,444	Total	$	277,079	$	1,173,475	$	1,921	$	1,452,475

Liabilities:	Liabilities:									Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	Accrued expenses and other liabilities (interest rate swap agreements)	$	0	$	53,988	$	0	$	53,988	Accrued expenses and other liabilities (interest rate swap agreements)	$	0	$	33,709	$	0	$	33,709
Total	Total	$	0	$	53,988	$	0	$	53,988	Total	$	0	$	33,709	$	0	$	33,709

December 31, 2019
December 31, 2020										December 31, 2020
Assets:	Assets:									Assets:
Investment securities available-for-sale:	Investment securities available-for-sale:									Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities	U.S. Treasury and Federal agencies securities	$	80,393	$	446,571	$	0	$	526,964	U.S. Treasury and Federal agencies securities	$	80,285	$	539,197	$	0	$	619,482
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	0		82,213		2,292		84,505		U.S. States and political subdivisions securities	0		78,975		2,152		81,127
Mortgage-backed securities — Federal agencies	Mortgage-backed securities — Federal agencies	0		375,389		0		375,389		Mortgage-backed securities — Federal agencies	0		453,789		0		453,789
Corporate debt securities	Corporate debt securities	0		53,025		0		53,025		Corporate debt securities	0		42,369		0		42,369
Foreign government and other securities	Foreign government and other securities	0		700		0		700		Foreign government and other securities	0		700		0		700
Total debt securities available-for-sale	Total debt securities available-for-sale	80,393		957,898		2,292		1,040,583		Total debt securities available-for-sale	80,285		1,115,030		2,152		1,197,467

Mortgages held for sale	Mortgages held for sale	0		20,277		0		20,277		Mortgages held for sale	0		12,885		0		12,885
Accrued income and other assets (interest rate swap agreements)	Accrued income and other assets (interest rate swap agreements)	0		21,975		0		21,975		Accrued income and other assets (interest rate swap agreements)	0		46,654		0		46,654
Total	Total	$	80,393	$	1,000,150	$	2,292	$	1,082,835	Total	$	80,285	$	1,174,569	$	2,152	$	1,257,006

Liabilities:	Liabilities:									Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	Accrued expenses and other liabilities (interest rate swap agreements)	$	0	$	22,352	$	0	$	22,352	Accrued expenses and other liabilities (interest rate swap agreements)	$	0	$	47,681	$	0	$	47,681
Total	Total	$	0	$	22,352	$	0	$	22,352	Total	$	0	$	47,681	$	0	$	47,681

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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 ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

(Dollars in thousands)

U.S. States and
political
subdivisions
securities

Beginning balance ~~July~~April 1, ~~2020~~2021

~~3,179~~1,907

Total gains or losses (realized/unrealized):

Included in earnings

Included in other comprehensive income

~~166~~33

Purchases

Issuances

Sales

Settlements

Maturities

~~(80)~~(19)

Transfers into Level 3

Transfers out of Level 3

Ending balance ~~September~~June 30, ~~2020~~2021

~~3,265~~1,921

Beginning balance ~~July~~April 1, ~~2019~~2020

~~5,061~~5,295

Total gains or losses (realized/unrealized):

Included in earnings

Included in other comprehensive income

~~(12)~~(97)

Purchases

Issuances

Sales

Settlements

Maturities

~~(80)~~(2,019)

Transfers into Level 3

Transfers out of Level 3

Ending balance ~~September~~June 30, ~~2019~~2020

~~4,969~~3,179

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 ~~September~~June 30, ~~2020~~2021 or ~~2019.~~2020.

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

(Dollars in thousands)

Fair Value

Valuation Methodology

Unobservable Inputs

Range of Inputs

Weighted Average

(Dollars in thousands)

Fair Value

Valuation Methodology

Unobservable Inputs

Range of Inputs

Weighted Average

September 30, 2020

June 30, 2021

Debt securities available-for sale

Direct placement municipal securities

3,265

Discounted cash flows

Credit spread assumption

1.12% - 2.52%

1.47

Direct placement municipal securities

1,921

Discounted cash flows

Credit spread assumption

0.05% - 2.71%

1.96

December 31, 2019

December 31, 2020

Debt securities available-for sale

Direct placement municipal securities

2,292

Discounted cash flows

Credit spread assumption

0.12% - 2.85%

Direct placement municipal securities

2,152

Discounted cash flows

Credit spread assumption

0.04% - 2.30%

1.55

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~~Collateral-dependent 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~~an allowance 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 ~~September~~June 30, ~~2020:~~2021: collateral-dependent impaired loans - ~~$3.80~~$0.00 million; mortgage servicing rights - ~~$0.26~~($0.55) million; repossessions - ~~$0.65~~$0.21 million; and other real estate - ~~$0.00~~$0.01 million.

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


(Dollars in thousands)	(Dollars in thousands)	Level 1		Level 2		Level 3		Total		(Dollars in thousands)	Level 1		Level 2		Level 3		Total
September 30, 2020
Impaired loans - collateral based		$	—	$	—	$	19,802	$	19,802
June 30, 2021										June 30, 2021
Collateral-dependent impaired loans										Collateral-dependent impaired loans	$	—	$	—	$	7,988	$	7,988
Accrued income and other assets (mortgage servicing rights)	Accrued income and other assets (mortgage servicing rights)	—		—		3,729		3,729		Accrued income and other assets (mortgage servicing rights)	—		—		4,455		4,455
Accrued income and other assets (repossessions)	Accrued income and other assets (repossessions)	—		—		4,639		4,639		Accrued income and other assets (repossessions)	—		—		1,213		1,213
Accrued income and other assets (other real estate)	Accrued income and other assets (other real estate)	—		—		303		303		Accrued income and other assets (other real estate)	—		—		0		0
Total	Total	$	—	$	—	$	28,473	$	28,473	Total	$	—	$	—	$	13,656	$	13,656

December 31, 2019
Impaired loans - collateral based		$	—	$	—	$	8,492	$	8,492
December 31, 2020										December 31, 2020
Collateral-dependent impaired loans										Collateral-dependent impaired loans	$	—	$	—	$	11,991	$	11,991
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)	—		—		3,804		3,804
Accrued income and other assets (repossessions)	Accrued income and other assets (repossessions)	—		—		8,623		8,623		Accrued income and other assets (repossessions)	—		—		1,976		1,976
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)	—		—		359		359
Total	Total	$	—	$	—	$	21,837	$	21,837	Total	$	—	$	—	$	18,130	$	18,130

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


(Dollars in thousands)	(Dollars in thousands)	Carrying Value		Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs	Weighted Average		(Dollars in thousands)	Carrying Value		Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs	Weighted Average
September 30, 2020
Impaired loans		$	19,802	$	19,802	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	0% - 90%	28	%
June 30, 2021											June 30, 2021
Collateral-dependent impaired loans											Collateral-dependent impaired loans	$	7,988	$	7,988	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	10% - 90%	30.8	%

Mortgage servicing rights	Mortgage servicing rights	3,729		4,000		Discounted cash flows	Constant prepayment rate (CPR)	15.3% - 24.7%	21.7	%	Mortgage servicing rights	4,455		4,885		Discounted cash flows	Constant prepayment rate (CPR)	12.4% - 21.8%	18.8	%
							Discount rate	8.4% - 11.2%	8.6	%							Discount rate	8.5% - 11.3%	8.7	%

Repossessions	Repossessions	4,639		4,898		Appraisals, trade publications and auction values	Discount for lack of marketability	3% - 16%	5	%	Repossessions	1,213		1,294		Appraisals, trade publications and auction values	Discount for lack of marketability	0% - 14%	6	%

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

December 31, 2019
Impaired loans		$	8,492	$	8,492	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	0% - 90%
December 31, 2020											December 31, 2020
Collateral-dependent impaired loans											Collateral-dependent impaired loans	$	11,991	$	11,991	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	0% - 100%	43.7	%

Mortgage servicing rights	Mortgage servicing rights	4,200		5,986		Discounted cash flows	Constant prepayment rate (CPR)	10.2% - 28.1%			Mortgage servicing rights	3,804		4,038		Discounted cash flows	Constant prepayment rate (CPR)	16.2% - 30.5%	22.8	%
							Discount rate	9.3% - 12.1%									Discount rate	8.3% - 11.1%	8.5	%

Repossessions	Repossessions	8,623		9,211		Appraisals, trade publications and auction values	Discount for lack of marketability	3% - 25%			Repossessions	1,976		2,144		Appraisals, trade publications and auction values	Discount for lack of marketability	0% - 16%	8	%

Other real estate	Other real estate	522		564		Appraisals	Discount for lack of marketability	0% - 11%			Other real estate	359		388		Appraisals	Discount for lack of marketability	6% - 13%	7	%

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) Carrying or Contract Value Fair Value Level 1 Level 2 Level 3
September 30, 2020
Assets:
Cash and due from banks $ 62,575 $ 62,575 $ 62,575 $ 0 $ 0
Federal funds sold and interest bearing deposits with other banks 91,641 91,641 91,641 0 0
Investment securities, available-for-sale 1,083,427 1,083,427 76,298 1,003,864 3,265
Other investments 27,674 27,674 27,674 0 0
Mortgages held for sale 20,990 20,990 0 20,990 0
Loans and leases, net of reserve for loan and lease losses 5,490,219 5,568,395 0 0 5,568,395
Mortgage servicing rights 3,729 4,000 0 0 4,000
Accrued interest receivable 21,565 21,565 0 21,565 0
Interest rate swaps 53,027 53,027 0 53,027 0
Liabilities:
Deposits $ 5,896,855 $ 5,909,192 $ 4,598,859 $ 1,310,333 $ 0
Short-term borrowings 165,574 165,574 159,822 5,752 0
Long-term debt and mandatorily redeemable securities 81,659 82,894 0 82,894 0
Subordinated notes 58,764 57,617 0 57,617 0
Accrued interest payable 7,647 7,647 0 7,647 0
Interest rate swaps 53,988 53,988 0 53,988 0
Off-balance-sheet instruments * 0 289 0 289 0
December 31, 2019
Assets:
Cash and due from banks $ 67,215 $ 67,215 $ 67,215 $ 0 $ 0
Federal funds sold and interest bearing deposits with other banks 16,150 16,150 16,150 0 0
Investment securities, available-for-sale 1,040,583 1,040,583 80,393 957,898 2,292
Other investments 28,414 28,414 28,414 0 0
Mortgages held for sale 20,277 20,277 0 20,277 0
Loans and leases, net of reserve for loan and lease losses 4,974,273 4,992,684 0 0 4,992,684
Mortgage servicing rights 4,200 5,986 0 0 5,986
Accrued interest receivable 19,125 19,125 0 19,125 0
Interest rate swaps 21,975 21,975 0 21,975 0
Liabilities:
Deposits $ 5,357,326 $ 5,362,633 $ 3,708,828 $ 1,653,805 $ 0
Short-term borrowings 145,893 145,893 120,891 25,002 0
Long-term debt and mandatorily redeemable securities 71,639 71,084 0 71,084 0
Subordinated notes 58,764 61,469 0 61,469 0
Accrued interest payable 13,918 13,918 0 13,918 0
Interest rate swaps 22,352 22,352 0 22,352 0
Off-balance-sheet instruments * 0 281 0 281 0


(Dollars in thousands)	Carrying or Contract Value		Fair Value		Level 1		Level 2		Level 3
June 30, 2021
Assets:
Cash and due from banks	$	69,101	$	69,101	$	69,101	$	0	$	0
Federal funds sold and interest bearing deposits with other banks	400,346		400,346		400,346		0		0
Investment securities, available-for-sale	1,413,022		1,413,022		277,079		1,134,022		1,921
Other investments	27,429		27,429		27,429		0		0
Mortgages held for sale	6,453		6,453		0		6,453		0
Loans and leases, net of allowance for loan and lease losses	5,346,684		5,423,316		0		0		5,423,316
Mortgage servicing rights	4,455		4,885		0		0		4,885
Accrued interest receivable	19,138		19,138		0		19,138		0
Interest rate swaps	33,000		33,000		0		33,000		0
Liabilities:
Deposits	$	6,345,410	$	6,350,792	$	5,352,785	$	998,007	$	0
Short-term borrowings	172,344		172,344		166,289		6,055		0
Long-term debt and mandatorily redeemable securities	81,330		81,907		0		81,907		0
Subordinated notes	58,764		58,534		0		58,534		0
Accrued interest payable	2,771		2,771		0		2,771		0
Interest rate swaps	33,709		33,709		0		33,709		0
Off-balance-sheet instruments *	0		360		0		360		0

December 31, 2020
Assets:
Cash and due from banks	$	74,186	$	74,186	$	74,186	$	0	$	0
Federal funds sold and interest bearing deposits with other banks	168,861		168,861		168,861		0		0
Investment securities, available-for-sale	1,197,467		1,197,467		80,285		1,115,030		2,152
Other investments	27,429		27,429		27,429		0		0
Mortgages held for sale	12,885		12,885		0		12,885		0
Loans and leases, net of allowance for loan and lease losses	5,348,647		5,417,396		0		0		5,417,396
Mortgage servicing rights	3,804		4,038		0		0		4,038
Accrued interest receivable	20,242		20,242		0		20,242		0
Interest rate swaps	46,654		46,654		0		46,654		0
Liabilities:
Deposits	$	5,946,028	$	5,955,545	$	4,778,671	$	1,176,874	$	0
Short-term borrowings	150,641		150,641		143,730		6,911		0
Long-term debt and mandatorily redeemable securities	81,864		82,965		0		82,965		0
Subordinated notes	58,764		58,560		0		58,560		0
Accrued interest payable	3,996		3,996		0		3,996		0
Interest rate swaps	47,681		47,681		0		47,681		0
Off-balance-sheet instruments *	0		321		0		321		0

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

These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. These estimates are subjective in nature and require considerable judgment to interpret market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange, nor are they intended to represent the fair value of the Company as a whole. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of the respective balance sheet date. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

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Other significant assets, such as premises and equipment, other assets, and liabilities not defined as financial instruments, are not included in the above disclosures. Also, the fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis is presented to provide information concerning 1st Source Corporation and its subsidiaries’ (collectively referred to as “the Company”, “we”, and “our”) financial condition as of ~~September~~June 30, ~~2020,~~2021, as compared to December 31, ~~2019,~~2020, and the results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. 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~~2020 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,~~2020, 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 ~~September~~June 30, ~~2020~~2021 were ~~$7.29~~$7.72 billion, an increase of ~~$668.17~~$402.28 million or ~~10.09%~~5.50% from December 31, ~~2019.~~2020. Total investment securities available-for-sale were ~~$1.08~~$1.41 billion, an increase of ~~$42.84~~$215.56 million or ~~4.12%~~18.00% from December 31, ~~2019.~~2020. The largest contributor to the increase in investment securities available-for-sale was an increase of $150.40 million in U.S. treasury and federal agency securities. Federal funds sold and interest bearing deposits with other banks were ~~$91.64~~$400.35 million, an increase of ~~$75.49~~$231.49 million or ~~467.44%~~137.09% from December 31, ~~2019.~~2020. The increase in federal funds sold and interest bearing deposits with other banks was due to increased interest bearing deposits at the Federal Reserve Bank as a result of excess liquidity.

Total loans and leases were ~~$5.63~~$5.48 billion, ~~an increase~~a decrease of ~~$541.51~~$6.26 million or ~~10.65%~~0.11% from December 31, ~~2019.~~2020. The largest contributor to the ~~increase~~decrease in loans and leases was PPP loans ~~funded during~~forgiven by the ~~second and third quarters of 2020.~~SBA. PPP loans are discussed in the “COVID-19 Impact” section below. Our foreign loan and lease balances, all denominated in U.S. dollars were ~~$176.62~~$187.55 million and ~~$184.24~~$180.06 million as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Foreign loans and leases are in aircraft financing. Loan and lease balances to borrowers in Brazil and Mexico were ~~$66.46~~$68.01 million and ~~$104.80~~$100.73 million as of ~~September~~June 30, ~~2020,~~2021, respectively, compared to ~~$58.29~~$66.98 million and ~~$111.91~~$103.52 million as of December 31, ~~2019,~~2020, respectively. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 there was not a significant concentration in any other country. Solar loan and lease balances were $263.47 million as of September 30, 2020, an increase of $93.85 million or 55.33% from the $169.62 million at December 31, 2019. Solar loan and lease balances are included in commercial and agricultural loans.

Equipment owned under operating leases was ~~$79.70~~$56.01 million, a decrease of ~~$31.98~~$9.03 million, or ~~28.64%~~13.88% compared to December 31, ~~2019.~~2020. 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 ~~$5.90~~$6.35 billion, an increase of ~~$539.53~~$399.38 million or ~~10.07%~~6.72% from the end of ~~2019.~~2020. The largest contributors to the increase in total deposits was PPP loan fundings into business accounts, ~~and~~ consumer savings ~~levels.~~levels, and seasonal public fund deposits. Short-term borrowings were ~~$165.57~~$172.34 million, an increase of ~~$19.68~~$21.70 million or ~~13.49%~~14.41% from December 31, ~~2019.~~2020. The largest contributor to the increase in short-term borrowings was an increase of $23.53 million in repurchase agreements at June 30, 2021 compared to December 31, 2020. Long-term debt and mandatorily redeemable securities were ~~$81.66~~$81.33 million, ~~an increase~~a decrease of ~~$10.02~~$0.53 million or ~~13.99%~~0.65% from December 31, ~~2019.~~2020.

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The following table shows accrued income and other assets.

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


(Dollars in thousands)	June 30, 2021		December 31, 2020
Accrued income and other assets:
Bank owned life insurance cash surrender value	$	70,909	$	70,192
Operating lease right of use assets	22,902		23,825
Accrued interest receivable	19,138		20,242
Mortgage servicing rights	4,455		3,804
Other real estate	—		359
Repossessions	1,213		1,976
Partnership investments carrying amount	73,385		76,349
All other assets	76,092		91,828
Total accrued income and other assets	$	268,094	$	288,575

The largest ~~contributors~~contributor to the ~~increase~~decrease in accrued income and other assets from December 31, ~~2019~~2020 was ~~an increase~~a decrease in the fair value of interest rate ~~swaps~~swap contracts with customers ~~and higher solar partnership investment carrying amounts.~~included in all other assets above.

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~~would not spread across entire departments. WeAdditionally, we are encouraging virtual meetings and conference calls in place of in-person meetings, including our annual shareholder meeting which was held virtually again this year. Employees with health conditions putting them at higher risk of adverse effects from coronavirus infection ~~are working~~were given the opportunity to work remotely. ~~Additionally, travel has been restricted. We are promoting~~Travel was restricted and we promoted social distancing, frequent hand washing, ~~thorough~~ disinfection of all surfaces, and the use of masks or nose and mouth coverings ~~have been~~were mandated in all of our locations. ~~The~~We continue to offer paid time off to all of our colleagues to schedule vaccinations. As of mid-July, over 70% of our colleagues had received at least their first dose of vaccine. In April, we fully reopened the majority of our banking ~~center lobbies have been closed except~~centers with safe social distancing and mask guidelines in place for ~~advance appointments only.~~the safety of our colleagues and clients. 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~~provide a more physically distanced alternative. Although infection rates in the communities we serve vary by region, the positive impact that vaccinations have had on curbing the spread of the virus has allowed us to begin bringing departments back together and weto loosen travel restrictions for colleagues who are fully vaccinated. We will continue to make prudent decisions for the safety of our colleagues and our ~~clients.~~clients following recommended Centers for Disease Control and local health department guidance. We are hopeful that infection rates will continue to decline in the communities we serve as the percentage of fully vaccinated individuals continues to increase.

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Loan and lease modifications

We began receiving requests from our borrowers for loan and lease deferrals in ~~March.~~March 2020 which declined over the remainder of 2020 and the first six months of 2021. 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~~allowance for loan and lease losses. The following table shows coronavirus loan and lease modification balances in deferment as of June 30, ~~2020~~2021 and ~~September 30,~~December 31, 2020.


		COVID-19 Related Loan and Lease Modifications							COVID-19 Related Loan and Lease Modifications
(Dollars in millions)	(Dollars in millions)	June 30, 2020		September 30, 2020		(Dollars in millions)	June 30, 2021		December 31, 2020
Auto and light truck rental	Auto and light truck rental	$	224	$	22	Auto and light truck rental	$	—	$	5
Specialty vehicle⁽¹⁾	Specialty vehicle⁽¹⁾	75		23		Specialty vehicle(1)	5		21
Medium and heavy duty truck	Medium and heavy duty truck	87		5		Medium and heavy duty truck	—		—
Aircraft	Aircraft	93		13		Aircraft	12		13
Construction	Construction	139		—		Construction	—		7
Commercial	Commercial	210		63		Commercial	48		83
Residential real estate and home equity	Residential real estate and home equity	4		—		Residential real estate and home equity	—		—
Consumer	Consumer	8		—		Consumer	—		—
Total loans and leases	Total loans and leases	$	840	$	126	Total loans and leases	$	65	$	129
(1) Includes buses, step vans and funeral cars.	(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~~June 30, ~~2020.~~2021.


(Dollars in millions)	(Dollars in millions)	Principal Only Deferrals		Principal and Interest Deferrals		Total Modifications in Deferment		Additional Modifications Expected⁽¹⁾		Total Modifications		Recorded Investment at September 30, 2020		Total Modifications as a % of September 30, 2020 Balance		(Dollars in millions)	Principal Only Deferrals		Principal and Interest Deferrals		Total Modifications in Deferment		Additional Modifications Expected(1)		Total Modifications		Recorded Investment at June 30, 2021		Total Modifications as a % of June 30, 2021 Balance
Auto and light truck rental	Auto and light truck rental	$	21	$	1	$	22	$	16	$	38	$	379	10	%	Auto and light truck rental	$	—	$	—	$	—	$	—	$	—	$	467	—		%
Specialty vehicle⁽²⁾	Specialty vehicle⁽²⁾	11		12		23		23		46		149		31	%	Specialty vehicle(2)	5		—		5		11		16		128		13		%
Medium and heavy duty truck	Medium and heavy duty truck	5		—		5		—		5		271		2	%	Medium and heavy duty truck	—		—		—		—		—		256		—		%
Aircraft	Aircraft	13		—		13		6		19		806		2	%	Aircraft	12		—		12		—		12		884		1		%
Construction	Construction	—		—		—		1		1		724		—	%	Construction	—		—		—		—		—		729		—		%
Commercial	Commercial	5		58		63		23		86		2,643		3	%	Commercial	8		40		48		—		48		2,397		2		%
Residential real estate and home equity	Residential real estate and home equity	—		—		—		—		—		520		—	%	Residential real estate and home equity	—		—		—		—		—		493		—		%
Consumer	Consumer	—		—		—		—		—		135		—	%	Consumer	—		—		—		—		—		129		—		%
Total loans and leases	Total loans and leases	55		71		126		69		195		5,627		3	%	Total loans and leases	25		40		65		11		76		5,483		1		%
PPP loans, net of unearned discount⁽³⁾	PPP loans, net of unearned discount⁽³⁾	—		—		—		—		—		581		—	%	PPP loans, net of unearned discount(3)	—		—		—		—		—		315		—		%
Total loans and leases less PPP loans	Total loans and leases less PPP loans	$	55	$	71	$	126	$	69	$	195	$	5,046	4	%	Total loans and leases less PPP loans	$	25	$	40	$	65	$	11	$	76	$	5,168	1		%
(1) Represents modifications which ended deferment during September 2020 and are in the process of receiving or expected to receive an extension.
(1) Represents modifications which ended deferment during June 2021 and are in the process of receiving or expected to receive an extension.																(1) Represents modifications which ended deferment during June 2021 and are in the process of receiving or expected to receive an extension.
(2) Includes buses, step vans and funeral cars.	(2) Includes buses, step vans and funeral cars.																													(2) Includes buses, step vans and funeral cars.
(3) PPP loan balances are located within the Commercial category above.	(3) PPP loan balances are located within the Commercial category above.																													(3) PPP loan balances are located within the Commercial category above.

As of ~~September~~June 30, ~~2020,~~2021, COVID-19 related loan modifications for our bus lending were ~~$45.35~~$15.70 million or ~~50.85%~~25.56% (includes ~~$22.92~~$10.51 million whose modification period ended during ~~September~~June 2021 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~~$47.67 million or ~~47.25% (includes $17.21 million~~29.43% (there were no modifications whose ~~modification~~ period ended during ~~September but~~June 2021 that 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.~~above.

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

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

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

Paycheck Protection Program (PPP) and Liquidity

As part of the CARES Act, approved by ~~the~~ President Trump on March 27, 2020 and extended on July 4, 2020, the Small Business Administration (SBA) ~~has been~~was authorized to guarantee loans under the PPP through August 8, 2020 for businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. We began accepting applications on April 3, 2020 and disbursed the final PPP loan on August 25, ~~2020.~~2020 from the first round. On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act was approved which authorized a second round of PPP loans. We disbursed the final PPP loan on May 28, 2021 from the second round. 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~~June 30, ~~2020.~~2021.

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


	Number of Loans	$ of Loans (000's)		Average Loan Size
2020 PPP Loans	3,540	$	597,451	$	169,000
2021 PPP Loans	3,239	261,459		81,000
Total	6,779	$	858,910	$	127,000

As of ~~September~~June 30, ~~2020,~~2021, total PPP loans were ~~$580.62~~$315.09 million which is net of an unearned discount of ~~$14.21~~$12.97 million and located within the commercial and agricultural portfolio. At ~~September~~June 30, ~~2020,~~2021, specialty finance customers had ~~$104.80~~$54.41 million of PPP loans and traditional commercial banking customers had ~~$475.82~~$260.68 million of PPP loans.

~~Table of Contents~~

~~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 in 2020, 1,972 loans were for $50,000 or less. Of the 3,239 PPP loans we originated in 2021, 2,424 loans were for $50,000 or less. As of ~~mid-October,~~June 30, 2021, we had ~~submitted~~helped our clients secure forgiveness for over ~~$100~~$527 million and had submitted loan forgiveness requests to the ~~SBA. The majority~~SBA for over 91% of the ~~requests~~total PPP loan amounts we ~~have submitted~~funded during 2020. We were able to ~~date remain~~secure loans for over 500 minority- and women-owned businesses, which represents approximately 16% of our overall efforts in ~~process pending SBA review before reimbursement can proceed.~~this latest round of PPP funding. Additionally, we helped fund almost 400 PPP loans to new customers during 2021.

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. If needed, we will utilize the liquidity relief offered by the PPPLF 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~~June 30, ~~2020,~~2021, we had not ~~yet~~ utilized the PPPLF.

See Part I Financial Information, Item 2 Management’s Discussion and Analysis of 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~~had experienced a decrease in their fair value as of ~~September 30,~~December 31, 2020 resulting in ~~year-to-date~~2020 impairment charges of $0.81 million due to lower mortgage rates leading to faster prepayment speeds. During the six months ended June 30, 2021, we recognized $0.59 million of impairment recoveries due to reduced prepayment speeds. We will continue to evaluate MSRs at each reporting date to determine whether further valuation allowances or recoveries 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 intangible assets, long-lived assets, right of use assets, or available-for-sale investment securities due to the COVID-19 pandemic. 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,~~I, Item 1A, Risk Factors in our 2020 Form 10-Kfor more information.

~~Reserve~~

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Allowance 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 inDuring 2021, except for the bus segment ~~within the~~of our auto and light truck portfolio, ~~as well as a couple~~we experienced relatively stable to slightly improving credit quality. Special attention loan balances decreased $22.03 million for the quarter and $36.91 million year-to-date and nonperforming loans decreased by $2.67 million for the quarter and $4.60 million year-to-date. The impact of ~~downgrades in~~COVID-19 has been particularly harsh on 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~~bus segment of our ~~highest risk exposures~~auto 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 lendinglight truck portfolio where, during the ~~fourth~~first quarter, ~~of 2020. Furthermore, the bus collateral may be difficult~~we continued to ~~liquidate, particularly in this environment. We believe our auto rental customers will continue~~experience higher than normal downgrades, movement to ~~struggle; however, vehicle auctions are well established~~nonaccrual status and charge-offs. This quarter, we realized few additional defaults and are ~~an effective means of liquidating collateral and used vehicle values,~~beginning to ~~date, have remained strong, so our loss exposure is well managed.~~see some customers return to more normalized terms. 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~~may change, ~~particularly as~~if businesses ~~continue~~struggle to ~~struggle and customers request an additional round of loan modifications.~~get back to normal or consumer preferences potentially change. During the last recession, we ~~also~~ noted a delayed impact on our commercial lending as compared to our specialty finance lending. We also remain concerned about segments of our commercial real estate portfolio, particularly the hotel sector and commercial buildings and retail property. Many of our local hotel customers continue to have payment deferrals. Our losses year-to-date remain moderate, ~~but~~except the bus segment where we recognized net charge-offs of $0.25 million for the quarter and $4.49 million year-to-date. As we deem the overall outlook to have improved particularly given the stronger than expected GDP growth and the improved jobs market following the successful roll-out of vaccines in the United States, we reviewed and revised our COVID-19 qualitative adjustments and revised our forecast adjustment to reflect our improved outlook. We continue to ~~build reserves~~maintain the allowance for credit losses at a level we deem appropriate as ~~we anticipate~~ some of the current and future downgrades and defaults ~~will eventually~~may 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~~Allowance for ~~Loan and Lease~~Credit Losses” for more information.

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CAPITAL

As of ~~September~~June 30, ~~2020,~~2021, total shareholders’ equity was ~~$877.75~~$901.23 million, up ~~$49.48~~$14.38 million, or ~~5.97%~~1.62% from the ~~$828.28~~$886.85 million at December 31, ~~2019.~~2020. In addition to net income of ~~$54.97~~$58.33 million, other significant changes in shareholders’ equity during the first ~~nine~~six months of ~~2020~~2021 included ~~$21.76~~$14.98 million of dividends ~~paid.~~paid and $20.40 million in common stock acquired for treasury. The accumulated other comprehensive income component of shareholders’ equity totaled ~~$19.66~~$7.60 million at ~~September~~June 30, ~~2020,~~2021, compared to ~~$5.17~~$18.37 million at December 31, ~~2019.~~2020. Our shareholders’ equity-to-assets ratio was ~~12.04%~~11.68% as of ~~September~~June 30, ~~2020,~~2021, compared to ~~12.51%~~12.12% at December 31, ~~2019.~~2020. Book value per common share rose to ~~$34.35~~$36.05 at ~~September~~June 30, ~~2020,~~2021, from ~~$32.47~~$34.93 at December 31, ~~2019.~~2020.

We declared and paid cash dividends per common share of ~~$0.28~~$0.30 during the ~~third~~second quarter of ~~2020.~~2021. The trailing four quarters dividend payout ratio, representing cash dividends per common share divided by diluted earnings per common share, was ~~38.00%~~28.05%. 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 ~~September~~June 30, ~~2020,~~2021, are presented in the table below.

Actual Minimum Capital Adequacy Minimum Capital Adequacy with Capital Buffer To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk-Weighted Assets):
1st Source Corporation $ 948,891 15.74 % $ 482,133 8.00 % $ 632,800 10.50 % $ 602,667 10.00 %
1st Source Bank 859,135 14.24 482,677 8.00 633,514 10.50 603,347 10.00
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation 872,755 14.48 361,600 6.00 512,267 8.50 482,133 8.00
1st Source Bank 782,915 12.98 362,008 6.00 512,845 8.50 482,677 8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation 778,494 12.92 271,200 4.50 421,867 7.00 391,733 6.50
1st Source Bank 745,654 12.36 271,506 4.50 422,343 7.00 392,175 6.50
Tier 1 Capital (to Average Assets):
1st Source Corporation 872,755 12.14 287,593 4.00 N/A N/A 359,492 5.00
1st Source Bank 782,915 10.89 287,573 4.00 N/A N/A 359,467 5.00

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~~As part of the CARES Act,~~


	Actual				Minimum Capital Adequacy				Minimum Capital Adequacy with Capital Buffer				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets):
1st Source Corporation	$	990,792	16.58	%	$	478,023	8.00	%	$	627,405	10.50	%	$	597,529	10.00	%
1st Source Bank	918,843		15.38		478,049		8.00		627,439		10.50		597,561		10.00
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	915,286		15.32		358,517		6.00		507,899		8.50		478,023		8.00
1st Source Bank	843,333		14.11		358,537		6.00		507,927		8.50		478,049		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	814,055		13.62		268,888		4.50		418,270		7.00		388,394		6.50
1st Source Bank	799,102		13.37		268,903		4.50		418,293		7.00		388,415		6.50
Tier 1 Capital (to Average Assets):
1st Source Corporation	915,286		12.08		303,127		4.00		N/A		N/A		378,909		5.00
1st Source Bank	843,333		11.13		303,022		4.00		N/A		N/A		378,778		5.00

PPP loan balances have been assigned a zero percent risk weight and therefore had no impact on our total risk-weighted assets at ~~September~~June 30, ~~2020.~~2021.

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.

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 ~~September~~June 30, ~~2020,~~2021, we had no borrowings in the federal funds market. We could borrow ~~$225.00~~$245.00 million in additional funds for a short time from these banks on a collective basis. As of ~~September~~June 30, ~~2020,~~2021, we had ~~$55.36~~$54.41 million outstanding in FHLB advances and could borrow an additional ~~$500.50~~$480.71 million contingent on the FHLB activity-based stock ownership requirement. We also had no outstandings with the FRB and could borrow ~~$456.53~~$427.80 million as of ~~September~~June 30, ~~2020.~~

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2021.

Our loan to asset ratio was ~~77.18%~~71.04% at ~~September~~June 30, ~~2020~~2021 compared to ~~76.79%~~75.03% at December 31, ~~2019~~2020 and ~~76.21%~~77.29% at ~~September~~June 30, ~~2019.~~2020. Cash and cash equivalents totaled ~~$154.22~~$469.45 million at ~~September~~June 30, ~~2020~~2021 compared to ~~$83.37~~$243.05 million at December 31, ~~2019~~2020 and ~~$127.49~~$180.24 million at ~~September~~June 30, ~~2019.~~2020. The ~~largest contributors to the~~ increase in cash and cash equivalents was ~~higher deposit balances~~primarily due to ~~both~~continued individual and business customers’ propensity to save during times of ~~uncertainty.~~uncertainty, PPP loan forgiveness proceeds and seasonal public fund deposit growth. At ~~September~~June 30, ~~2020,~~2021, the Consolidated Statements of Financial Condition was rate sensitive by ~~$309.13~~$273.26 million more assets than liabilities scheduled to reprice within one year, or approximately ~~1.09%~~1.08%. 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 ~~$737~~$949 million.

RESULTS OF OPERATIONS

Net income available to common shareholders for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2020~~2021 was ~~$20.06~~$30.22 million and ~~$54.97~~$58.33 million, compared to ~~$24.44~~$18.50 million and ~~$70.02~~$34.92 million for the same periods in ~~2019.~~2020. Diluted net income per common share was ~~$0.78~~$1.19 and ~~$2.14~~$2.29 for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$0.95~~$0.72 and ~~$2.72~~$1.36 for the same periods in ~~2019.~~2020. Return on average common shareholders’ equity was ~~8.52%~~13.12% for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~11.83%~~8.23% in ~~2019.~~2020. The return on total average assets was ~~1.05%~~1.57% for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~1.45%~~1.02% in ~~2019.~~2020.

Net income ~~decreased~~increased for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the first ~~nine~~six months of ~~2019.~~2020. Net interest income ~~decreased and~~increased, the provision for ~~loan~~credit losses decreased, noninterest income increased and ~~lease losses increased which was offset by an increase in~~ noninterest ~~income.~~expense decreased. Details of the changes in the various components of net income are discussed further below.

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NET INTEREST INCOME

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

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY

INTEREST RATES AND INTEREST DIFFERENTIAL

Three Months Ended
September 30, 2020 June 30, 2020 September 30, 2019
(Dollars in thousands) Average
Balance Interest Income/Expense Yield/
Rate Average
Balance Interest Income/Expense Yield/
Rate Average
Balance Interest Income/Expense Yield/
Rate
ASSETS
Investment securities available-for-sale:
Taxable $ 1,012,703 $ 4,103 1.61 % $ 995,776 $ 4,487 1.81 % $ 959,104 $ 5,056 2.09 %
Tax exempt⁽¹⁾
45,077 257 2.26 % 49,534 286 2.32 % 65,146 388 2.36 %
Mortgages held for sale 26,327 186 2.81 % 27,016 198 2.95 % 19,888 190 3.79 %
Loans and leases, net of unearned discount⁽¹⁾
5,669,615 58,210 4.08 % 5,565,160 58,700 4.24 % 5,091,358 66,712 5.20 %
Other investments 87,998 289 1.31 % 89,525 316 1.42 % 54,768 497 3.60 %
Total earning assets⁽¹⁾
6,841,720 63,045 3.67 % 6,727,011 63,987 3.83 % 6,190,264 72,843 4.67 %
Cash and due from banks 72,474 73,523 66,046
Reserve for loan and lease losses (134,824) (124,186) (106,559)
Other assets 502,172 509,058 471,129
Total assets $ 7,281,542 $ 7,185,406 $ 6,620,880
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits $ 4,225,299 $ 6,532 0.62 % $ 4,248,478 $ 8,265 0.78 % $ 4,174,746 $ 13,524 1.29 %
Short-term borrowings 187,912 83 0.18 % 191,411 90 0.19 % 188,562 293 0.62 %
Subordinated notes 58,764 824 5.58 % 58,764 835 5.71 % 58,764 914 6.17 %
Long-term debt and mandatorily redeemable securities 81,528 610 2.98 % 81,766 659 3.24 % 71,304 750 4.17 %
Total interest-bearing liabilities 4,553,503 8,049 0.70 % 4,580,419 9,849 0.86 % 4,493,376 15,481 1.37 %
Noninterest-bearing deposits 1,664,135 1,562,100 1,188,645
Other liabilities 149,978 151,281 119,125
Shareholders’ equity 876,992 862,209 809,279
Noncontrolling interests 36,934 29,397 10,455
Total liabilities and equity $ 7,281,542 $ 7,185,406 $ 6,620,880
Less: Fully tax-equivalent adjustments (128) (137) (167)
Net interest income/margin (GAAP-derived)⁽¹⁾
$ 54,868 3.19 % $ 54,001 3.23 % $ 57,195 3.67 %
Fully tax-equivalent adjustments 128 137 167
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.


							Three Months Ended
	June 30, 2021						March 31, 2021						June 30, 2020
(Dollars in thousands)	Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate
ASSETS
Investment securities available-for-sale:
Taxable	$	1,305,988	$	4,156	1.28	%	$	1,193,583	$	3,987	1.35	%	$	995,776	$	4,487	1.81	%
Tax exempt(1)	33,563		192		2.29	%	37,394		214		2.32	%	49,534		286		2.32	%
Mortgages held for sale	7,208		54		3.00	%	14,285		86		2.44	%	27,016		198		2.95	%









Loans and leases, net of unearned discount(1)	5,515,387		57,169		4.16	%	5,499,009		57,860		4.27	%	5,565,160		58,700		4.24	%
Other investments	402,740		317		0.32	%	216,280		266		0.50	%	89,525		316		1.42	%
Total earning assets(1)	7,264,886		61,888		3.42	%	6,960,551		62,413		3.64	%	6,727,011		63,987		3.83	%
Cash and due from banks	76,198						75,178						73,523
Allowance for loan and lease losses	(142,056)						(143,206)						(124,186)
Other assets	458,248						457,890						509,058
Total assets	$	7,657,276					$	7,350,413					$	7,185,406

LIABILITIES AND SHAREHOLDERS’ EQUITY




Interest-bearing deposits	$	4,458,915	$	3,202	0.29	%	$	4,261,207	$	3,526	0.34	%	$	4,248,478	$	8,265	0.78	%
Short-term borrowings	186,605		29		0.06	%	176,726		36		0.08	%	191,411		90		0.19	%
Subordinated notes	58,764		814		5.56	%	58,764		818		5.65	%	58,764		835		5.71	%
Long-term debt and mandatorily redeemable securities	81,516		790		3.89	%	80,967		500		2.50	%	81,766		659		3.24	%
Total interest-bearing liabilities	4,785,800		4,835		0.41	%	4,577,664		4,880		0.43	%	4,580,419		9,849		0.86	%
Noninterest-bearing deposits	1,819,739						1,719,264						1,562,100
Other liabilities	108,916						115,034						151,281
Shareholders’ equity	898,388						894,553						862,209
Noncontrolling interests	44,433						43,898						29,397
Total liabilities and equity	$	7,657,276					$	7,350,413					$	7,185,406
Less: Fully tax-equivalent adjustments			(118)						(121)						(137)
Net interest income/margin (GAAP-derived)(1)			$	56,935	3.14	%			$	57,412	3.35	%			$	54,001	3.23	%
Fully tax-equivalent adjustments			118						121						137
Net interest income/margin - FTE(1)			$	57,053	3.15	%			$	57,533	3.35	%			$	54,138	3.24	%

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

Quarter Ended ~~September~~June 30, ~~2020~~2021 compared to the Quarter Ended ~~September~~June 30, ~~2019~~2020

The taxable-equivalent net interest income for the three months ended ~~September~~June 30, ~~2020~~2021 was ~~$55.00~~$57.05 million, ~~a decrease~~an increase of ~~4.12%~~5.38% over the same period in ~~2019.~~2020. The net interest margin on a fully taxable-equivalent basis was ~~3.20%~~3.15% for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~3.68%~~3.24% for the three months ended ~~September~~June 30, ~~2019.~~2020.

During the three month period ended ~~September~~June 30, ~~2020,~~2021, average earning assets increased ~~$651.46~~$537.88 million, up ~~10.52%~~8.00% over the comparable period in ~~2019.~~2020. Average interest-bearing liabilities increased ~~$60.13~~$205.38 million or ~~1.34%~~4.48%. The yield on average earning assets decreased ~~100~~41 basis points to ~~3.67%~~3.42% from ~~4.67%~~3.83% primarily due to lower rates on loans and leases and investment securities. Total cost of average interest-bearing liabilities decreased 6745 basis points to ~~0.70%~~0.41% from ~~1.37%~~0.86% as a result of athe lower interest rate ~~environment during 2020.~~environment. The result to the net interest margin, or the ratio of net interest income to average earning assets, was a decrease of 48nine basis points.

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The largest ~~contributor~~contributors to the reduced yield on average earning assets for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to the three months ended ~~September~~June 30, ~~2019,~~2020, were accommodative fiscal and monetary policies supporting economic recovery from the pandemic that have increased liquidity and maintained a low rate environment. The yield on net loans and leases decreased eight basis points due to the low rate environment and was positively impacted by one basis point due to accelerated recognition of unearned fees on PPP loans forgiven by the SBA and offset by PPP loan balances outstanding which earn interest at 1.00%. Average net loans and leases decreased $49.77 million or 0.89% primarily due to PPP loan forgiveness of $158.41 million in the commercial and agricultural loan portfolio during the second quarter. Average investment securities increased $294.24 million or 28.15% with the largest increases in U.S. treasury and federal agency securities and mortgage-backed securities due to continued investment of excess liquidity. 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 commerial paper increased $313.22 million or 349.86% from the second quarter of 2020 as excess liquidity resulted in higher balances held at the Federal Reserve Bank.

Average interest-bearing deposits increased $210.44 million or 4.95% for the second quarter of 2021 over the same period in 2020 primarily due to the impact of government stimulus programs on consumer savings levels. The effective rate paid on average interest-bearing deposits decreased 49 basis points to 0.29% from 0.78%. 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 second quarter of 2020. Average noninterest-bearing deposits grew $257.64 million or 16.49% for the second quarter of 2021 over the same period in 2020 primarily due to PPP loan fundings as business customers remain cautious with their funds and spending.

Average short-term borrowings decreased $4.81 million or 2.51% for the second quarter of 2021 compared to the same period in 2020. Interest paid on short-term borrowings decreased 13 basis points. Interest paid on subordinated notes decreased 15 basis points during the second quarter of 2021 from the same period a year ago due to a variable rate on one tranche. Average long-term debt and mandatorily redeemable securities balances decreased $0.25 million or 0.31%. Interest paid on long-term debt and mandatorily redeemable securities increased 65 basis points during the second quarter of 2021 from the same period in 2020 primarily due to higher rates on mandatorily redeemable securities.



	Six Months Ended
	June 30, 2021						June 30, 2020
(Dollars in thousands)	Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate
ASSETS
Investment securities available-for-sale:
Taxable	$	1,250,096	$	8,143	1.31	%	$	984,598	$	10,037	2.05	%
Tax exempt(1)	35,468		406		2.31	%	53,377		611		2.30	%
Mortgages held for sale	10,727		140		2.63	%	19,155		294		3.09	%
Loans and leases, net of unearned discount(1)	5,507,243		115,029		4.21	%	5,331,779		120,220		4.53	%
Other investments	310,025		583		0.38	%	65,494		662		2.03	%
Total earning assets(1)	7,113,559		124,301		3.52	%	6,454,403		131,824		4.11	%
Cash and due from banks	75,691						69,465
Allowance for loan and lease losses	(142,628)						(118,212)
Other assets	458,070						492,608
Total assets	$	7,504,692					$	6,898,264

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits	$	4,360,607	$	6,728	0.31	%	$	4,162,374	$	19,116	0.92	%
Short-term borrowings	181,693		65		0.07	%	196,978		344		0.35	%
Subordinated notes	58,764		1,632		5.60	%	58,764		1,719		5.88	%
Long-term debt and mandatorily redeemable securities	81,243		1,290		3.20	%	79,870		1,512		3.81	%
Total interest-bearing liabilities	4,682,307		9,715		0.42	%	4,497,986		22,691		1.01	%
Noninterest-bearing deposits	1,769,779						1,379,103
Other liabilities	111,958						141,570
Shareholders’ equity	896,481						853,467
Noncontrolling interests	44,167						26,138
Total liabilities and equity	$	7,504,692					$	6,898,264
Less: Fully tax-equivalent adjustments			(239)						(288)
Net interest income/margin (GAAP-derived)(1)			$	114,347	3.24	%			$	108,845	3.39	%
Fully tax-equivalent adjustments			239						288
Net interest income/margin - FTE(1)			$	114,586	3.25	%			$	109,133	3.40	%

(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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Six Months Ended June 30, 2021 compared to the Six Months Ended June 30, 2020

The taxable-equivalent net interest income for the six months ended June 30, 2021 was $114.59 million, an increase of 5.00% over the same period in 2020. The net interest margin on a fully taxable-equivalent basis was 3.25% compared to a net interest margin of 3.40% for the same period in 2020.

During the six month period ended June 30, 2021, average earning assets increased $659.16 million, up 10.21% over the comparable period in 2020. Average interest-bearing liabilities increased $184.32 million or 4.10%. The yield on average earning assets decreased 59 basis points to 3.52% from 4.11% primarily due to lower rates on loans and leases and investment securities. Total cost of average interest-bearing liabilities decreased 59 basis points to 0.42% from 1.01% as a result of the lower interest rate environment. The result to the net interest margin, or the ratio of net interest income to average earning assets, was a decrease of 15 basis points due to the impact of aforementioned government programs.

The largest contributor to the reduced yield on average earning assets for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, was a decrease in yields on net loans and leases of ~~112~~32 basis points primarily due to ~~market conditions~~the low interest rate environment as ~~a result of several~~the Federal Reserve ~~interest rate decreases during~~continues to support the ~~second half of 2019 and first three months of 2020.~~economic recovery from the pandemic. The yield on net loans and leases was ~~also negatively~~positively impacted by ~~a net six~~five basis points due to accelerated recognition of unearned fees on PPP loans which have been forgiven by the SBA offset by PPP loan balances outstanding which earn interest at 1.00% ~~and negatively impacted by four basis points due to net interest reversals of $0.42 million in the third quarter of 2020 vs. net interest recoveries of $0.08 million in the third quarter of 2019.~~. Average net loans and leases increased ~~$578.26~~$175.46 million or ~~11.36% with the largest increase~~3.29% primarily due to average PPP loans of ~~$578.36~~$408.17 million compared to average PPP loans of $223.94 million in 2020 in the commercial and agricultural loan portfolio. Total average investment securities increased ~~$33.53~~$247.59 million or ~~3.27%.~~23.85% with the largest increases in U.S. treasury and federal agency securities and mortgage-backed securities due to continued investment of excess liquidity. Average mortgages held for sale ~~increased $6.44~~decreased $8.43 million or ~~32.38%~~44.00%. Average other investments, which include federal funds sold, time deposits with other banks, Federal Reserve Bank excess balances, Federal Reserve Bank and Federal Home Loan Bank (FHLB) stock and commercial paper increased ~~$33.23~~$244.53 million or ~~60.67%~~373.36% from the ~~third~~second quarter of ~~2019.~~2020. The majority of the increase was attributable to excess liquidity held at the Federal Reserve Bank.

Average interest-bearing deposits increased ~~$50.55~~$198.23 million or ~~1.21%~~4.76% for the ~~third quarter~~first six months of ~~2020~~2021 over the same period in ~~2019~~2020 primarily due to the impact of government stimulus programs on consumer savings levels. The effective rate paid on average interest-bearing deposits decreased 6761 basis points to ~~0.62%~~0.31% from ~~1.29%~~0.92%. 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 ~~third~~second quarter of ~~2019.~~2020. Average noninterest-bearing deposits grew ~~$475.49~~$390.68 million or ~~40.00%~~28.33% for the ~~third quarter~~first six months of ~~2020~~2021 over the same period in ~~2019~~2020 primarily due to PPP loan fundings inas business ~~accounts.~~customers remain cautious with their funds and spending.

Average short-term borrowings decreased ~~$0.65~~$15.29 million or ~~0.34%~~7.76% for the ~~third quarter~~first six months of ~~2020~~2021 compared to the same period in ~~2019.~~2020. Interest paid on short-term borrowings decreased 4428 basis points. Interest paid on subordinated notes decreased 5928 basis points ~~during the third quarter of 2020 from the same period a year ago~~ due to a variable rate on one ~~traunche.~~tranche. Average long-term debt and mandatorily redeemable securities balances increased ~~$10.22~~$1.37 million or ~~14.34%~~1.72%. Interest paid on long-term debt and mandatorily redeemable securities decreased ~~119 basis points during the third quarter of 2020 from the same period in 2019 primarily due to lower rates on mandatorily redeemable securities.~~

Nine Months Ended
September 30, 2020 September 30, 2019
(Dollars in thousands) Average
Balance Interest Income/Expense Yield/
Rate Average
Balance Interest Income/Expense Yield/
Rate
ASSETS
Investment securities available-for-sale:
Taxable $ 994,035 $ 14,140 1.90 % $ 932,779 $ 15,757 2.26 %
Tax exempt⁽¹⁾
50,590 868 2.29 % 71,684 1,297 2.42 %
Mortgages held for sale 21,563 480 2.97 % 13,616 418 4.10 %
Loans and leases, net of unearned discount⁽¹⁾
5,445,213 178,430 4.38 % 4,984,498 194,954 5.23 %
Other investments 73,050 951 1.74 % 50,109 1,434 3.83 %
Total earning assets⁽¹⁾
6,584,451 194,869 3.95 % 6,052,686 213,860 4.72 %
Cash and due from banks 70,475 65,801
Reserve for loan and lease losses (123,790) (103,699)
Other assets 495,820 452,759
Total assets $ 7,026,956 $ 6,467,547
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits $ 4,183,502 $ 25,648 0.82 % $ 4,083,140 $ 37,972 1.24 %
Short-term borrowings 193,934 427 0.29 % 213,551 1,764 1.10 %
Subordinated notes 58,764 2,543 5.78 % 58,764 2,770 6.30 %
Long-term debt and mandatorily redeemable securities 80,427 2,122 3.52 % 71,034 2,258 4.25 %
Total interest-bearing liabilities 4,516,627 30,740 0.91 % 4,426,489 44,764 1.35 %
Noninterest-bearing deposits 1,474,807 1,147,195
Other liabilities 144,393 97,096
Shareholders’ equity 861,366 791,438
Noncontrolling interests 29,763 5,329
Total liabilities and equity $ 7,026,956 $ 6,467,547
Less: Fully tax-equivalent adjustments (416) (526)
Net interest income/margin (GAAP-derived)⁽¹⁾
$ 163,713 3.32 % $ 168,570 3.72 %
Fully tax-equivalent adjustments 416 526
Net interest income/margin - FTE⁽¹⁾
$ 164,129 3.33 % $ 169,096 3.74 %
(1) See “Reconciliation of Non-GAAP Financial Measures” at the end of this section for additional information on this performance measure/ratio.

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

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

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

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

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

Average short-term borrowings decreased $19.62 million or 9.19% for the first nine months of 2020 compared to the same period in 2019. Interest paid on short-term borrowings decreased 81 basis points. The decrease in short-term borrowings was primarily the result of lower borrowings with the FHLB. Interest paid on subordinated notes decreased 52 basis points due to a variable rate associated with one traunche. Average long-term debt and mandatorily redeemable securities increased $9.39 million or 13.22%. Interest paid on long-term debt and mandatorily redeemable securities decreased 7361 basis points due to lower rates on mandatorily redeemable securities.

Reconciliation of Non-GAAP Financial Measures

The accounting and reporting policies of 1st Source conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components) and net interest margin (including its individual components). Management believes that these measures provide users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities.

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Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources.

Three Months Ended Nine Months Ended
(Dollars in thousands) September 30,
2020 June 30, 2020 September 30,
2019 September 30,
2020 September 30,
2019
Calculation of Net Interest Margin
(A) Interest income (GAAP) $ 62,917 $ 63,850 $ 72,676 $ 194,453 $ 213,334
Fully tax-equivalent adjustments:
(B) - Loans and leases 78 83 95 251 283
(C) - Tax-exempt investment securities 50 54 72 165 243
(D) Interest income - FTE (A+B+C) 63,045 63,987 72,843 194,869 213,860
(E) Interest expense (GAAP) 8,049 9,849 15,481 30,740 44,764
(F) Net interest income (GAAP) (A–E) 54,868 54,001 57,195 163,713 168,570
(G) Net interest income - FTE (D–E) 54,996 54,138 57,362 164,129 169,096
(H) Annualization factor 3.978 4.022 3.967 1.336 1.337
(I) Total earning assets $ 6,841,720 $ 6,727,011 $ 6,190,264 $ 6,584,451 $ 6,052,686
Net interest margin (GAAP-derived) (F*H)/I 3.19 % 3.23 % 3.67 % 3.32 % 3.72 %
Net interest margin - FTE (G*H)/I 3.20 % 3.24 % 3.68 % 3.33 % 3.74 %

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		Three Months Ended									Six Months Ended
(Dollars in thousands)		June 30, 2021			March 31, 2021			June 30, 2020			June 30, 2021			June 30, 2020
Calculation of Net Interest Margin
(A)	Interest income (GAAP)	$	61,770		$	62,292		$	63,850		$	124,062		$	131,536
	Fully tax-equivalent adjustments:
(B)	- Loans and leases	80			81			83			161			173
(C)	- Tax-exempt investment securities	38			40			54			78			115
(D)	Interest income - FTE (A+B+C)	61,888			62,413			63,987			124,301			131,824
(E)	Interest expense (GAAP)	4,835			4,880			9,849			9,715			22,691
(F)	Net interest income (GAAP) (A–E)	56,935			57,412			54,001			114,347			108,845
(G)	Net interest income - FTE (D–E)	57,053			57,533			54,138			114,586			109,133
(H)	Annualization factor	4.011			4.056			4.022			2.017			2.011
(I)	Total earning assets	$	7,264,886		$	6,960,551		$	6,727,011		$	7,113,559		$	6,454,403
	Net interest margin (GAAP-derived) (F*H)/I	3.14		%	3.35		%	3.23		%	3.24		%	3.39		%
	Net interest margin - FTE (G*H)/I	3.15		%	3.35		%	3.24		%	3.25		%	3.40		%

PROVISION AND ~~RESERVE~~ALLOWANCE FOR ~~LOAN AND LEASE~~CREDIT LOSSES

The provision for ~~loan and lease~~credit losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$9.30~~a recovery of $3.03 million and ~~$31.03~~$0.63 million compared to a provision for ~~loan and lease~~credit losses in the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 of ~~$3.72~~$10.38 million and ~~$12.88~~$21.73 million. Net charge-offs of ~~$3.77~~$0.16 million or ~~0.26%~~0.01% of average loans and leases were recorded for the ~~third~~second quarter ~~2020,~~2021, compared to net recoveries of ~~$0.31~~$0.11 million or ~~0.02%~~0.01% of average loans and leases for the same quarter a year ago. Year-to-date net charge-offs of ~~$5.47~~$3.67 million or 0.13% of average loans and leases have been recorded in ~~2020,~~2021, compared to net charge-offs of ~~$4.41~~$1.70 million or ~~0.12%~~0.06% of average loans and leases through ~~September~~June 30, ~~2019.~~

~~The provision for the three months ended September 30, 2020 was~~2020. Net charge-offs in 2021 were principally ~~driven by increases in special attention loan balances and nonperforming loans, most of which were~~ in the bus ~~segment~~sector of the auto and light truck ~~portfolio. There~~portfolio and were generally previously designated as special attention and placed in a pool of other loans with similar risk characteristics.

The recovery of provision for credit losses for the three months ended June 30, 2021 was ~~a decline~~principally driven by decreasing our COVID-19 qualitative adjustments in the various portfolios, with the exception of ~~$65.29~~the bus sector of the auto and light truck portfolio and the hotel sector of the commercial real estate portfolio, and revising our forecast factors given the stronger than expected GDP growth and the improving jobs market. We remain concerned about the long-term prospects for our bus segment and for customers in various portfolios that benefited during the past year from payment deferrals and have not yet been able to return to original payment terms, particularly commercial real estate accounts in the hotel sector. COVID-19 related loan modifications are discussed in the “COVID-19 Impact” section above. The $40.04 million decrease in outstanding loan balances this quarter ~~following strong growth last quarter related~~was attributable to a $128.75 million decrease in PPP loans partially offset by a $88.71 million increase in loan outstandings in our core loan products. As of quarter-end, PPP loans total $315.09 million and necessitate minimal reserves as the ~~PPP loan program. The Bank funded $597 million under this~~ program ~~which~~ carries a 100% SBA guarantee and a debt forgiveness ~~component by the CARES Act. We established~~component. Impairment reserves for assets individually evaluated slightly increased this quarter but continue to be a small reserve against this pool of loans to cover procedural and other unanticipated risks. We continued to have COVID-19 related downgrades this quarter, including one large-dollar commercial account plus numerous additional accounts with less exposure. There were 36 accounts greater than $100,000 downgraded to special attention this quarter, 31 of which were in the bus segment of the auto and light truck portfolio. This compares to 21 downgraded last quarter, eight of which were bus-related, and 40 accounts in total downgraded for all of 2019. The 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 bus) and hotel industries. COVID-19 related loan modifications to these industries are discussed in the “COVID-19 Impact” section above. We extended PPP loans to 44component 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.overall allowance.

We continue to evaluate risks which may impact our loan portfolios. ~~During~~Most notably, the ~~first quarter of 2020, as a result of the coronavirus~~ pandemic and ~~resultant business shutdowns and unemployment spikes,~~related economic disruptions dominated our risk analysis over the past six quarters. As previously noted, we reviewed our ~~loan~~COVID-19 factors and determined reductions were in order for most 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.this quarter. 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. Congress ~~has not been able to come to agreement on further stimulus~~is working through spending initiatives and ~~the impending election further adds to the uncertainty.~~is facing several challenges. Additional current concerns include slower growth projections for world economies and the sharp decline in global trade growth exacerbated by trade and supply chain 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~~from the pandemic and ~~ongoing corruption~~the likely slow economic recovery given difficulties encountered securing vaccine access and distribution which has caused escalating social tensions and rising unemployment. Corruption scandals persist, fueling U.S. border concerns. ~~Concerns~~Globally, 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~~$188 million inof foreign ~~exposure. The~~exposure, the majority of ~~our foreign exposure~~which is in Mexico and Brazil. ~~As we ended 2019, the Brazilian economy was~~We review political and economic data for these countries on a ~~path~~regular basis to assess the impact the environment may have on our customers. Historically, we have experienced volatile and unanticipated losses in both the foreign and domestic segments of ~~gradual improvement~~our aircraft portfolios. Losses have been primarily attributable to unexpected declines in the value of specific aircraft collateral at a time when the borrower is experiencing financial difficulties. We review and ~~Mexico’s economy, although stronger, was beginning~~assess aircraft values on an ongoing basis and use a tiered approach to ~~exhibit some weaknesses. Now, considering the pandemic, both are projected~~establish advance rates and amortization schedules in an effort to ~~contract in 2020.~~limit collateral exposure. We continue to monitor individual customer performance and assess risks in the portfolio as a whole.

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On ~~September~~June 30, ~~2020,~~2021, 30 day and over loan and lease delinquencies as a percentage of loan and lease balances were ~~0.29%~~0.09%, compared to ~~0.47%~~0.60% on ~~September~~June 30, ~~2019.~~2020. The ~~reserve~~allowance for loan and lease losses as a percentage of loans and leases outstanding at the end of the period was ~~2.43%~~2.49% compared to ~~2.14%~~2.31% one year ago. The ~~reserve~~allowance as a percentage of loans and leases outstanding, net of PPP loans, was ~~2.69%.~~2.63% compared to 2.73% at December 31, 2020 and 2.54% at June 30, 2020. The increase in the ~~reserve~~allowance of 18 basis points 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.~~concerns, and forecast factor adjustments as part of the current expected credit losses (CECL) methodology. A summary of loan and lease loss experience during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 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 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 September 30, 2020, we estimate an additional increase to the allowance for credit losses of between $0 million and $2 million which will be recognized through earnings after adoption. We believe that as of September 30, 2020, a forecast adjustment is necessary as well as qualitative factor adjustments for portfolio segments most severely impacted by the COVID-19 business shutdowns. Given the 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 hotels, as evidenced by deferral 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) September 30,
2020 December 31,
2019 September 30,
2019
Loans and leases past due 90 days or more $ 81 $ 309 $ 311
Nonaccrual loans and leases 70,595 9,789 10,188
Other real estate 303 522 629
Repossessions 4,639 8,623 6,610
Equipment owned under operating leases 136 — —
Total nonperforming assets $ 75,754 $ 19,243 $ 17,738


(Dollars in thousands)	June 30, 2021		December 31, 2020		June 30, 2020
Loans and leases past due 90 days or more	$	44	$	115	$	256
Nonaccrual loans and leases	55,864		60,388		62,800
Other real estate	—		359		303
Repossessions	1,213		1,976		6,132
Equipment owned under operating leases	1,728		1,695		57
Total nonperforming assets	$	58,849	$	64,533	$	69,548

Nonperforming assets as a percentage of loans and leases were ~~1.33%~~1.06% at ~~September~~June 30, ~~2020, 0.37%~~2021, 1.16% at December 31, ~~2019,~~2020, and ~~0.34%~~1.20% at ~~September~~June 30, ~~2019.~~2020. Excluding PPP loans, nonperforming assets as a percentage of loan and leases were ~~1.48%~~1.13% at ~~September~~June 30, ~~2020, 0.37%~~2021, 1.24% at December 31, ~~2019,~~2020, and ~~0.34%~~1.33% at ~~September~~June 30, ~~2019.~~2020. Nonperforming assets totaled ~~$75.75~~$58.85 million at ~~September~~June 30, ~~2020, an increase~~2021, a decrease of ~~293.67%~~8.81% from the ~~$19.24~~$64.53 million reported at December 31, ~~2019,~~2020, and a ~~327.07% increase~~15.38% decrease from the ~~$17.74~~$69.55 million reported at ~~September~~June 30, ~~2019.~~2020. The ~~increase~~decrease in nonperforming assets during the first ~~nine~~six months of ~~2020~~2021 was related to ~~higher~~lower nonaccrual loans and leases. The ~~increase~~decrease in nonperforming assets at ~~September~~June 30, 2021 from June 30, 2020 ~~from September 30, 2019 also occurred~~was related to a decrease in nonaccrual loans and ~~leases.~~leases and lower repossessions.

The ~~increase~~decrease in nonaccrual loans and leases at ~~September~~June 30, ~~2020~~2021 from December 31, ~~2019~~2020 and ~~September~~from June 30, ~~2019~~2020 occurred primarily in the auto ~~and light truck and construction equipment portfolios. During the first nine months~~rental division of ~~2020, two relationships of a combined $18.21 million of auto rental loan balances in~~ the auto and light truck portfolio, ~~and two relationships of a combined $19.10 million in~~ the construction equipment ~~portfolio went into nonaccrual. Additionally, during~~and the ~~third quarter~~commercial and agricultural portfolios offset by increases in the bus division of ~~2020, $14.76 million of bus loan balances in our~~the auto and light truck ~~portfolio were placed in nonaccrual.~~portfolio. A summary of nonaccrual loans and leases and past due aging for the period ended ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 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 decreased over the past year due to sales of existing properties outpacing current foreclosures.~~

Repossessions consisted mainly of ~~aircraft and~~buses in the auto and light ~~trucks.~~truck portfolio as of June 30, 2021. 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~~allowance 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~~June 30, ~~2020~~2021 compared to ~~December 31, 2019~~June 30, 2020 was primarily the result of the sale of a repossessed ~~aircraft and the write-down of one aircraft.~~aircrafts.

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

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


(Dollars in thousands)	June 30, 2021		December 31, 2020		June 30, 2020
Commercial and agricultural	$	—	$	—	$	—
Solar	—		—		—
Auto and light truck	1,175		1,120		630
Medium and heavy duty truck	—		—		—
Aircraft	—		750		5,450
Construction equipment	—		—		35
Commercial real estate	—		303		303
Residential real estate and home equity	—		56		—
Consumer	38		106		17
Total	$	1,213	$	2,335	$	6,435

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 September 30,												Nine Months Ended September 30,														Three Months Ended June 30,			Six Months Ended June 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		$ Change	% Change		2020		2019		$ Change	% Change		(Dollars in thousands)	2021		2020		$ Change	% Change		2021		2020		$ Change	% Change
Noninterest income:	Noninterest income:															Noninterest income:
Trust and wealth advisory	Trust and wealth advisory	$	5,153	$	4,982	171	3.43%		$	15,590	$	15,423	167	1.08	%	Trust and wealth advisory	$	6,466	$	5,589	877	15.69	%	$	11,947	$	10,437	1,510	14.47	%
Service charges on deposit accounts	Service charges on deposit accounts	2,336		2,892		(556)	(19.23)%		6,851		8,175		(1,324)	(16.20)	%	Service charges on deposit accounts	2,508		1,910		598	31.31	%	4,955		4,515		440	9.75	%
Debit card	Debit card	4,019		3,727		292	7.83%		10,993		10,616		377	3.55	%	Debit card	4,754		3,601		1,153	32.02	%	8,936		6,974		1,962	28.13	%
Mortgage banking	Mortgage banking	6,474		1,362		5,112	NM		12,125		3,297		8,828	NM		Mortgage banking	2,859		3,315		(456)	(13.76)	%	6,760		5,651		1,109	19.62	%
Insurance commissions	Insurance commissions	1,825		1,603		222	13.85%		5,401		5,295		106	2.00	%	Insurance commissions	1,684		1,695		(11)	(0.65)	%	3,836		3,576		260	7.27	%
Equipment rental	Equipment rental	5,593		7,578		(1,985)	(26.19)%		18,213		23,369		(5,156)	(22.06)	%	Equipment rental	4,255		5,990		(1,735)	(28.96)	%	8,884		12,620		(3,736)	(29.60)	%
Gains on investment securities available-for-sale		—		—		—	NM		279		—		279	NM
(Losses) gains on investment securities available-for-sale																(Losses) gains on investment securities available-for-sale	(680)		(1)		(679)	NM		(680)		279		(959)	NM
Other	Other	2,641		3,621		(980)	(27.06)%		8,452		9,378		(926)	(9.87)	%	Other	3,052		3,142		(90)	(2.86)	%	6,129		5,811		318	5.47	%
Total noninterest income	Total noninterest income	$	28,041	$	25,765	2,276	8.83	%	$	77,904	$	75,553	2,351	3.11	%	Total noninterest income	$	24,898	$	25,241	(343)	(1.36)	%	$	50,767	$	49,863	904	1.81	%

NM = Not Meaningful

Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased ~~slightly~~ during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared with the same periods a year ago. Trust and wealth advisory fees are largely based on the number and size of client relationships and the market value of assets under management. The market value of trust assets under management at ~~September~~June 30, 2021, December 31, 2020, and June 30, 2020 ~~December 31, 2019, and September 30, 2019~~ was ~~$4.30~~$5.11 billion, ~~$4.48~~$4.74 billion, and ~~$4.24~~$4.20 billion, respectively. Strong stock market performance helped improve the market value of trust assets under management.

Service charges on deposit accounts ~~decreased~~increased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 over the comparable periods in ~~2019.~~2020. The ~~decrease~~increase in service charges on deposit accounts primarily reflects a ~~lower~~higher volume of ~~nonsufficient fund transactions~~customer ATM fees and ~~reduced ATM~~increased business deposit account fees. ~~Higher deposit balances from elevated~~Increasing vaccination rates have led to a corresponding improvement in consumer ~~savings levels in conjunction with the pandemic resulted in fewer overdrawn accounts.~~and business activity.

Debit card income ~~increased~~improved in the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 over the same periods a year ago. The majority of the improvement in debit card income was the result of an increased volume of debit card transactions ~~in 2020.~~as the economy reopened and consumer activity increased.

Mortgage banking income ~~increased~~decreased in the three ~~and nine~~ months ended ~~September~~June 30, ~~2020~~2021 and increased for the six months ended June 30, 2021 as compared to the same periods in ~~2019.~~2020. The ~~year-to-date~~decrease during the second quarter of 2021 compared to last year was primarily caused by a lower volume of sales on loans originated for the secondary market offset by the recognition of $0.55 million in impairment recoveries on our mortgage servicing rights. The increase during the six months ended June 30, 2021 compared to the same period in 2020 was primarily caused by better margins on a higher volume of loan sales as a result of more loans originated for the secondary market ~~offset by higher mortgage servicing rights amortization expense~~ and ~~$0.81~~the recognition of $0.59 million ofin impairment ~~charges~~recoveries on our mortgage servicing rights.

Insurance commissions were ~~higher~~relatively flat during the three ~~and nine~~ months ended ~~September~~June 30, ~~2020~~2021 compared to the same ~~periods~~period a year ago and were higher during the six months ended June 30, 2021 over the same period a year ago. The increase during the first six months of 2021 was ~~primarily~~mainly due to ~~new business offset by a reduction in~~increased contingent commissions received.

Equipment rental income decreased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 over the comparable periods in ~~2019.~~2020. The ~~decrease~~decline was the result of ~~reduced~~a reduction in leasing volume primarily in the construction equipment ~~aircraft~~ and auto and light truck portfolios resulting in the average equipment rental portfolio decreasing by ~~21%~~30.8% over the same period a year ~~ago.~~ago due to changing customer preferences.

~~Gains~~Losses on investment securities available-for-sale during the ~~nine~~three and six months ended ~~September~~June 30, ~~2019~~2021 were primarily the result of repositioning the portfolio. Gains during the first six months of 2020 were primarily from the sale of a corporate ~~securities~~security in managing portfolio risk.

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

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Other income decreased for the three months ended June 30, 2021 compared to one year ago and increased for the six months ended June 30, 2021 over the comparable period in 2020. The decrease during the second quarter of 2021 compared to the same period one year ago was primarily a result of lower customer swap fees and reduced bank owned life insurance policy claims offset by higher partnership investment gains and increased brokerage fees and commissions. The increase during the six months ended June 30, 2021 compared to the same period last year was primarily the result of higher partnership investment gains and increased brokerage fees and commissions offset by reduced customer swap fees.

NONINTEREST EXPENSE

The following table shows the details of noninterest expense.


		Three Months Ended September 30,												Nine Months Ended September 30,														Three Months Ended June 30,			Six Months Ended June 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		$ Change	% Change		2020		2019		$ Change	% Change		(Dollars in thousands)	2021		2020		$ Change	% Change		2021		2020		$ Change	% Change
Noninterest expense:	Noninterest expense:															Noninterest expense:
Salaries and employee benefits	Salaries and employee benefits	$	25,609	$	24,434	1,175	4.81	%	$	74,009	$	71,716	2,293	3.20	%	Salaries and employee benefits	$	25,510	$	23,999	1,511	6.30	%	$	50,706	$	48,400	2,306	4.76	%
Net occupancy	Net occupancy	2,512		2,635		(123)	(4.67)	%	7,737		7,888		(151)	(1.91)	%	Net occupancy	2,527		2,504		23	0.92	%	5,246		5,225		21	0.40	%
Furniture and equipment	Furniture and equipment	6,247		6,027		220	3.65	%	18,912		18,340		572	3.12	%	Furniture and equipment	6,337		6,258		79	1.26	%	12,795		12,665		130	1.03	%
Depreciation – leased equipment	Depreciation – leased equipment	4,694		6,198		(1,504)	(24.27)	%	15,263		19,122		(3,859)	(20.18)	%	Depreciation – leased equipment	3,550		5,142		(1,592)	(30.96)	%	7,323		10,569		(3,246)	(30.71)	%
Professional fees	Professional fees	2,041		1,603		438	27.32	%	4,741		4,907		(166)	(3.38)	%	Professional fees	2,146		1,258		888	70.59	%	3,759		2,700		1,059	39.22	%
Supplies and communication	Supplies and communication	1,305		1,643		(338)	(20.57)	%	4,329		4,744		(415)	(8.75)	%	Supplies and communication	1,430		1,390		40	2.88	%	2,905		3,024		(119)	(3.94)	%
FDIC and other insurance	FDIC and other insurance	868		260		608	NM		1,755		1,513		242	15.99	%	FDIC and other insurance	772		599		173	28.88	%	1,437		887		550	62.01	%
Business development and marketing	Business development and marketing	923		1,844		(921)	(49.95)	%	3,403		4,471		(1,068)	(23.89)	%	Business development and marketing	1,351		1,121		230	20.52	%	2,348		2,480		(132)	(5.32)	%
Loan and lease collection and repossession	Loan and lease collection and repossession	1,054		697		357	51.22	%	2,655		2,288		367	16.04	%	Loan and lease collection and repossession	486		838		(352)	(42.00)	%	615		1,601		(986)	(61.59)	%
Other	Other	1,790		1,765		25	1.42	%	5,599		4,674		925	19.79	%	Other	1,089		1,716		(627)	(36.54)	%	2,204		3,809		(1,605)	(42.14)	%
Total noninterest expense	Total noninterest expense	$	47,043	$	47,106	(63)	(0.13)	%	$	138,403	$	139,663	(1,260)	(0.90)	%	Total noninterest expense	$	45,198	$	44,825	373	0.83	%	$	89,338	$	91,360	(2,022)	(2.21)	%

NM = Not Meaningful

Salaries and employee benefits increased during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the same periods in ~~2019.~~2020. The increase was mainly due to higher base salaries as a result of normal merit increases, increased incentive compensation, and ~~a slight increase in average staffing levels along with~~ a rise in ~~commission compensation primarily in our residential mortgage area~~company contributions to employee retirement accounts offset by a decrease in group insurance ~~claims and incentive compensation.~~claims.

Net occupancy expense ~~decreased~~was flat during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the same periods a year ago. ~~The decrease was primarily due to lower repair expenses offset by increased building depreciation.~~

Furniture and equipment expense, including depreciation, rose slightly during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the same periods a year ago. Furniture and equipment expense was higher in ~~2020~~2021 mainly due to higher ~~computer processing charges and increased~~ software maintenance costs offset by a reduction in mileage reimbursements and furniture and equipment depreciation.

Depreciation on leased equipment decreased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the same periods in ~~2019.~~2020. Depreciation on leased equipment correlates with the decrease in equipment rental income.

Professional fees increased during the third quarter of 2020 compared to the third quarter of 2019 and decreased in the first nine months of 2020 compared to the same period a year ago. The increase during the third quarter was mainly due to higher legal fees and utilization of consulting services. The decrease in the first nine months was mainly due to reduced utilization of consulting services offset by an increase in legal fees and board of director fees.

~~Supplies and communication decreased during the third~~second quarter and first ~~nine~~six months of ~~2020~~2021 compared to the same periods a year ago. The increase during the 2021 was mainly due to higher legal and consulting fees.

Supplies and communication increased during the second quarter and decreased during the first six months of 2021 compared to the same periods a year ago. The second quarter increase was primarily the result of higher printing and postage costs offset by reduced data communication line charges. The decrease ~~resulted primarily from~~during the first half of 2021 compared to 2020 was due to lower ~~printing~~postage costs and reduced telephone line and equipment ~~expenses.~~expenses and data communication line charges.

FDIC and other insurance was higher during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the same periods in ~~2019.~~2020. The increase in ~~2020~~2021 was mainly due to FDIC insurance premium credits recognized ~~starting third quarter 2019 and ending second quarter 2020.~~during the first six months of 2020 which were not present in 2021.

Business development and marketing expense rose during the second quarter of 2021 and decreased during the ~~third quarter and~~ first ~~nine~~six months of ~~2020~~2021 compared to the same periods a year ago. The ~~decrease~~increase during the second quarter of 2021 compared to 2020 was ~~primarily~~mainly due to ~~lower~~increased business ~~development expense as a result of fewer business~~meals, entertainment and travel opportunities tied to fewer COVID-19 ~~precautions.~~

~~Loan and lease collection and repossession expense increased during the three and nine months ended September 30, 2020 compared to the same periods in 2019.~~restrictions. 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 assetsreduction during the first ~~nine~~six months of ~~2020 compared~~2021 was primarily due to ~~2019.~~fewer business meals and travel opportunities tied to continued COVID-19 precautions during the first quarter of 2021.

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~~Other expenses was relatively flat~~Loan and lease collection and repossession expense decreased during the ~~third~~second quarter and first six months of ~~2020~~2021 compared to the same ~~period~~periods in ~~2019~~2020. The decrease was mainly due to lower general collection and repossession expenses and increased gains on the sale of repossessed assets offset by increased collection and repossession legal expenses.

Other expenses were lower during the second quarter and first ~~nine~~six months of ~~2020~~2021 compared to the same ~~period~~periods in ~~2019.~~2020. The ~~increase~~decrease during the ~~first nine months~~second quarter and year-to-date was primarily the result of ~~lower gains on the sale of fixed assets,~~ a ~~rise~~reduced provision for interest rate swaps with customers, a decrease in the provision for unfunded loan commitments and ~~a higher provision for interest rate swaps with customers and a write down of operating lease equipment of $0.45 million offset by~~ lower employee training expenses due to more stringent COVID-19 travel precautions ~~and a trust loss recovery~~during the first quarter offset by lower gains on the sale of ~~$0.17 million.~~operating lease equipment.

INCOME TAXES

The provision for income taxes for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2020~~2021 was ~~$6.51~~$9.43 million and ~~$17.19~~$18.06 million, compared to ~~$7.69~~$5.52 million and ~~$21.52~~$10.68 million for the same periods in ~~2019.~~2020. The effective tax rate was ~~24.50%~~23.76% and ~~23.92%~~22.94% for the quarter ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~23.81%~~23.64% and ~~23.50%~~23.40% for the first ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and 2019,~~ respectively. ~~The increase in the quarterly effective tax rate was due to a slight increase in the tax provision for state income taxes.~~

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.~~2020. For information regarding our market risk, refer to 1st Source’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

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 ~~September~~June 30, ~~2020,~~2021, 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 ~~third~~second fiscal quarter of ~~2020~~2021 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.

There have been no material changes in risks faced by 1st Source ~~has made the following addition to the~~since December 31, 2020. For information regarding our risk factors, ~~disclosed in Item 1A of Part 1 of its~~refer to 1st Source’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

~~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 buses, auto rental and hotels have been impacted due to reduced demand related to quarantines and travel restrictions. Other industries within our loan and lease portfolio or the communities we serve are likely to experience similar disruptions and economic hardships as the current coronavirus pandemic persists. In addition, such events could affect the stability of our deposit base, lead to mass layoffs and furloughs which could impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, result in lost revenue or cause us to incur additional expenses.

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

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

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

ISSUER PURCHASES OF EQUITY SECURITIES

~~Period~~

~~Total Number of Shares Purchased~~

~~Average Price Paid Per Share~~

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs*

~~Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs~~

~~July 01 - 31, 2020~~

—

~~859,374~~

~~August 01 - 31, 2020~~

—

~~859,374~~

~~September 01 - 30, 2020~~

—

~~859,374~~


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs*	Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs
April 01 - 30, 2021	42,182	$	47.62	42,182	495,289
May 01 - 31, 2021	157,866	48.25		157,866	337,423
June 01 - 30, 2021	83,711	49.58		83,711	253,712

* 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~~1,746,288 shares.

On July 22, 2021, the Board of Directors authorized the repurchase of approximately 2.0 million shares. This authorization shall supersede any prior repurchase authorizations.

ITEM 3.Defaults Upon Senior Securities.

None

ITEM 4.Mine Safety Disclosures.

None

ITEM 5.Other Information.

None

~~Table of Contents~~

ITEM 6.Exhibits.

The following exhibits are filed with this report:


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

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

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

32.2						Certification pursuant to 18 U.S.C. Section 1350 of Chief Financial Officer.

101.INS						XBRL Instance Document — The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB						XBRL Taxonomy Extension Labels Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

104						Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

1st Source Corporation

DATE

~~October~~July 22, ~~2020~~2021

/s/ CHRISTOPHER J. MURPHY III

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

DATE

~~October~~July 22, ~~2020~~2021

/s/ ANDREA G. SHORT

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

4947


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

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


(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Reserve
September 30, 2020
With no related reserve recorded:
Commercial and agricultural	$	768	$	768	$	—
Auto and light truck	20,094		20,094		—
Medium and heavy duty truck	830		830		—
Aircraft	1,953		1,953		—
Construction equipment	5,312		5,312		—
Commercial real estate	1,354		1,354		—
Residential real estate and home equity	0		0		—
Consumer	0		0		—
Total with no related reserve recorded	30,311		30,311		—
With a reserve recorded:
Commercial and agricultural	6,647		6,647		1,554
Auto and light truck	16,980		16,980		7,517
Medium and heavy duty truck	114		114		34
Aircraft	0		0		0
Construction equipment	12,910		12,910		7,966
Commercial real estate	0		0		0
Residential real estate and home equity	331		333		111
Consumer	0		0		0
Total with a reserve recorded	36,982		36,984		17,182
Total impaired loans	$	67,293	$	67,295	$	17,182

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


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

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


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

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


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


	Actual						Minimum Capital Adequacy						Minimum Capital Adequacy with Capital Buffer				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets):
1st Source Corporation	$	948,891	15.74	%	$	482,133	8.00	%	$	632,800	10.50	%	$	602,667	10.00	%
1st Source Bank	859,135		14.24		482,677		8.00		633,514		10.50		603,347		10.00
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	872,755		14.48		361,600		6.00		512,267		8.50		482,133		8.00
1st Source Bank	782,915		12.98		362,008		6.00		512,845		8.50		482,677		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	778,494		12.92		271,200		4.50		421,867		7.00		391,733		6.50
1st Source Bank	745,654		12.36		271,506		4.50		422,343		7.00		392,175		6.50
Tier 1 Capital (to Average Assets):
1st Source Corporation	872,755		12.14		287,593		4.00		N/A		N/A		359,492		5.00
1st Source Bank	782,915		10.89		287,573		4.00		N/A		N/A		359,467		5.00