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 ~~June 30, 2020~~March 31, 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 ~~July 17, 2020~~April 16, 2021 — ~~25,550,365~~25,268,707 shares

Table of Contents

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition — ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020	3
	Consolidated Statements of Income — three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~	4
	Consolidated Statements of Comprehensive Income — three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~	5
	Consolidated Statements of Shareholders’ Equity — three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~	65
	Consolidated Statements of Cash Flows — ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~	76
	Notes to the Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3031
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4243
Item 4.	Controls and Procedures	4243

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	4243
Item 1A.	Risk Factors	4243
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	4344
Item 6.	Exhibits	44

SIGNATURES			45

EXHIBITS
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.1
	Exhibit 32.2

Table of Contents

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited - Dollars in thousands)


		June 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
ASSETS	ASSETS					ASSETS
Cash and due from banks	Cash and due from banks	$	67,591	$	67,215	Cash and due from banks	$	69,683	$	74,186
Federal funds sold and interest bearing deposits with other banks	Federal funds sold and interest bearing deposits with other banks	112,645		16,150		Federal funds sold and interest bearing deposits with other banks	266,271		168,861
Investment securities available-for-sale	Investment securities available-for-sale	1,055,797		1,040,583		Investment securities available-for-sale	1,291,340		1,197,467
Other investments	Other investments	30,619		28,414		Other investments	27,429		27,429

Mortgages held for sale	Mortgages held for sale	36,508		20,277		Mortgages held for sale	9,351		12,885
Loans and leases, net of unearned discount:	Loans and leases, net of unearned discount:					Loans and leases, net of unearned discount:
Commercial and agricultural	Commercial and agricultural	1,710,712		1,132,791		Commercial and agricultural	1,238,708		1,186,118
Solar						Solar	296,124		292,604
Auto and light truck	Auto and light truck	563,606		588,807		Auto and light truck	552,676		542,369
Medium and heavy duty truck	Medium and heavy duty truck	284,432		294,824		Medium and heavy duty truck	268,636		279,172
Aircraft	Aircraft	782,160		784,040		Aircraft	873,770		861,460
Construction equipment	Construction equipment	739,027		705,451		Construction equipment	705,744		714,888
Commercial real estate	Commercial real estate	942,971		908,177		Commercial real estate	975,383		969,864
Residential real estate and home equity	Residential real estate and home equity	531,972		532,003		Residential real estate and home equity	486,156		511,379
Consumer	Consumer	137,442		139,434		Consumer	125,888		131,447
Total loans and leases	Total loans and leases	5,692,322		5,085,527		Total loans and leases	5,523,085		5,489,301
Reserve for loan and lease losses		(131,283)		(111,254)
Allowance for loan and lease losses						Allowance for loan and lease losses	(139,550)		(140,654)
Net loans and leases	Net loans and leases	5,561,039		4,974,273		Net loans and leases	5,383,535		5,348,647
Equipment owned under operating leases, net	Equipment owned under operating leases, net	86,183		111,684		Equipment owned under operating leases, net	61,395		65,040
Net premises and equipment	Net premises and equipment	51,486		52,219		Net premises and equipment	48,288		49,373
Goodwill and intangible assets	Goodwill and intangible assets	83,959		83,971		Goodwill and intangible assets	83,942		83,948
Accrued income and other assets	Accrued income and other assets	279,319		227,990		Accrued income and other assets	270,697		288,575
Total assets	Total assets	$	7,365,146	$	6,622,776	Total assets	$	7,511,931	$	7,316,411

LIABILITIES	LIABILITIES					LIABILITIES
Deposits:	Deposits:					Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	$	1,684,102	$	1,216,834	Noninterest-bearing demand	$	1,833,116	$	1,636,684
Interest-bearing deposits:	Interest-bearing deposits:					Interest-bearing deposits:
Interest-bearing demand	Interest-bearing demand	1,866,415		1,677,200		Interest-bearing demand	2,068,382		2,059,139
Savings	Savings	942,891		814,794		Savings	1,148,823		1,082,848
Time	Time	1,500,048		1,648,498		Time	1,081,020		1,167,357
Total interest-bearing deposits	Total interest-bearing deposits	4,309,354		4,140,492		Total interest-bearing deposits	4,298,225		4,309,344
Total deposits	Total deposits	5,993,456		5,357,326		Total deposits	6,131,341		5,946,028
Short-term borrowings:	Short-term borrowings:					Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase	Federal funds purchased and securities sold under agreements to repurchase	169,483		120,459		Federal funds purchased and securities sold under agreements to repurchase	173,302		143,564
Other short-term borrowings	Other short-term borrowings	7,536		25,434		Other short-term borrowings	7,299		7,077
Total short-term borrowings	Total short-term borrowings	177,019		145,893		Total short-term borrowings	180,601		150,641
Long-term debt and mandatorily redeemable securities	Long-term debt and mandatorily redeemable securities	81,760		71,639		Long-term debt and mandatorily redeemable securities	81,722		81,864
Subordinated notes	Subordinated notes	58,764		58,764		Subordinated notes	58,764		58,764
Accrued expenses and other liabilities	Accrued expenses and other liabilities	152,494		140,518		Accrued expenses and other liabilities	123,744		148,444
Total liabilities	Total liabilities	6,463,493		5,774,140		Total liabilities	6,576,172		6,385,741

SHAREHOLDERS’ EQUITY	SHAREHOLDERS’ EQUITY					SHAREHOLDERS’ EQUITY
Preferred stock; 0 par value	Preferred stock; 0 par value					Preferred stock; 0 par value
Authorized 10,000,000 shares; NaN issued or outstanding	Authorized 10,000,000 shares; NaN issued or outstanding	—		—		Authorized 10,000,000 shares; NaN issued or outstanding	0		0
Common stock; 0 par value	Common stock; 0 par value					Common stock; 0 par value
Authorized 40,000,000 shares; issued 28,205,674 at June 30, 2020 and December 31, 2019		436,538		436,538
Authorized 40,000,000 shares; issued 28,205,674 at March 31, 2021 and December 31, 2020						Authorized 40,000,000 shares; issued 28,205,674 at March 31, 2021 and December 31, 2020	436,538		436,538
Retained earnings	Retained earnings	484,491		463,269		Retained earnings	535,737		514,176
Cost of common stock in treasury (2,655,319 shares at June 30, 2020 and 2,696,200 shares at December 31, 2019)		(75,922)		(76,702)
Cost of common stock in treasury (2,936,987 shares at March 31, 2021 and 2,816,557 shares at December 31, 2020)						Cost of common stock in treasury (2,936,987 shares at March 31, 2021 and 2,816,557 shares at December 31, 2020)	(88,223)		(82,240)
Accumulated other comprehensive income	Accumulated other comprehensive income	19,888		5,172		Accumulated other comprehensive income	7,243		18,371
Total shareholders’ equity	Total shareholders’ equity	864,995		828,277		Total shareholders’ equity	891,295		886,845
Noncontrolling interests	Noncontrolling interests	$	36,658	$	20,359	Noncontrolling interests	44,464		43,825
Total equity	Total equity	$	901,653	$	848,636	Total equity	935,759		930,670
Total liabilities and equity	Total liabilities and equity	$	7,365,146	$	6,622,776	Total liabilities and equity	$	7,511,931	$	7,316,411

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

Table of Contents

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

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


		Three Months Ended June 30,						Six Months Ended June 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Interest income:	Interest income:									Interest income:
Loans and leases	Loans and leases	$	58,815	$	65,599	$	120,341	$	128,282	Loans and leases	$	57,864	$	61,526
Investment securities, taxable	Investment securities, taxable	4,487		5,186		10,037		10,701		Investment securities, taxable	3,988		5,550
Investment securities, tax-exempt	Investment securities, tax-exempt	232		353		496		738		Investment securities, tax-exempt	174		264
Other	Other	316		499		662		937		Other	266		346
Total interest income	Total interest income	63,850		71,637		131,536		140,658		Total interest income	62,292		67,686
Interest expense:	Interest expense:									Interest expense:
Deposits	Deposits	8,265		12,978		19,116		24,448		Deposits	3,526		10,851
Short-term borrowings	Short-term borrowings	90		540		344		1,471		Short-term borrowings	36		254
Subordinated notes	Subordinated notes	835		928		1,719		1,856		Subordinated notes	818		884
Long-term debt and mandatorily redeemable securities	Long-term debt and mandatorily redeemable securities	659		764		1,512		1,508		Long-term debt and mandatorily redeemable securities	500		853
Total interest expense	Total interest expense	9,849		15,210		22,691		29,283		Total interest expense	4,880		12,842
Net interest income	Net interest income	54,001		56,427		108,845		111,375		Net interest income	57,412		54,844
Provision for loan and lease losses		10,375		4,247		21,728		9,165
Net interest income after provision for loan and lease losses		43,626		52,180		87,117		102,210
Provision for credit losses*										Provision for credit losses*	2,398		11,353
Net interest income after provision for credit losses										Net interest income after provision for credit losses	55,014		43,491
Noninterest income:	Noninterest income:									Noninterest income:
Trust and wealth advisory	Trust and wealth advisory	5,589		5,583		10,437		10,441		Trust and wealth advisory	5,481		4,848
Service charges on deposit accounts	Service charges on deposit accounts	1,910		2,785		4,515		5,283		Service charges on deposit accounts	2,447		2,605
Debit card	Debit card	3,601		3,669		6,974		6,889		Debit card	4,182		3,373
Mortgage banking	Mortgage banking	3,315		999		5,651		1,935		Mortgage banking	3,901		2,336
Insurance commissions	Insurance commissions	1,695		1,518		3,576		3,692		Insurance commissions	2,152		1,881
Equipment rental	Equipment rental	5,990		7,809		12,620		15,791		Equipment rental	4,629		6,630
(Losses) gains on investment securities available-for-sale		(1)		—		279		—
Gains on investment securities available-for-sale										Gains on investment securities available-for-sale	0		280
Other	Other	3,142		3,301		5,811		5,757		Other	3,077		2,669
Total noninterest income	Total noninterest income	25,241		25,664		49,863		49,788		Total noninterest income	25,869		24,622
Noninterest expense:	Noninterest expense:									Noninterest expense:
Salaries and employee benefits	Salaries and employee benefits	23,999		23,787		48,400		47,282		Salaries and employee benefits	25,196		24,401
Net occupancy	Net occupancy	2,504		2,481		5,225		5,253		Net occupancy	2,719		2,721
Furniture and equipment	Furniture and equipment	6,258		6,289		12,665		12,313		Furniture and equipment	6,458		6,407
Depreciation – leased equipment	Depreciation – leased equipment	5,142		6,400		10,569		12,924		Depreciation – leased equipment	3,773		5,427
Professional fees	Professional fees	1,258		1,706		2,700		3,304		Professional fees	1,613		1,442
Supplies and communication	Supplies and communication	1,390		1,608		3,024		3,101		Supplies and communication	1,475		1,634
FDIC and other insurance	FDIC and other insurance	599		608		887		1,253		FDIC and other insurance	665		288
Business development and marketing	Business development and marketing	1,121		1,678		2,480		2,627		Business development and marketing	997		1,359
Loan and lease collection and repossession	Loan and lease collection and repossession	838		230		1,601		1,591		Loan and lease collection and repossession	129		763
Other	Other	1,716		2,566		3,809		2,909		Other	1,115		2,093
Total noninterest expense	Total noninterest expense	44,825		47,353		91,360		92,557		Total noninterest expense	44,140		46,535
Income before income taxes	Income before income taxes	24,042		30,491		45,620		59,441		Income before income taxes	36,743		21,578
Income tax expense	Income tax expense	5,516		7,074		10,676		13,828		Income tax expense	8,637		5,160
Net income	Net income	18,526		23,417		34,944		45,613		Net income	28,106		16,418
Net (income) loss attributable to noncontrolling interests	Net (income) loss attributable to noncontrolling interests	(24)		(32)		(29)		(32)		Net (income) loss attributable to noncontrolling interests	(1)		(5)
Net income available to common shareholders	Net income available to common shareholders	$	18,502	$	23,385	$	34,915	$	45,581	Net income available to common shareholders	$	28,105	$	16,413
Per common share:	Per common share:									Per common share:
Basic net income per common share	Basic net income per common share	$	0.72	$	0.91	$	1.36	$	1.76	Basic net income per common share	$	1.10	$	0.64
Diluted net income per common share	Diluted net income per common share	$	0.72	$	0.91	$	1.36	$	1.76	Diluted net income per common share	$	1.10	$	0.64
Cash dividends	Cash dividends	$	0.28	$	0.27	$	0.57	$	0.54	Cash dividends	$	0.29	$	0.29
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	25,540,855		25,615,718		25,532,105		25,687,056		Basic weighted average common shares outstanding	25,320,930		25,523,356
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	25,540,855		25,615,718		25,532,105		25,687,056		Diluted weighted average common shares outstanding	25,320,930		25,523,356

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

*ASU 2016-13 adopted during the fourth quarter of 2020 therefore March 31, 2020 provision amount reflects the incurred loss method.

Table of Contents

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited - Dollars in thousands)


		Three Months Ended June 30,						Six Months Ended June 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Net income	Net income	$	18,526	$	23,417	$	34,944	$	45,613	Net income	$	28,106	$	16,418
Other comprehensive income:	Other comprehensive income:									Other comprehensive income:
Unrealized appreciation of available-for-sale securities		2,946		7,668		19,663		17,241
Reclassification adjustment for realized losses (gains) included in net income		1		—		(279)		—
Unrealized (depreciation) appreciation of available-for-sale securities										Unrealized (depreciation) appreciation of available-for-sale securities	(14,658)		16,717
Reclassification adjustment for realized gains included in net income										Reclassification adjustment for realized gains included in net income	0		(280)
Income tax effect	Income tax effect	(710)		(1,847)		(4,668)		(4,152)		Income tax effect	3,530		(3,958)
Other comprehensive income, net of tax		2,237		5,821		14,716		13,089
Other comprehensive (loss) income, net of tax										Other comprehensive (loss) income, net of tax	(11,128)		12,479
Comprehensive income	Comprehensive income	20,763		29,238		$	49,660	$	58,702	Comprehensive income	$	16,978	$	28,897
Comprehensive (income) loss attributable to noncontrolling interests	Comprehensive (income) loss attributable to noncontrolling interests	(24)		(32)		(29)		(32)		Comprehensive (income) loss attributable to noncontrolling interests	(1)		(5)
Comprehensive income available to common shareholders	Comprehensive income available to common shareholders	$	20,739	$	29,206	$	49,631	$	58,670	Comprehensive income available to common shareholders	$	16,977	$	28,892

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, 2019 $ — $ 436,538 $ 414,428 $ (69,136) $ (3,408) $ 778,422 $ 2,679 $ 781,101
Net income — — 23,385 — — 23,385 32 23,417
Other comprehensive income — — — — 5,821 5,821 — 5,821
Issuance of 8,906 common shares under stock based compensation awards — — 217 177 — 394 — 394
Cost of 141,627 shares of common stock acquired for treasury — — — (6,421) — (6,421) — (6,421)
Common stock dividend ($0.27 per share) — — (6,939) — — (6,939) — (6,939)
Contributions from noncontrolling interests — — — — — — 7,313 7,313
Balance at June 30, 2019 $ — $ 436,538 $ 431,091 $ (75,380) $ 2,413 $ 794,662 $ 10,024 804,686
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 — — — — — — — —
Common stock dividend ($0.28 per share) — — (7,166) — — (7,166) — (7,166)
Contributions from noncontrolling interests — — — — — — 10,301 10,301
Distributions to noncontrolling interests — — — — — — (72) (72)
Balance at June 30, 2020 $ — $ 436,538 $ 484,491 $ (75,922) $ 19,888 $ 864,995 $ 36,658 $ 901,653

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) — — (301) — (301)
Balance at January 1, 2019, adjusted — 436,538 398,679 (62,760) (10,676) 761,781 1,508 763,289
Net income — — 45,581 — — 45,581 32 45,613
Other comprehensive income — — — — 13,089 13,089 — 13,089
Issuance of 47,271 common shares under stock based compensation awards — — 750 1,059 — 1,809 — 1,809
Cost of 295,787 shares of common stock acquired for treasury — — — (13,679) — (13,679) — (13,679)
Common stock dividend ($0.54 per share) — — (13,919) — — (13,919) — (13,919)
Contributions from noncontrolling interests — — — — — — 8,484 8,484
Balance at June 30, 2019 $ — $ 436,538 $ 431,091 $ (75,380) $ 2,413 $ 794,662 $ 10,024 804,686
Balance at January 1, 2020 $ — $ 436,538 $ 463,269 $ (76,702) $ 5,172 $ 828,277 $ 20,359 $ 848,636
Net income — — 34,915 — — 34,915 29 34,944
Other comprehensive income — — — — 14,716 14,716 — 14,716
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 — — — — — — — —
Common stock dividend ($0.57 per share) — — (14,575) — — (14,575) — (14,575)
Contributions from noncontrolling interests — — — — — — 16,441 16,441
Distributions to noncontrolling interests — — — — — — (171) (171)
Balance at June 30, 2020 $ — $ 436,538 $ 484,491 $ (75,922) $ 19,888 $ 864,995 $ 36,658 $ 901,653


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


Net income	—		—		16,413		—		—		16,413		5		16,418
Other comprehensive income	—		—		—		—		12,479		12,479		—		12,479
Issuance of 25,910 common shares under stock based compensation awards	—		—		638		499		—		1,137		—		1,137
Cost of 0 shares of common stock acquired for treasury	—		—		—		0		—		0		—		0
Common stock dividend ($0.29 per share)	—		—		(7,409)		—		—		(7,409)		—		(7,409)
Contributions from noncontrolling interests	—		—		—		—		—		0		6,140		6,140
Distributions to noncontrolling interests	—		—		—		—		—		0		(99)		(99)
Balance at March 31, 2020	$	—	$	436,538	$	472,911	$	(76,203)	$	17,651	$	850,897	$	26,405	877,302

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


Net income	—		—		28,105		—		—		28,105		1		28,106
Other comprehensive loss	—		—		—		—		(11,128)		(11,128)		—		(11,128)
Issuance of 35,027 common shares under stock based compensation awards	—		—		844		638		—		1,482		—		1,482
Cost of 155,457 shares of common stock acquired for treasury	—		—		—		(6,621)		—		(6,621)		—		(6,621)
Common stock dividend ($0.29 per share)	—		—		(7,388)		—		—		(7,388)		—		(7,388)
Contributions from noncontrolling interests	—		—		—		—		—		0		887		887
Distributions to noncontrolling interests	—		—		—		—		—		0		(249)		(249)

Balance at March 31, 2021	$	—	$	436,538	$	535,737	$	(88,223)	$	7,243	$	891,295	$	44,464	$	935,759

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

Table of Contents

1st SOURCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - Dollars in thousands)


		Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019			2021		2020
Operating activities:	Operating activities:					Operating activities:
Net income	Net income	$	34,944	$	45,613	Net income	$	28,106	$	16,418
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		21,728		9,165
Provision for credit losses*						Provision for credit losses*	2,398		11,353
Depreciation of premises and equipment	Depreciation of premises and equipment	2,847		2,957		Depreciation of premises and equipment	1,361		1,435
Depreciation of equipment owned and leased to others	Depreciation of equipment owned and leased to others	10,569		12,924		Depreciation of equipment owned and leased to others	3,773		5,427
Stock-based compensation	Stock-based compensation	1,519		1,341		Stock-based compensation	885		736
Amortization of investment securities premiums and accretion of discounts, net	Amortization of investment securities premiums and accretion of discounts, net	2,356		1,737		Amortization of investment securities premiums and accretion of discounts, net	1,734		717
Amortization of mortgage servicing rights	Amortization of mortgage servicing rights	1,103		527		Amortization of mortgage servicing rights	590		409
Mortgage servicing rights impairments		546		—
Mortgage servicing rights impairment recoveries						Mortgage servicing rights impairment recoveries	(42)		0
Amortization of right of use assets	Amortization of right of use assets	1,410		1,581		Amortization of right of use assets	1,133		704
Deferred income taxes	Deferred income taxes	(7,786)		(1,677)		Deferred income taxes	2,452		(2,941)
Gains on investment securities available-for-sale	Gains on investment securities available-for-sale	(279)		—		Gains on investment securities available-for-sale	0		(280)
Originations of loans held for sale, net of principal collected	Originations of loans held for sale, net of principal collected	(154,212)		(52,505)		Originations of loans held for sale, net of principal collected	(85,661)		(33,104)
Proceeds from the sales of loans held for sale	Proceeds from the sales of loans held for sale	142,680		45,610		Proceeds from the sales of loans held for sale	91,720		41,699
Net gain on sale of loans held for sale	Net gain on sale of loans held for sale	(4,699)		(993)		Net gain on sale of loans held for sale	(2,525)		(1,767)
Net gain on sale of other real estate and repossessions	Net gain on sale of other real estate and repossessions	(9)		(470)		Net gain on sale of other real estate and repossessions	(141)		(23)

Net gain on sale of premises and equipment		—		(1,289)

Change in interest receivable	Change in interest receivable	(1,851)		(2,234)		Change in interest receivable	(142)		(702)
Change in interest payable	Change in interest payable	(4,491)		3,953		Change in interest payable	265		(199)
Change in other assets	Change in other assets	2,055		(8,474)		Change in other assets	(7,843)		(826)
Change in other liabilities	Change in other liabilities	(4,828)		9,938		Change in other liabilities	4,519		(6,237)
Other	Other	755		1,106		Other	(93)		486
Net change in operating activities	Net change in operating activities	44,357		68,810		Net change in operating activities	42,489		33,305

Investing activities:	Investing activities:					Investing activities:
Proceeds from sales of investment securities available-for-sale	Proceeds from sales of investment securities available-for-sale	8,403		—		Proceeds from sales of investment securities available-for-sale	0		5,578
Proceeds from maturities and paydowns of investment securities available-for-sale	Proceeds from maturities and paydowns of investment securities available-for-sale	198,105		59,683		Proceeds from maturities and paydowns of investment securities available-for-sale	119,692		121,353
Purchases of investment securities available-for-sale	Purchases of investment securities available-for-sale	(204,415)		(76,137)		Purchases of investment securities available-for-sale	(229,957)		(127,517)
Net change in partnership investments	Net change in partnership investments	(30,356)		(12,825)		Net change in partnership investments	(1,142)		(12,904)
Net change in other investments		(2,205)		—

Loans sold or participated to others	Loans sold or participated to others	8,004		16,740		Loans sold or participated to others	3,813		2,863
Proceeds from principal payments on direct finance leases	Proceeds from principal payments on direct finance leases	25,238		27,446		Proceeds from principal payments on direct finance leases	7,317		9,682
Proceeds from PPP lender origination fees		18,913		—

Net change in loans and leases	Net change in loans and leases	(662,772)		(332,743)		Net change in loans and leases	(49,255)		(59,609)
Net change in equipment owned under operating leases	Net change in equipment owned under operating leases	14,932		(5,109)		Net change in equipment owned under operating leases	(128)		5,019
Purchases of premises and equipment	Purchases of premises and equipment	(2,126)		(4,526)		Purchases of premises and equipment	(280)		(1,659)
Proceeds from disposal of premises and equipment	Proceeds from disposal of premises and equipment	12		3,427		Proceeds from disposal of premises and equipment	5		12
Proceeds from sales of other real estate and repossessions	Proceeds from sales of other real estate and repossessions	4,547		5,964		Proceeds from sales of other real estate and repossessions	697		764
Net change in investing activities	Net change in investing activities	(623,720)		(318,080)		Net change in investing activities	(149,238)		(56,418)

Financing activities:	Financing activities:					Financing activities:
Net change in demand deposits and savings accounts	Net change in demand deposits and savings accounts	784,580		59,626		Net change in demand deposits and savings accounts	271,650		(57,476)
Net change in time deposits	Net change in time deposits	(148,450)		221,897		Net change in time deposits	(86,337)		(23,939)
Net change in short-term borrowings	Net change in short-term borrowings	31,126		(13,335)		Net change in short-term borrowings	29,960		136,952
Proceeds from issuance of long-term debt	Proceeds from issuance of long-term debt	10,000		—		Proceeds from issuance of long-term debt	0		10,000
Payments on long-term debt	Payments on long-term debt	(2,343)		(2,052)		Payments on long-term debt	(2,035)		(1,917)
Stock issued under stock purchase plans		39		49

Acquisition of treasury stock	Acquisition of treasury stock	—		(13,679)		Acquisition of treasury stock	(6,621)		0
Net change in noncontrolling interests	Net change in noncontrolling interests	16,271		8,484		Net change in noncontrolling interests	639		6,041
Cash dividends paid on common stock	Cash dividends paid on common stock	(14,989)		(14,311)		Cash dividends paid on common stock	(7,600)		(7,614)
Net change in financing activities	Net change in financing activities	676,234		246,679		Net change in financing activities	199,656		62,047

Net change in cash and cash equivalents	Net change in cash and cash equivalents	96,871		(2,591)		Net change in cash and cash equivalents	92,907		38,934
Cash and cash equivalents, beginning of year	Cash and cash equivalents, beginning of year	83,365		99,079		Cash and cash equivalents, beginning of year	243,047		83,365
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	180,236	$	96,488	Cash and cash equivalents, end of period	$	335,954	$	122,299
Supplemental Information:	Supplemental Information:					Supplemental Information:
Non-cash transactions:	Non-cash transactions:					Non-cash transactions:
Loans transferred to other real estate and repossessed assets	Loans transferred to other real estate and repossessed assets	$	2,123	$	9,961	Loans transferred to other real estate and repossessed assets	$	839	$	1,268
Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan	Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan	622		300		Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan	715		622
Right of use assets obtained in exchange for lease obligations	Right of use assets obtained in exchange for lease obligations	31		1,383		Right of use assets obtained in exchange for lease obligations	46		31

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

*ASU 2016-13 adopted during the fourth quarter of 2020 therefore March 31, 2020 provision amount reflects the incurred loss method.

Table of Contents

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.

Table of Contents

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. 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 March 31, 2021 and December 31, 2020, loan and lease modification balances related to the COVID-19 pandemic were $104 million and $129 million, respectively.

Note 2 — Recent Accounting Pronouncements

Reference Rate Reform: In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company is ~~assessing~~continuing to assess ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

~~Partnership Investments and Derivatives:In January 2020, the FASB issued ASU No. 2020-01~~ “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” These amendments, among other things, clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including early adoption in an interim period. An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that includes the adoption date. The Company is assessing ASU 2020-01 and its impact on its accounting and disclosures.

~~Income Taxes:~~In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” These amendments remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is assessing ASU 2019-12 and its impact on its accounting and disclosure.

~~Table of Contents~~

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

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

The FASB issued additional ASUs containing clarifying guidance, transition relief provisions and minor updates to the original ASU. These include ASU 2018-19 (issued November 2018), ASU 2019-04 (issued April 2019), ASU 2019-05 (issued May 2019), ASU 2019-10 (issued November 2019), ASU 2019-11 (issued November 2019), ASU 2020-02 (issued February 2020) and ASU 2020-03 (issued March 2020). ASU 2016-13 and subsequent ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This amendment is required to be adopted using a modified retrospective approach with a cumulative-effect adjustment to beginning retained earnings, as of the beginning of the first reporting period in which the guidance is effective.

As previously disclosed, the Company formed a cross-functional team to work through its implementation plan. The Company’s cross-functional team is substantially complete with the assessment and documentation of processes, internal controls, data and model validation testing, parallel testing, qualitative factors and forecast periods as well as model development. The Company implemented a third-party software solution to assist in the application of the new standard including portfolio segmentation according to shared risk characteristics and modeling methodologies. The Company had finalized the formal review and approval process and the results of its CECL estimate as of year-end but has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, until the date on which the national emergency related to the COVID-19 outbreak is terminated or December 31, 2020, whichever occurs first. Upon adoption of ASU 2016-13, the Company will recognize a one-time cumulative effect adjustment through retained earnings of $2.58 million to increase its allowance for credit losses and $0.78 million to increase the unfunded loan commitment liability as of January 1, 2020. As of June 30, 2020, the Company estimates an additional increase to its allowance for credit losses of between $0 million and $8 million which will be recognized through earnings after 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.

Note 3 — Investment Securities Available-For-Sale

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


(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2020
March 31, 2021										March 31, 2021
U.S. Treasury and Federal agencies securities	U.S. Treasury and Federal agencies securities	$	533,794	$	11,834	$	(9)	$	545,619	U.S. Treasury and Federal agencies securities	$	675,940	$	7,482	$	(5,017)	$	678,405
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	72,169		2,101		(158)		74,112		U.S. States and political subdivisions securities	84,472		1,926		(729)		85,669
Mortgage-backed securities — Federal agencies	Mortgage-backed securities — Federal agencies	380,606		10,796		(124)		391,278		Mortgage-backed securities — Federal agencies	484,888		9,008		(4,406)		489,490
Corporate debt securities	Corporate debt securities	42,332		1,756		—		44,088		Corporate debt securities	35,800		1,276		0		37,076
Foreign government and other securities	Foreign government and other securities	700		—		—		700		Foreign government and other securities	700		0		0		700
Total debt securities available-for-sale	Total debt securities available-for-sale	$	1,029,601	$	26,487	$	(291)	$	1,055,797	Total debt securities available-for-sale	$	1,281,800	$	19,692	$	(10,152)	$	1,291,340

December 31, 2019
December 31, 2020										December 31, 2020
U.S. Treasury and Federal agencies securities	U.S. Treasury and Federal agencies securities	$	524,896	$	2,538	$	(470)	$	526,964	U.S. Treasury and Federal agencies securities	$	610,195	$	9,521	$	(234)	$	619,482
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	83,566		1,048		(109)		84,505		U.S. States and political subdivisions securities	78,812		2,346		(31)		81,127
Mortgage-backed securities — Federal agencies	Mortgage-backed securities — Federal agencies	372,458		3,948		(1,017)		375,389		Mortgage-backed securities — Federal agencies	442,748		11,237		(196)		453,789
Corporate debt securities	Corporate debt securities	52,151		890		(16)		53,025		Corporate debt securities	40,813		1,556		0		42,369
Foreign government and other securities	Foreign government and other securities	700		—		—		700		Foreign government and other securities	700		0		0		700
Total debt securities available-for-sale	Total debt securities available-for-sale	$	1,033,771	$	8,424	$	(1,612)	$	1,040,583	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 March 31, 2021 and December 31, 2020, accrued interest receivable on investment securities available-for-sale was $3.98 million and $3.84 million, respectively.

109

Table of Contents

At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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 ~~June 30, 2020.~~March 31, 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	$	176,637	$	177,803	Due in one year or less	$	96,850	$	97,884
Due after one year through five years	Due after one year through five years	441,222		455,537		Due after one year through five years	586,850		592,948
Due after five years through ten years	Due after five years through ten years	30,556		30,680		Due after five years through ten years	112,742		110,586
Due after ten years	Due after ten years	580		499		Due after ten years	470		432
Mortgage-backed securities	Mortgage-backed securities	380,606		391,278		Mortgage-backed securities	484,888		489,490
Total debt securities available-for-sale	Total debt securities available-for-sale	$	1,029,601	$	1,055,797	Total debt securities available-for-sale	$	1,281,800	$	1,291,340

The following table summarizes gross unrealized losses and fair value by investment category and age. At ~~June 30, 2020,~~March 31, 2021, the Company’s available-for-sale securities portfolio consisted of ~~595~~646 securities, 61152 of which were in an unrealized loss position.


		Less than 12 Months						12 months or Longer							Total							Less than 12 Months				12 months or Longer		Total
(Dollars in thousands)	(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		(Dollars in thousands)		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2020
March 31, 2021														March 31, 2021
U.S. Treasury and Federal agencies securities	U.S. Treasury and Federal agencies securities	$	30,051	$	(9)	$	—	$	—	$	30,051	$	(9)	U.S. Treasury and Federal agencies securities		$	368,296	$	(5,017)	$	0	$	0	$	368,296	$	(5,017)
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	3,099		(158)		—		—		3,099		(158)		U.S. States and political subdivisions securities		25,027		(696)		407		(33)		25,434		(729)
Mortgage-backed securities - Federal agencies	Mortgage-backed securities - Federal agencies	18,921		(85)		7,825		(39)		26,746		(124)		Mortgage-backed securities - Federal agencies		220,921		(4,398)		752		(8)		221,673		(4,406)
Corporate debt securities	Corporate debt securities	—		—		—		—		—		—		Corporate debt securities		0		0		0		0		0		0
Foreign government and other securities	Foreign government and other securities	500		—		—		—		500		—		Foreign government and other securities		0		0		0		0		0		0
Total debt securities available-for-sale	Total debt securities available-for-sale	$	52,571	$	(252)	$	7,825	$	(39)	$	60,396	$	(291)	Total debt securities available-for-sale		$	614,244	$	(10,111)	$	1,159	$	(41)	$	615,403	$	(10,152)

December 31, 2019
December 31, 2020														December 31, 2020
U.S. Treasury and Federal agencies securities	U.S. Treasury and Federal agencies securities	$	87,352	$	(171)	$	69,053	$	(299)	$	156,405	$	(470)	U.S. Treasury and Federal agencies securities		$	136,534	$	(234)	$	0	$	0	$	136,534	$	(234)
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	9,283		(107)		1,042		(2)		10,325		(109)		U.S. States and political subdivisions securities		6,391		(30)		199		(1)		6,590		(31)
Mortgage-backed securities - Federal agencies	Mortgage-backed securities - Federal agencies	81,951		(383)		51,165		(634)		133,116		(1,017)		Mortgage-backed securities - Federal agencies		67,736		(187)		3,274		(9)		71,010		(196)
Corporate debt securities	Corporate debt securities	—		—		8,091		(16)		8,091		(16)		Corporate debt securities		0		0		0		0		0		0
Foreign government and other securities	Foreign government and other securities	—		—		—		—		—		—		Foreign government and other securities		200		0		0		0		200		0
Total debt securities available-for-sale	Total debt securities available-for-sale	$	178,586	$	(661)	$	129,351	$	(951)	$	307,937	$	(1,612)	Total debt securities available-for-sale		$	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 March 31, 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 June 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.

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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 June 30,						Six Months Ended June 30,					Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020
Gross realized gains	Gross realized gains	$	5	$	—	$	285	$	—	Gross realized gains	$	0	$	280
Gross realized losses	Gross realized losses	(6)		—		(6)		—		Gross realized losses	0		0
OTTI losses		—		—		—		—

Net realized gains (losses)	Net realized gains (losses)	$	(1)	$	—	$	279	$	—	Net realized gains (losses)	$	0	$	280

At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, investment securities available-for-sale with carrying values of ~~$381.27~~$354.17 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).

~~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
June 30, 2020
Commercial and agricultural $ 1,650,853 $ 59,859 $ 1,710,712
Auto and light truck 512,482 51,124 563,606
Medium and heavy duty truck 282,038 2,394 284,432
Aircraft 757,575 24,585 782,160
Construction equipment 684,190 54,837 739,027
Commercial real estate 918,796 24,175 942,971
Total $ 4,805,934 $ 216,974 $ 5,022,908
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.

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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
June 30, 2020
Residential real estate and home equity $ 529,773 $ 2,199 $ 531,972
Consumer 136,991 451 137,442
Total $ 666,764 $ 2,650 $ 669,414
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 three months ended March 31, 2021 and the full year of 2020 amounted to $232.44 million and $597.45 million, respectively. As of March 31, 2021, PPP loan balances were $443.84 million which is net of an unearned discount of $13.62 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, pledge of permits and licenses, and guarantee of the sponsor. Financing is provided to qualified borrowers throughout the continental United States with an emphasis on the region east of the Rocky Mountains. Previously, this portfolio segment was included in the commercial and agricultural portfolio segment.

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 busses. 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 are presently stressed due to the continued shut down of various sports and entertainment.

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 ~~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 March 31, 2021.


																	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)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
June 30, 2020
Commercial and agricultural	Commercial and agricultural	$	1,705,959	$	1,722	$	—	$	—	$	1,707,681	$	3,031	$	1,710,712	Commercial and agricultural
Grades 1-6																Grades 1-6	$	255,244	$	384,680	$	88,262	$	103,661	$	50,785	$	35,240	$	268,480	$	0	$	1,186,352
Grades 7-12																Grades 7-12	5,790		840		3,775		4,353		2,848		3,190		31,560		0		52,356
Total commercial and agricultural																Total commercial and agricultural	261,034		385,520		92,037		108,014		53,633		38,430		300,040		0		1,238,708
Solar																Solar
Grades 1-6																Grades 1-6	28,077		116,125		83,874		19,336		36,740		3,999		0		0		288,151
Grades 7-12																Grades 7-12	0		1,188		6,040		745		0		0		0		0		7,973
Total solar																Total solar	28,077		117,313		89,914		20,081		36,740		3,999		0		0		296,124
Auto and light truck	Auto and light truck	530,884		1,806		—		—		532,690		30,916		563,606		Auto and light truck
Grades 1-6																Grades 1-6	92,970		209,596		119,507		44,072		19,813		3,384		0		0		489,342
Grades 7-12																Grades 7-12	0		17,831		24,883		11,062		7,589		1,969		0		0		63,334
Total auto and light truck																Total auto and light truck	92,970		227,427		144,390		55,134		27,402		5,353		0		0		552,676
Medium and heavy duty truck	Medium and heavy duty truck	283,363		—		—		—		283,363		1,069		284,432		Medium and heavy duty truck
Grades 1-6																Grades 1-6	16,870		86,222		81,785		40,273		26,270		15,702		0		0		267,122
Grades 7-12																Grades 7-12	0		0		898		0		0		616		0		0		1,514
Total medium and heavy duty truck																Total medium and heavy duty truck	16,870		86,222		82,683		40,273		26,270		16,318		0		0		268,636
Aircraft	Aircraft	754,386		12,701		13,102		—		780,189		1,971		782,160		Aircraft
Grades 1-6																Grades 1-6	91,745		383,028		143,854		80,623		85,767		63,229		7,640		0		855,886
Grades 7-12																Grades 7-12	0		10,717		2,502		470		583		3,612		0		0		17,884
Total aircraft																Total aircraft	91,745		393,745		146,356		81,093		86,350		66,841		7,640		0		873,770
Construction equipment	Construction equipment	715,389		1,376		2		—		716,767		22,260		739,027		Construction equipment
Grades 1-6																Grades 1-6	59,070		295,555		167,247		85,951		32,604		14,310		18,105		41		672,883
Grades 7-12																Grades 7-12	572		11,847		8,038		7,379		44		159		1,705		3,117		32,861
Total construction equipment																Total construction equipment	59,642		307,402		175,285		93,330		32,648		14,469		19,810		3,158		705,744
Commercial real estate	Commercial real estate	939,186		2,318		304		—		941,808		1,163		942,971		Commercial real estate
Grades 1-6																Grades 1-6	37,606		192,699		195,889		169,354		170,139		175,081		503		0		941,271
Grades 7-12																Grades 7-12	3,525		7,895		7,526		4,504		6,679		3,983		0		0		34,112
Total commercial real estate																Total commercial real estate	41,131		200,594		203,415		173,858		176,818		179,064		503		0		975,383
Residential real estate and home equity	Residential real estate and home equity	529,272		377		124		234		530,007		1,965		531,972		Residential real estate and home equity
Performing																Performing	19,235		130,509		56,110		16,840		17,801		112,867		126,248		4,837		484,447
Nonperforming																Nonperforming	0		0		0		21		0		1,341		247		100		1,709
Total residential real estate and home equity																Total residential real estate and home equity	19,235		130,509		56,110		16,861		17,801		114,208		126,495		4,937		486,156
Consumer	Consumer	136,733		212		46		23		137,014		428		137,442		Consumer
Total		$	5,595,172	$	20,512	$	13,578	$	257	$	5,629,519	$	62,803	$	5,692,322

December 31, 2019
Commercial and agricultural		$	1,131,704	$	118	$	—	$	—	$	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		—		—		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		—		—		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	15,816		38,546		29,303		15,557		5,605		1,987		18,761		0		125,575
Nonperforming																Nonperforming	0		0		39		76		32		8		158		0		313
Total consumer																Total consumer	$	15,816	$	38,546	$	29,342	$	15,633	$	5,637	$	1,995	$	18,919	$	0	$	125,888

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The following table shows ~~impaired~~the amortized cost of loans and leases, segregated by ~~class,~~portfolio segment, credit quality rating and ~~the corresponding reserve for impaired loan and lease losses.~~year of origination as of December 31, 2020.


									Term Loans and Leases by Origination Year
(Dollars in thousands)	(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Reserve		(Dollars in thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
June 30, 2020
With no related reserve recorded:
Commercial and agricultural	Commercial and agricultural	$	182	$	182	$	—	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	16,629		16,629		—		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	955		955		—		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	1,971		1,971		—		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	476		476		—		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	1,016		1,016		—		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	—		—		—		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	—		—		—		Consumer
Total with no related reserve recorded		21,229		21,229		—
With a reserve recorded:
Commercial and agricultural		10,339		10,339		5,622
Auto and light truck		14,032		14,029		2,559
Medium and heavy duty truck		114		114		34
Aircraft		—		—		—
Construction equipment		13,756		13,756		8,243
Commercial real estate		—		—		—
Residential real estate and home equity		333		335		113
Consumer		—		—		—
Total with a reserve recorded		38,574		38,573		16,571
Total impaired loans		$	59,803	$	59,802	$	16,571

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		—		—		—
Consumer		—		—		—
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		—		—		—
Aircraft		—		—		—
Construction equipment		736		736		75
Commercial real estate		—		—		—
Residential real estate and home equity		337		339		117
Consumer		—		—		—
Total with a reserve recorded		11,717		11,719		3,225
Total impaired loans		$	16,839	$	16,841	$	3,225
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

Table of Contents

The following table shows the amortized cost of loans and leases, segregated by portfolio segment, with delinquency aging and 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
March 31, 2021
Commercial and agricultural	$	1,233,324	$	9	$	149	$	—	$	1,233,482	$	5,226	$	1,238,708
Solar	296,124		0		0		—		296,124		0		296,124
Auto and light truck	514,136		350		195		—		514,681		37,995		552,676
Medium and heavy duty truck	268,009		11		0		—		268,020		616		268,636
Aircraft	869,618		0		3,384		—		873,002		768		873,770
Construction equipment	693,952		1,085		0		—		695,037		10,707		705,744
Commercial real estate	974,137		0		0		—		974,137		1,246		975,383
Residential real estate and home equity	483,718		672		57		59		484,506		1,650		486,156
Consumer	125,014		292		269		8		125,583		305		125,888
Total	$	5,458,032	$	2,419	$	4,054	$	67	$	5,464,572	$	58,513	$	5,523,085

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 leases at March 31, 2021 and December 31, 2020 was $16.39 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 months ended March 31, 2020.


		Three Months Ended June 30,														Six Months Ended June 30,
		2020						2019						2020					2019					Three Months Ended March 31, 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
Commercial and agricultural	Commercial and agricultural	$	5,381	$	35	$	4,080	$	13	$	6,594	$	138	$	3,450	$	13	Commercial and agricultural		$	7,807	$	102
Solar																		Solar		0		0
Auto and light truck	Auto and light truck	10,783		—		2,791		—		5,763		—		3,898		—		Auto and light truck		743		0
Medium and heavy duty truck	Medium and heavy duty truck	1,023		—		562		—		1,024		—		308		—		Medium and heavy duty truck		1,025		0
Aircraft	Aircraft	2,307		—		1,589		—		2,044		—		3,517		—		Aircraft		1,781		0
Construction equipment	Construction equipment	14,302		—		1,417		—		11,040		4		1,673		—		Construction equipment		7,778		4
Commercial real estate	Commercial real estate	1,028		—		1,834		—		1,200		—		1,846		—		Commercial real estate		1,372		0
Residential real estate and home equity	Residential real estate and home equity	334		4		341		5		335		7		342		10		Residential real estate and home equity		336		4
Consumer	Consumer	—		—		—		—		—		—		—		—		Consumer		0		0
Total	Total	$	35,158	$	39	$	12,614	$	18	$	28,000	$	149	$	15,034	$	23	Total		$	20,842	$	110

There were ~~2 nonperforming~~0 loan and lease modifications classified as a troubled debt ~~restructuring~~restructurings (TDR) during the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~1 nonperforming TDR during the three and six months ended June 30, 2019. The TDRs during the second quarter of 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 six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ 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 ~~June 30, 2020~~March 31, 2021 and ~~2019, respectively. There was~~ 1 TDR which had a payment default within the twelve months following modification during the ~~six~~three months ended ~~June 30, 2020 and 2019.~~March 31, 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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.


(Dollars in thousands)	(Dollars in thousands)	June 30, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Performing TDRs	Performing TDRs	$	334	$	10,238	Performing TDRs	$	327	$	330
Nonperforming TDRs	Nonperforming TDRs	14,782		486		Nonperforming TDRs	9,359		11,156
Total TDRs	Total TDRs	$	15,116	$	10,724	Total TDRs	$	9,686	$	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 March 31, 2020 provision for credit losses and other allowance for loan and lease loss methodology has been consistently applied for several years, with enhancements instituted periodically. Reserve ratios are reviewed quarterly and revised periodically to reflect recent loss history and to incorporate current risks and trends which may not be recognized in historical data. As the historical charge-off analysis is updated, the Company reviews the look-back periods for each business loan portfolio. Furthermore, a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency is performed in order to review portfolio trends and other factors, including specific industry risks and economic conditions, which may have an impact on the reserves and reserve ratios applied to various portfolios. The Company adjusts the calculated historical based ratio as a result of the analysis of environmental factors, principally economic risk and concentration risk. Key economic factors affecting the portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation and global economic and political issues. Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in the business banking and commercial real estate portfolios and by collateral concentration in the specialty finance portfolios and exposure to foreign markets by geographic risk.

~~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 for loan and lease losses, segregated by class,~~disclosures for the three months ended ~~June 30,~~March 31, 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
June 30, 2020
Balance, beginning of period $ 23,179 $ 15,471 $ 4,356 $ 30,069 $ 22,693 $ 19,588 $ 3,908 $ 1,534 $ 120,798
Charge-offs 42 — — 254 129 — — 187 612
Recoveries 136 58 — 55 379 13 3 78 722
Net charge-offs (recoveries) (94) (58) — 199 (250) (13) (3) 109 (110)
Provision (recovery of provision) 5,734 1,842 293 1,231 929 335 (90) 101 10,375
Balance, end of period $ 29,007 $ 17,371 $ 4,649 $ 31,101 $ 23,872 $ 19,936 $ 3,821 $ 1,526 $ 131,283
June 30, 2019
Balance, beginning of period $ 18,307 $ 14,259 $ 4,409 $ 33,440 $ 10,883 $ 15,834 $ 3,386 $ 1,334 $ 101,852
Charge-offs 9 57 1,132 1 1 — — 313 1,513
Recoveries 28 20 — 117 15 51 3 91 325
Net charge-offs (recoveries) (19) 37 1,132 (116) (14) (51) (3) 222 1,188
Provision (recovery of provision) 726 2,119 1,394 (1,638) 1,387 (128) 129 258 4,247
Balance, end of period $ 19,052 $ 16,341 $ 4,671 $ 31,918 $ 12,284 $ 15,757 $ 3,518 $ 1,370 $ 104,911

were calculated under the incurred loss method.

The ~~following table shows~~determination of the ~~changes in~~allowance requires significant judgment to estimate credit losses measured on a collective pool basis when similar risk characteristics exist, and for loans evaluated individually. In determining the ~~reserve~~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 external sources relating to the historical 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 ~~segregated by class, for~~related to the ~~six months ended June 30, 2020~~Company’s financial assets measured at amortized cost. To ensure that the allowance is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and ~~2019.~~an appropriate provision is made to adjust the allowance.

(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
June 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 571 34 — 840 1,561 1 13 430 3,450
Recoveries 302 140 — 503 590 28 30 158 1,751
Net charge-offs (recoveries) 269 (106) — 337 971 (27) (17) 272 1,699
Provision (recovery of provision) 5,605 2,865 37 380 10,723 1,559 195 364 21,728
Balance, end of period $ 29,007 $ 17,371 $ 4,649 $ 31,101 $ 23,872 $ 19,936 $ 3,821 $ 1,526 $ 131,283
June 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 88 466 1,132 3,001 196 — 21 563 5,467
Recoveries 62 29 — 302 119 60 6 166 744
Net charge-offs (recoveries) 26 437 1,132 2,699 77 (60) 15 397 4,723
Provision (recovery of provision) 2,015 2,089 1,500 1,570 1,439 (8) 108 452 9,165
Balance, end of period $ 19,052 $ 16,341 $ 4,671 $ 31,918 $ 12,284 $ 15,757 $ 3,518 $ 1,370 $ 104,911
The Company 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 probability of default (“PD”)/loss given default (“LGD”) methodology (PD/LGD).

Table of Contents

The following table shows the ~~reserve~~changes in the allowance for loan and lease losses, ~~and recorded investment in loans and leases,~~ segregated by ~~class, separated between~~portfolio segment, for the three months ended March 31, 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
March 31, 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	1		0		4,286		0		0		8		0		5		152		4,452
Recoveries	377		0		49		0		119		254		15		1		135		950
Net charge-offs (recoveries)	(376)		0		4,237		0		(119)		(246)		(15)		4		17		3,502
Provision (recovery of provision)	(1,605)		209		4,654		(129)		1,047		(3,103)		1,561		(207)		(29)		2,398
Balance, end of period	$	15,451	$	5,758	$	29,343	$	6,271	$	35,219	$	16,309	$	24,334	$	5,163	$	1,702	$	139,550

March 31, 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	529		0		34		0		586		1,432		1		13		243		2,838
Recoveries	166		0		82		0		448		211		15		27		80		1,029
Net charge-offs (recoveries)	363		0		(48)		0		138		1,221		(14)		(14)		163		1,809
Provision (recovery of provision)*	(280)		151		1,023		(256)		(851)		9,794		1,224		285		263		11,353
Balance, end of period*	$	20,283	$	2,896	$	15,471	$	4,356	$	30,069	$	22,693	$	19,588	$	3,908	$	1,534	$	120,798

*ASU 2016-13 adopted during the fourth quarter of 2020 therefore first quarter 2020 amounts reflect the incurred loss method.

The allowance for loan and lease losses increased during first quarter 2021 for the 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 auto and light truck portfolio were driven by loan growth, as were increases in other portfolios. Likewise, decreases in the allowance in other portfolio segments were due to decreases in loan balances. The decrease in the allowance for the construction equipment was also driven by a reduction of impairments for loans evaluated individually. The impact of adopting ASC 326 is included in the beginning balance (December 31, 2020) of each loan segment.

Commercial and agricultural – loan balances increased during the period due to a $92.28 million net increase in PPP loans. Allowances were released as a result of paydowns exceeding loan originations on our core business products and minimal allowances were established for PPP loans, which have negligible risk.

Solar – allowance increased slightly to accommodate the limited loan growth in this portfolio segment.

Auto and light truck – allowance increased as a result of the significant impact the pandemic had on the bus segment of the portfolio with the increase in the allowance attributable primarily to credit deterioration in the bus segment, as well as a small increase for loan growth in the auto rental and leasing segments.

Medium and heavy duty truck – allowance decrease was principally attributable to a decline in loan balances during the period.

Aircraft – allowance increase was principally impacted by loan growth in the domestic segment.

Construction equipment – allowance decrease was mainly driven by lower impairments on loans evaluated individually and ~~collectively evaluated~~somewhat lower portfolio loan outstanding balances.

Commercial real estate – allowance increase was primarily due to credit deterioration in a hotel sector credit.

Residential real estate and home equity – allowance decreased as a result of lower portfolio outstanding balances.

Consumer – segment saw a decrease in the allowance due to somewhat lower outstanding loan balances.

Economic Outlook

As of March 31, 2021, the impact of the COVID-19 pandemic continues to adversely affect the loan and lease portfolios. 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 will benefit from a second round of paycheck protection program funds or targeted funds for ~~impairment~~struggling industry sectors such as transportation. The Company’s assumption was that the economic slowdown will have an adverse impact on the loan and lease portfolio over the next two years. GDP is expected to grow throughout 2021 but is not expected to return to pre-pandemic levels until 2022. Likewise, unemployment is not likely to get back to pre-shutdown levels until 2022.

As a result of ~~June 30,~~the unprecedented economic uncertainty caused by the COVID-19 pandemic, the Company’s future loss estimates may vary considerably from the March 31, 2021 assumptions.

Table of Contents

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 changes in the liability for credit losses on unfunded loan commitments.


	Three Months Ended March 31,
(Dollars in thousands)		2021		2020
Balance, beginning of period*		$	4,499	$	3,172


Provision (recovery of provision)*		94		94
Balance, end of period*		$	4,593	$	3,266

*ASU 2016-13 adopted during the fourth quarter of 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
June 30, 2020
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment $ 5,622 $ 2,559 $ 34 $ — $ 8,243 $ — $ 113 $ — $ 16,571
Ending balance, collectively evaluated for impairment 23,385 �� 14,812 4,615 31,101 15,629 19,936 3,708 1,526 114,712
Total reserve for loan and lease losses $ 29,007 $ 17,371 $ 4,649 $ 31,101 $ 23,872 $ 19,936 $ 3,821 $ 1,526 $ 131,283
Recorded investment in loans
Ending balance, individually evaluated for impairment $ 10,521 $ 30,661 $ 1,069 $ 1,971 $ 14,232 $ 1,016 $ 333 $ — $ 59,803
Ending balance, collectively evaluated for impairment 1,700,191 532,945 283,363 780,189 724,795 941,955 531,639 137,442 5,632,519
Total recorded investment in loans $ 1,710,712 $ 563,606 $ 284,432 $ 782,160 $ 739,027 $ 942,971 $ 531,972 $ 137,442 $ 5,692,322
December 31, 2019
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment $ 3,003 $ 30 $ — $ — $ 75 $ — $ 117 $ — $ 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 $ — $ 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 first 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 June 30,						Six Months Ended June 30,					Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020
Direct finance leases:	Direct finance leases:									Direct finance leases:
Interest income on lease receivable	Interest income on lease receivable	$	2,097	$	3,241	$	4,430	$	6,419	Interest income on lease receivable	$	1,590	$	2,333

Operating leases:	Operating leases:									Operating leases:
Income related to lease payments	Income related to lease payments	$	5,990	$	7,809	$	12,620	$	15,791	Income related to lease payments	$	4,629	$	6,630
Depreciation expense	Depreciation expense	5,142		6,400		10,569		12,924		Depreciation expense	3,773		5,427

Income related to reimbursements from lessees for personal property tax on operating leased equipment for the three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ was ~~$0.17~~$0.24 million and ~~$0.11 million, respectively and for the six months ended June 30, 2020 and 2019 was $0.42 million and $0.35~~$0.25 million, respectively. Expense related to personal property tax payments on operating leased equipment for the three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ was ~~$0.17~~$0.24 million and ~~$0.11 million, respectively and for the six months ended June 30, 2020 and 2019 was $0.42 million and $0.35~~$0.25 million, respectively.

~~Table of Contents~~

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 ~~$766.15~~$866.57 million and ~~$740.91~~$838.45 million at ~~June 30, 2020~~March 31, 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.

Table of Contents

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


		Three Months Ended June 30,						Six Months Ended June 30,					Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020
Mortgage servicing rights:	Mortgage servicing rights:									Mortgage servicing rights:
Balance at beginning of period	Balance at beginning of period	$	4,153	$	4,247	$	4,200	$	4,283	Balance at beginning of period	$	4,616	$	4,200
Additions	Additions	835		188		1,197		385		Additions	761		362
Amortization	Amortization	(694)		(294)		(1,103)		(527)		Amortization	(590)		(409)
Sales	Sales	—		—		—		—		Sales	0		0
Carrying value before valuation allowance at end of period	Carrying value before valuation allowance at end of period	4,294		4,141		4,294		4,141		Carrying value before valuation allowance at end of period	4,787		4,153
Valuation allowance:	Valuation allowance:									Valuation allowance:
Balance at beginning of period	Balance at beginning of period	—		—		—		—		Balance at beginning of period	(812)		0
Impairment charges		(546)		—		(546)		—
Impairment recoveries										Impairment recoveries	42		0
Balance at end of period	Balance at end of period	$	(546)	$	—	$	(546)	$	—	Balance at end of period	$	(770)	$	0
Net carrying value of mortgage servicing rights at end of period	Net carrying value of mortgage servicing rights at end of period	$	3,748	$	4,141	$	3,748	$	4,141	Net carrying value of mortgage servicing rights at end of period	$	4,017	$	4,153
Fair value of mortgage servicing rights at end of period	Fair value of mortgage servicing rights at end of period	$	4,023	$	5,987	$	4,023	$	5,987	Fair value of mortgage servicing rights at end of period	$	4,365	$	4,538

At ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the fair value of MSRs exceeded the carrying value reported in the Consolidated Statements of Financial Condition by ~~$0.28~~$0.35 million and ~~$1.85~~$0.39 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 million and ~~$0.63~~$0.69 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were $1.50 million and $1.25 million for the six months ended June 30, 2020 and 2019,~~ respectively. Mortgage loan contractual servicing fees are included in Mortgage Banking on the Consolidated Statements of Income.

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

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

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


(Dollars in thousands)	(Dollars in thousands)	June 30, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Amounts of commitments:	Amounts of commitments:					Amounts of commitments:
Loan commitments to extend credit	Loan commitments to extend credit	$	1,072,937	$	1,095,054	Loan commitments to extend credit	$	1,189,671	$	1,140,892
Standby letters of credit	Standby letters of credit	$	25,871	$	27,549	Standby letters of credit	$	26,978	$	24,884
Commercial and similar letters of credit	Commercial and similar letters of credit	$	4,005	$	2,332	Commercial and similar letters of credit	$	8,491	$	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.

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Note 9 — Derivative Financial Instruments

Commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments. See Note 8 for further information.

The Company has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Statements of Financial Condition and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s results of operations.

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

Asset derivatives Liability derivatives
(Dollars in thousands) Notional or contractual amount Statement of Financial Condition classification Fair value Statement of Financial Condition classification Fair value
June 30, 2020
Interest rate swap contracts $ 1,154,479 Other assets $ 55,782 Other liabilities $ 56,793
Loan commitments 36,271 Mortgages held for sale 1,071 N/A —
Forward contracts - mortgage loan 35,725 N/A — Mortgages held for sale 101
Total $ 1,226,475 $ 56,853 $ 56,894
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 —
Forward contracts - mortgage loan 23,632 N/A — 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
March 31, 2021
Interest rate swap contracts	$	1,158,793	Other assets	$	31,311	Other liabilities	$	32,005
Loan commitments	22,010		Mortgages held for sale	789		N/A	0
Forward contracts - mortgage loan	23,000		Mortgages held for sale	287		N/A	0
Total	$	1,203,803		$	32,387		$	32,005

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 June 30,						Six Months Ended June 30,						Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	Statement of Income classification	2020		2019		2020		2019		(Dollars in thousands)	Statement of Income classification	2021		2020
Interest rate swap contracts	Interest rate swap contracts	Other expense	$	(114)	$	(192)	$	(633)	$	(249)	Interest rate swap contracts	Other expense	$	333	$	(519)
Interest rate swap contracts	Interest rate swap contracts	Other income	446		505		537		784		Interest rate swap contracts	Other income	86		91
Loan commitments	Loan commitments	Mortgage banking	(310)		15		886		92		Loan commitments	Mortgage banking	(698)		1,196
Forward contracts - mortgage loan	Forward contracts - mortgage loan	Mortgage banking	257		(49)		(63)		(39)		Forward contracts - mortgage loan	Mortgage banking	577		(320)
Total	Total		$	279	$	279	$	727	$	588	Total		$	298	$	448

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

Gross Amounts Not Offset in the Statement of Financial Condition
(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
June 30, 2020
Interest rate swaps $ 60,579 $ 4,797 $ 55,782 $ — $ — $ 55,782
December 31, 2019
Interest rate swaps $ 22,279 $ 304 $ 21,975 $ — $ — $ 21,975

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							Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
March 31, 2021
Interest rate swaps	$	35,034	$	3,723	$	31,311	$	0	$	0	$	31,311

December 31, 2020
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															Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount		(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount
June 30, 2020
March 31, 2021														March 31, 2021
Interest rate swaps	Interest rate swaps	$	61,590	$	4,797	$	56,793	$	56,352	$	—	$	441	Interest rate swaps	$	35,728	$	3,723	$	32,005	$	32,090	$	0	$	(85)
Repurchase agreements	Repurchase agreements	169,483		—		169,483		169,483		—		—		Repurchase agreements	173,302		—		173,302		173,302		—		—
Total	Total	$	231,073	$	4,797	$	226,276	$	225,835	$	—	$	441	Total	$	209,030	$	3,723	$	205,307	$	205,392	$	0	$	(85)

December 31, 2019
December 31, 2020														December 31, 2020
Interest rate swaps	Interest rate swaps	$	22,656	$	304	$	22,352	$	23,482	$	—	$	(1,130)	Interest rate swaps	$	53,899	$	6,218	$	47,681	$	46,978	$	0	$	703
Repurchase agreements	Repurchase agreements	120,459		—		120,459		120,459		—		—		Repurchase agreements	143,564		—		143,564		143,564		—		—
Total	Total	$	143,115	$	304	$	142,811	$	143,941	$	—	$	(1,130)	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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, repurchase agreements had a remaining contractual maturity of ~~$167.34~~$172.30 million and ~~$119.45~~$141.42 million in overnight and ~~$2.14~~$1.00 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~~$0.50 million and ~~$0.35~~$0.43 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively and $0.86 million and $0.70 million for the six months ended June 30, 2020 and 2019,~~ respectively. The Company also recognized ~~$5.60~~$1.92 million and ~~$3.95~~$2.24 million of investment tax credits for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively and $7.84 million and $5.55 million for the six months ended June 30, 2020 and 2019,~~ respectively.

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The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. As a limited partner in these operating partnerships, we are allocated credits and deductions associated with the underlying properties. The Company has determined that it is not the primary beneficiary of these investments because the general partners have the power to direct activities that most significantly influence the economic performance of their respective partnerships.

The Company’s investments in these unconsolidated VIEs are carried in Other Assets on the Consolidated Statements of Financial Condition. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are generally carried in Other Liabilities on the Consolidated Statements of Financial Condition. The Company’s maximum exposure to loss from these unconsolidated VIEs include the investment recorded on the Company’s Consolidated Statements of Financial Condition, net of unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business, housing projects and renewable energy projects completely fail and do not meet certain taxing authority compliance requirements resulting in recapture of the related tax credits.

The following table provides a summary of investments in affordable housing, community development and renewable energy VIEs that the Company has not consolidated.


(Dollars in thousands)	(Dollars in thousands)	June 30, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Investment carrying amount	Investment carrying amount	$	24,312	$	19,843	Investment carrying amount	$	20,209	$	22,742
Unfunded capital and other commitments	Unfunded capital and other commitments	18,801		17,420		Unfunded capital and other commitments	25,981		26,716
Maximum exposure to loss	Maximum exposure to loss	45,119		37,904		Maximum exposure to loss	50,092		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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, approximately ~~$52.83~~ $53.33 million and ~~$41.24~~$53.61 million of the Company’s assets and ~~$12.20~~$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.

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The following table shows subordinated notes at ~~June 30, 2020.~~March 31, 2021.


(Dollars in thousands)	(Dollars in thousands)	Amount of Subordinated Notes		Interest Rate		Maturity Date	(Dollars in thousands)	Amount of Subordinated Notes		Interest Rate		Maturity Date
June 2007 issuance (1)	June 2007 issuance (1)	$	41,238	7.22	%	6/15/2037	June 2007 issuance (1)	$	41,238	7.22	%	6/15/2037
August 2007 issuance (2)	August 2007 issuance (2)	17,526		1.79	%	9/15/2037	August 2007 issuance (2)	17,526		1.66	%	9/15/2037
Total	Total	$	58,764				Total	$	58,764

(1) Fixed rate through life of debt.

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

Note 11 — Earnings Per Share

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

Stock options, where the exercise price was greater than the average market price of the common shares, were excluded from the computation of diluted earnings per common share because the result would have been antidilutive. There were 0 stock options outstanding as of ~~June 30, 2020~~March 31, 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 June 30,						Six Months Ended June 30,					Three Months Ended March 31,
(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
Distributed earnings allocated to common stock	Distributed earnings allocated to common stock	$	7,149	$	6,930	$	14,548	$	13,896	Distributed earnings allocated to common stock	$	7,364	$	7,399
Undistributed earnings allocated to common stock	Undistributed earnings allocated to common stock	11,245		16,323		20,186		31,425		Undistributed earnings allocated to common stock	20,531		8,941
Net earnings allocated to common stock	Net earnings allocated to common stock	18,394		23,253		34,734		45,321		Net earnings allocated to common stock	27,895		16,340
Net earnings allocated to participating securities	Net earnings allocated to participating securities	108		132		181		260		Net earnings allocated to participating securities	210		73
Net income allocated to common stock and participating securities	Net income allocated to common stock and participating securities	$	18,502	$	23,385	$	34,915	$	45,581	Net income allocated to common stock and participating securities	$	28,105	$	16,413

Weighted average shares outstanding for basic earnings per common share	Weighted average shares outstanding for basic earnings per common share	25,540,855		25,615,718		25,532,105		25,687,056		Weighted average shares outstanding for basic earnings per common share	25,320,930		25,523,356
Dilutive effect of stock compensation	Dilutive effect of stock compensation	—		—		—		—		Dilutive effect of stock compensation	0		0
Weighted average shares outstanding for diluted earnings per common share	Weighted average shares outstanding for diluted earnings per common share	25,540,855		25,615,718		25,532,105		25,687,056		Weighted average shares outstanding for diluted earnings per common share	25,320,930		25,523,356

Basic earnings per common share	Basic earnings per common share	$	0.72	$	0.91	$	1.36	$	1.76	Basic earnings per common share	$	1.10	$	0.64
Diluted earnings per common share	Diluted earnings per common share	$	0.72	$	0.91	$	1.36	$	1.76	Diluted earnings per common share	$	1.10	$	0.64

Note 12 — Stock Based Compensation

As of ~~June 30, 2020,~~March 31, 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 ~~June 30, 2020.~~March 31, 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.

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Total fair value of options vested and expensed was 0 for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020. As of ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ there were 0 outstanding stock options. There were 0 stock options exercised during the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020. All shares issued in connection with stock option exercises are issued from available treasury stock.

As of ~~June 30, 2020,~~March 31, 2021, there was ~~$8.51~~$9.17 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 ~~3.71~~3.60 years.

Note 13 — Accumulated Other Comprehensive Income (Loss)

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


		Three Months Ended June 30,						Six Months Ended June 30,					Affected Line Item in the Statements of Income			Three Months Ended March 31,						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		Affected Line Item in the Statements of Income		2020
Realized (losses) gains included in net income		$	(1)	$	—	$	279	$	—	(Losses) gains on investment securities available-for-sale
Realized gains included in net income											Realized gains included in net income			$	0			$	280		Gains on investment securities available-for-sale
		(1)		—		279		—		Income before income taxes				0		280				Income before income taxes
Tax effect	Tax effect	—		—		(65)		—		Income tax expense	Tax effect			0		(67)				Income tax expense
Net of tax	Net of tax	$	(1)	$	—	$	214	$	—	Net income	Net of tax			$	0	$	213			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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. Interest and penalties are recognized through the income tax provision. For the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Company recognized 0 interest or penalties. There were 0 accrued interest and penalties at ~~June 30, 2020~~March 31, 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.

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

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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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, all mortgages held for sale were carried at fair value.

The following table shows the differences between the fair value carrying amount of mortgages held for sale measured at fair value and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity.


(Dollars in thousands)	(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Excess of fair value carrying amount over (under) unpaid principal			(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Excess of fair value carrying amount over (under) unpaid principal
June 30, 2020
March 31, 2021									March 31, 2021
Mortgages held for sale reported at fair value	Mortgages held for sale reported at fair value	$	36,508	$	34,478	$	2,030	(1)	Mortgages held for sale reported at fair value	$	9,351	$	7,733	$	1,618	(1)

December 31, 2019
December 31, 2020									December 31, 2020
Mortgages held for sale reported at fair value	Mortgages held for sale reported at fair value	$	20,277	$	19,890	$	387	(1)	Mortgages held for sale reported at fair value	$	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.

Table of Contents

Mortgages held for sale and the related loan commitments and forward contracts (hedges) are valued using a market value approach and utilizing an appropriate current market yield and a loan commitment closing rate based on historical analysis.

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

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


(Dollars in thousands)	(Dollars in thousands)	Level 1		Level 2		Level 3		Total		(Dollars in thousands)	Level 1		Level 2		Level 3		Total
June 30, 2020
March 31, 2021										March 31, 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	$	82,605	$	463,014	$	—	$	545,619	U.S. Treasury and Federal agencies securities	$	118,956	$	559,449	$	0	$	678,405
U.S. States and political subdivisions securities	U.S. States and political subdivisions securities	—		70,933		3,179		74,112		U.S. States and political subdivisions securities	0		83,762		1,907		85,669
Mortgage-backed securities — Federal agencies	Mortgage-backed securities — Federal agencies	—		391,278		—		391,278		Mortgage-backed securities — Federal agencies	0		489,490		0		489,490
Corporate debt securities	Corporate debt securities	—		44,088		—		44,088		Corporate debt securities	0		37,076		0		37,076
Foreign government and other securities	Foreign government and other securities	—		700		—		700		Foreign government and other securities	0		700		0		700
Total debt securities available-for-sale	Total debt securities available-for-sale	82,605		970,013		3,179		1,055,797		Total debt securities available-for-sale	118,956		1,170,477		1,907		1,291,340

Mortgages held for sale	Mortgages held for sale	—		36,508		—		36,508		Mortgages held for sale	0		9,351		0		9,351
Accrued income and other assets (interest rate swap agreements)	Accrued income and other assets (interest rate swap agreements)	—		55,782		—		55,782		Accrued income and other assets (interest rate swap agreements)	0		31,311		0		31,311
Total	Total	$	82,605	$	1,062,303	$	3,179	$	1,148,087	Total	$	118,956	$	1,211,139	$	1,907	$	1,332,002

Liabilities:	Liabilities:									Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	Accrued expenses and other liabilities (interest rate swap agreements)	$	—	$	56,793	$	—	$	56,793	Accrued expenses and other liabilities (interest rate swap agreements)	$	0	$	32,005	$	0	$	32,005
Total	Total	$	—	$	56,793	$	—	$	56,793	Total	$	0	$	32,005	$	0	$	32,005

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	$	—	$	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	—		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	—		375,389		—		375,389		Mortgage-backed securities — Federal agencies	0		453,789		0		453,789
Corporate debt securities	Corporate debt securities	—		53,025		—		53,025		Corporate debt securities	0		42,369		0		42,369
Foreign government and other securities	Foreign government and other securities	—		700		—		700		Foreign government and other securities	0		700		0		700
Total debt securities available-for-sale	Total debt securities available-for-sale	80,393		957,898		2,292		1,040,583		Total debt securities available-for-sale	80,285		1,115,030		2,152		1,197,467

Mortgages held for sale	Mortgages held for sale	—		20,277		—		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)	—		21,975		—		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)	$	—	$	22,352	$	—	$	22,352	Accrued expenses and other liabilities (interest rate swap agreements)	$	0	$	47,681	$	0	$	47,681
Total	Total	$	—	$	22,352	$	—	$	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 ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

(Dollars in thousands)

U.S. States and
political
subdivisions
securities

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

~~5,295~~2,152

Total gains or losses (realized/unrealized):

Included in earnings

—0

Included in other comprehensive income

~~(97)~~(80)

Purchases

—0

Issuances

—0

Sales

—0

Settlements

—0

Maturities

~~(2,019)~~(165)

Transfers into Level 3

—0

Transfers out of Level 3

—0

Ending balance ~~June 30, 2020~~March 31, 2021

~~3,179~~1,907

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

~~5,064~~2,292

Total gains or losses (realized/unrealized):

Included in earnings

—0

Included in other comprehensive income

16 (17)

Purchases

—3,100

Issuances

—0

Sales

—0

Settlements

—0

Maturities

~~(19)~~(80)

Transfers into Level 3

—0

Transfers out of Level 3

—0

Ending balance ~~June 30, 2019~~March 31, 2020

~~5,061~~5,295

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 ~~June 30, 2020~~March 31, 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

June 30, 2020

March 31, 2021

Debt securities available-for sale

Direct placement municipal securities

3,179

Discounted cash flows

Credit spread assumption

0.16% - 3.99%

3.10

Direct placement municipal securities

1,907

Discounted cash flows

Credit spread assumption

1.78% - 3.15%

2.34

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 ~~June 30, 2020:~~March 31, 2021: collateral-dependent impaired loans - $0.00 million; mortgage servicing rights - ~~$0.55~~($0.04) million; repossessions - ~~$0.00~~$0.03 million; and other real estate - $0.00 million.

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


(Dollars in thousands)	(Dollars in thousands)	Level 1		Level 2		Level 3		Total		(Dollars in thousands)	Level 1		Level 2		Level 3		Total
June 30, 2020
Impaired loans - collateral based		$	—	$	—	$	22,002	$	22,002
March 31, 2021										March 31, 2021
Collateral-dependent impaired loans										Collateral-dependent impaired loans	$	—	$	—	$	9,171	$	9,171
Accrued income and other assets (mortgage servicing rights)	Accrued income and other assets (mortgage servicing rights)	—		—		3,748		3,748		Accrued income and other assets (mortgage servicing rights)	—		—		4,017		4,017
Accrued income and other assets (repossessions)	Accrued income and other assets (repossessions)	—		—		6,132		6,132		Accrued income and other assets (repossessions)	—		—		2,214		2,214
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)	—		—		369		369
Total	Total	$	—	$	—	$	32,185	$	32,185	Total	$	—	$	—	$	15,771	$	15,771

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
June 30, 2020
Impaired loans		$	22,002	$	22,002	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	10% - 50%	18	%
March 31, 2021											March 31, 2021
Collateral-dependent impaired loans											Collateral-dependent impaired loans	$	9,171	$	9,171	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	10% - 90%	30.0	%

Mortgage servicing rights	Mortgage servicing rights	3,748		4,023		Discounted cash flows	Constant prepayment rate (CPR)	14.4% - 25.1%	19.9	%	Mortgage servicing rights	4,017		4,365		Discounted cash flows	Constant prepayment rate (CPR)	14.6% - 25.3%	21.7	%
							Discount rate	8.6% - 11.5%	8.9	%							Discount rate	8.8% - 11.6%	8.9	%

Repossessions	Repossessions	6,132		6,474		Appraisals, trade publications and auction values	Discount for lack of marketability	3% - 19%	5	%	Repossessions	2,214		2,368		Appraisals, trade publications and auction values	Discount for lack of marketability	0% - 16%	7	%

Other real estate	Other real estate	303		324		Appraisals	Discount for lack of marketability	0% - 6%	6	%	Other real estate	369		374		Appraisals	Discount for lack of marketability	0% - 13%	1	%

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)	(Dollars in thousands)	Carrying or Contract Value		Fair Value		Level 1		Level 2		Level 3		(Dollars in thousands)	Carrying or Contract Value		Fair Value		Level 1		Level 2		Level 3
June 30, 2020
March 31, 2021												March 31, 2021
Assets:	Assets:											Assets:
Cash and due from banks	Cash and due from banks	$	67,591	$	67,591	$	67,591	$	—	$	—	Cash and due from banks	$	69,683	$	69,683	$	69,683	$	0	$	0
Federal funds sold and interest bearing deposits with other banks	Federal funds sold and interest bearing deposits with other banks	112,645		112,645		112,645		—		—		Federal funds sold and interest bearing deposits with other banks	266,271		266,271		266,271		0		0
Investment securities, available-for-sale	Investment securities, available-for-sale	1,055,797		1,055,797		82,605		970,013		3,179		Investment securities, available-for-sale	1,291,340		1,291,340		118,956		1,170,477		1,907
Other investments	Other investments	30,619		30,619		30,619		—		—		Other investments	27,429		27,429		27,429		0		0
Mortgages held for sale	Mortgages held for sale	36,508		36,508		—		36,508		—		Mortgages held for sale	9,351		9,351		0		9,351		0
Loans and leases, net of reserve for loan and lease losses		5,561,039		5,645,890		—		—		5,645,890
Loans and leases, net of allowance for loan and lease losses												Loans and leases, net of allowance for loan and lease losses	5,383,535		5,467,450		0		0		5,467,450
Mortgage servicing rights	Mortgage servicing rights	3,748		4,023		—		—		4,023		Mortgage servicing rights	4,017		4,365		0		0		4,365
Accrued interest receivable	Accrued interest receivable	20,976		20,976		—		20,976		—		Accrued interest receivable	20,384		20,384		0		20,384		0
Interest rate swaps	Interest rate swaps	55,782		55,782		—		55,782		—		Interest rate swaps	31,311		31,311		0		31,311		0
Liabilities:	Liabilities:											Liabilities:
Deposits	Deposits	$	5,993,456	$	6,009,207	$	4,493,408	$	1,515,799	$	—	Deposits	$	6,131,341	$	6,138,346	$	5,050,321	$	1,088,025	$	0
Short-term borrowings	Short-term borrowings	177,019		177,019		169,982		7,037		—		Short-term borrowings	180,601		180,601		174,684		5,917		0
Long-term debt and mandatorily redeemable securities	Long-term debt and mandatorily redeemable securities	81,760		82,954		—		82,954		—		Long-term debt and mandatorily redeemable securities	81,722		80,906		0		80,906		0
Subordinated notes	Subordinated notes	58,764		51,391		—		51,391		—		Subordinated notes	58,764		58,502		0		58,502		0
Accrued interest payable	Accrued interest payable	9,427		9,427		—		9,427		—		Accrued interest payable	4,260		4,260		0		4,260		0
Interest rate swaps	Interest rate swaps	56,793		56,793		—		56,793		—		Interest rate swaps	32,005		32,005		0		32,005		0
Off-balance-sheet instruments *	Off-balance-sheet instruments *	—		288		—		288		—		Off-balance-sheet instruments *	0		366		0		366		0

December 31, 2019
December 31, 2020												December 31, 2020
Assets:	Assets:											Assets:
Cash and due from banks	Cash and due from banks	$	67,215	$	67,215	$	67,215	$	—	$	—	Cash and due from banks	$	74,186	$	74,186	$	74,186	$	0	$	0
Federal funds sold and interest bearing deposits with other banks	Federal funds sold and interest bearing deposits with other banks	16,150		16,150		16,150		—		—		Federal funds sold and interest bearing deposits with other banks	168,861		168,861		168,861		0		0
Investment securities, available-for-sale	Investment securities, available-for-sale	1,040,583		1,040,583		80,393		957,898		2,292		Investment securities, available-for-sale	1,197,467		1,197,467		80,285		1,115,030		2,152
Other investments	Other investments	28,414		28,414		28,414		—		—		Other investments	27,429		27,429		27,429		0		0
Mortgages held for sale	Mortgages held for sale	20,277		20,277		—		20,277		—		Mortgages held for sale	12,885		12,885		0		12,885		0
Loans and leases, net of reserve for loan and lease losses		4,974,273		4,992,684		—		—		4,992,684
Loans and leases, net of allowance for loan and lease losses												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	Mortgage servicing rights	4,200		5,986		—		—		5,986		Mortgage servicing rights	3,804		4,038		0		0		4,038
Accrued interest receivable	Accrued interest receivable	19,125		19,125		—		19,125		—		Accrued interest receivable	20,242		20,242		0		20,242		0
Interest rate swaps	Interest rate swaps	21,975		21,975		—		21,975		—		Interest rate swaps	46,654		46,654		0		46,654		0
Liabilities:	Liabilities:											Liabilities:
Deposits	Deposits	$	5,357,326	$	5,362,633	$	3,708,828	$	1,653,805	$	—	Deposits	$	5,946,028	$	5,955,545	$	4,778,671	$	1,176,874	$	0
Short-term borrowings	Short-term borrowings	145,893		145,893		120,891		25,002		—		Short-term borrowings	150,641		150,641		143,730		6,911		0
Long-term debt and mandatorily redeemable securities	Long-term debt and mandatorily redeemable securities	71,639		71,084		—		71,084		—		Long-term debt and mandatorily redeemable securities	81,864		82,965		0		82,965		0
Subordinated notes	Subordinated notes	58,764		61,469		—		61,469		—		Subordinated notes	58,764		58,560		0		58,560		0
Accrued interest payable	Accrued interest payable	13,918		13,918		—		13,918		—		Accrued interest payable	3,996		3,996		0		3,996		0
Interest rate swaps	Interest rate swaps	22,352		22,352		—		22,352		—		Interest rate swaps	47,681		47,681		0		47,681		0
Off-balance-sheet instruments *	Off-balance-sheet instruments *	—		281		—		281		—		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 ~~June 30, 2020,~~March 31, 2021, as compared to December 31, ~~2019,~~2020, and the results of operations for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 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 ~~June 30, 2020~~March 31, 2021 were ~~$7.37~~$7.51 billion, an increase of ~~$742.37~~$195.52 million or ~~11.21%~~2.67% from December 31, ~~2019.~~2020. Total investment securities, available-for-sale were ~~$1.06~~$1.29 billion, an increase of ~~$15.21~~$93.87 million or ~~1.46%~~7.84% from December 31, ~~2019.~~2020. Federal funds sold and interest bearing deposits with other banks were ~~$112.65~~$266.27 million, an increase of ~~$96.50~~$97.41 million or ~~597.49%~~57.69% from December 31, ~~2019.~~2020.

Total loans and leases were ~~$5.69~~$5.52 billion, an increase of ~~$606.80~~$33.78 million or ~~11.93%~~0.62% from December 31, ~~2019.~~2020. The largest contributor to the increase in loans and leases was PPP loans funded during the ~~second~~first quarter of ~~2020.~~2021. PPP loans are discussed in the “COVID-19 Impact” section below. Our foreign loan and lease balances, all denominated in U.S. dollars were ~~$160.41~~$178.41 million and ~~$184.24~~$180.06 million as of ~~June 30, 2020~~March 31, 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 ~~$44.28~~$68.20 million and ~~$109.36~~$103.85 million as of ~~June 30, 2020,~~March 31, 2021, respectively, compared to ~~$58.29~~$66.98 million and ~~$111.91~~$103.52 million as of December 31, ~~2019,~~2020, respectively. As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 there was not a significant concentration in any other country. Solar loan and lease balances were $248.40 million as of June 30, 2020, an increase of $78.78 million or 46.45% 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 ~~$86.18~~$61.40 million, a decrease of ~~$25.50~~$3.65 million, or ~~22.83%~~5.60% 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 ~~$5.99~~$6.13 billion, an increase of ~~$636.13~~$185.31 million or ~~11.87%~~3.12% from the end of ~~2019.~~2020. The largest contributors to the increase in total deposits was PPP loan fundings into business accounts and ~~government stimulus payments.~~consumer savings levels. Short-term borrowings were ~~$177.02~~$180.60 million, an increase of ~~$31.13~~$29.96 million or ~~21.33%~~19.89% from December 31, ~~2019.~~2020. The largest contributor to the increase in short-term borrowings was an increase of $29.74 million in repurchase agreements at March 31, 2021 compared to December 31, 2020. Long-term debt and mandatorily redeemable securities were ~~$81.76~~$81.72 million, ~~an increase~~a decrease of ~~$10.12~~$0.14 million or ~~14.13%~~0.17% from December 31, ~~2019.~~2020.

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The following table shows accrued income and other assets.


(Dollars in thousands)	(Dollars in thousands)	June 30, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Accrued income and other assets:	Accrued income and other assets:					Accrued income and other assets:
Bank owned life insurance cash surrender value	Bank owned life insurance cash surrender value	$	69,879	$	68,774	Bank owned life insurance cash surrender value	$	70,402	$	70,192
Operating lease right of use assets	Operating lease right of use assets	22,744		24,147		Operating lease right of use assets	23,107		23,825
Accrued interest receivable	Accrued interest receivable	20,976		19,125		Accrued interest receivable	20,384		20,242
Mortgage servicing rights	Mortgage servicing rights	3,748		4,200		Mortgage servicing rights	4,017		3,804
Other real estate	Other real estate	303		522		Other real estate	369		359
Repossessions	Repossessions	6,132		8,623		Repossessions	2,214		1,976
Partnership investments carrying amount	Partnership investments carrying amount	77,147		61,083		Partnership investments carrying amount	73,539		76,349
All other assets	All other assets	78,390		41,516		All other assets	76,665		91,828
Total accrued income and other assets	Total accrued income and other assets	$	279,319	$	227,990	Total accrued income and other assets	$	270,697	$	288,575

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

CORONAVIRUS (COVID-19) IMPACT

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

Operational Impact

~~As part of~~Pursuant to our ~~contingency and~~preexisting disaster recovery ~~plans for~~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 ~~established separate teams within~~divided departments among various locations to help ensure that infection will not spread across entire departments. We are encouraging virtual meetings and conference calls in place of in-person meetings, including our annual shareholder meeting which ~~was~~will be held virtually again this year. Employees with health conditions putting them at higher risk of adverse effects from coronavirus infection ~~are working~~have been given the opportunity to work remotely. Additionally, travel has been restricted. We are promoting social distancing, frequent hand washing, ~~thorough~~ disinfection of all surfaces, and the use of masks or nose and mouth coverings have been mandated in all of our locations. ~~Our~~We are offering paid time off to all of our colleagues to schedule vaccinations. As of mid-April, 50% of our colleagues had received at least their first dose of vaccine. The majority of our banking center lobbies ~~have~~had been closed except for advance appointments only. In April, we fully reopened the majority of our banking centers with safe social distancing and mask guidelines in place for 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.~~provide a more physically distanced alternative. Infection rates in the communities we serve vary by region and we will continue to make prudent decisions for the safety of our colleagues and our clients. 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. 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 ~~modifications approved~~modification balances in deferment as of ~~June 30,~~March 31, 2021 and December 31, 2020.


													COVID-19 Related Loan and Lease Modifications
(Dollars in millions)	(Dollars in millions)	Principal Only Deferrals		Principal and Interest Deferrals		Total COVID-19 Related Modifications		Recorded Investment at June 30, 2020		Modifications as a % of June 30, 2020 Balance		(Dollars in millions)	March 31, 2021		December 31, 2020
Auto and light truck rental	Auto and light truck rental	$	13	$	211	$	224	$	411	55	%	Auto and light truck rental	$	1	$	5
Specialty vehicle⁽¹⁾	Specialty vehicle⁽¹⁾	—		75		75		153		49	%	Specialty vehicle(1)	27		21
Medium and heavy duty truck	Medium and heavy duty truck	7		80		87		284		31	%	Medium and heavy duty truck	—		—
Aircraft	Aircraft	19		74		93		782		12	%	Aircraft	9		13
Construction	Construction	16		123		139		739		19	%	Construction	7		7
Commercial	Commercial	49		161		210		2,654		8	%	Commercial	60		83
Residential real estate and home equity	Residential real estate and home equity	—		4		4		532		1	%	Residential real estate and home equity	—		—
Consumer	Consumer	—		8		8		137		6	%	Consumer	—		—
Total loans		104		736		840		5,692		15	%
PPP loans, net of unearned discount⁽²⁾		—		—		—		573		—	%
Total loans less PPP loans		$	104	$	736	$	840	$	5,119	16	%
(1) Includes motor coaches, shuttle buses, step vans, work trucks and funeral cars.
(2) PPP loan balances are located within the Commercial category above.
Total loans and leases												Total loans and leases	$	104	$	129
(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 March 31, 2021.


(Dollars in millions)	Principal Only Deferrals		Principal and Interest Deferrals		Total Modifications in Deferment		Additional Modifications Expected(1)		Total Modifications		Recorded Investment at March 31, 2021		Total Modifications as a % of March 31, 2021 Balance
Auto and light truck rental	$	1	$	—	$	1	$	—	$	1	$	425	—	%
Specialty vehicle(2)	27		—		27		9		36		128		28	%
Medium and heavy duty truck	—		—		—		—		—		269		—	%
Aircraft	9		—		9		8		17		874		2	%
Construction	7		—		7		—		7		706		1	%
Commercial	15		45		60		12		72		2,509		3	%
Residential real estate and home equity	—		—		—		—		—		486		—	%
Consumer	—		—		—		—		—		126		—	%
Total loans and leases	59		45		104		29		133		5,523		2	%
PPP loans, net of unearned discount(3)	—		—		—		—		—		444		—	%
Total loans and leases less PPP loans	$	59	$	45	$	104	$	29	$	133	$	5,079	3	%
(1) Represents modifications which ended deferment during March 2021 and are in the process of receiving or expected to receive an extension.
(2) Includes buses, step vans and funeral cars.
(3) PPP loan balances are located within the Commercial category above.

As of March 31, 2021, COVID-19 related loan modifications for our bus lending were $36.30 million or 56.03% (includes $8.86 million whose modification period ended during March but we expect to grant further extensions) of our total bus loan balances. COVID-19 related loan modifications for the hotel industry were $67.69 million or 42.61% (includes $11.90 million whose modification period ended during March but we expect to grant further extensions) of our total hotel loan balances. Hotel loans are shown within the Commercial category in the charts above.

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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.~~2020 and disbursed the final PPP loan on August 25, 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. 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 ~~June 30, 2020.~~March 31, 2021.

Number of Loans $ of Loans (000's) Average Loan Size
Phase One 2,024 $ 520,583 $ 257,000
Phase Two 1,326 71,649 54,000
Total 3,350 $ 592,232 $ 177,000


	Number of Loans	$ of Loans (000's)		Average Loan Size
2020 PPP Loans	3,540	$	597,451	$	169,000
2021 PPP Loans	2,573	232,437		90,000
Total	6,113	$	829,888	$	136,000

As of ~~June 30, 2020,~~March 31, 2021, total PPP loans were ~~$573.15~~$443.84 million which is net of an unearned discount of ~~$16.43~~$13.62 million and located within the commercial and agricultural portfolio. At ~~June 30, 2020,~~March 31, 2021, specialty finance customers had ~~$103.43~~$89.99 million of PPP loans and traditional commercial banking customers had ~~$469.72~~$353.85 million of PPP loans.

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 2,573 PPP loans we have originated in 2021, 1,809 loans were for $50,000 or less. As of March 31, 2021, we had helped our clients secure forgiveness for $369.16 million and had submitted loan forgiveness requests to the SBA for over 79% of the total PPP loan amounts we funded during 2020. We were able to secure loans for over 400 minority- and women-owned businesses, which represents approximately 15% of our overall efforts in this latest round of PPP funding. Additionally, we helped fund over 200 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. We intend to utilize the liquidity relief offered by the PPPLF to the extent needed and as such do not expect our participation in the PPP to have a negative impact on our liquidity position, capital resources, financial condition or results of operations. As of ~~June 30, 2020,~~March 31, 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 ~~June 30,~~December 31, 2020 resulting in 2020 impairment charges of ~~$0.55~~$0.81 million due to ~~decreased~~lower mortgage rates leading to faster prepayment speeds. During the first quarter of 2021, we recognized $0.04 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.

~~Table of Contents~~

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 and second 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~~During 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 $46.72 million in the second~~first quarter of ~~2020 and $67.58 million since December 31, 2019 and we anticipate further downgrades during~~2021, except for the ~~latter half~~bus segment of 2020 and into 2021. Likewise, non-performing loans increased by $36.56 million during the second quarter and $52.96 million since year-end. Second quarter 2020 downgrades were concentrated in auto rental and bus segments within theour auto and light truck portfolio, ~~as well as a couple~~we experienced relatively stable to slightly improving credit quality. Special attention loan balances decreased $14.88 million and nonperforming loans decreased by $1.92 million. The impact of ~~industry specific~~COVID-19 has been particularly harsh on the bus segment of our auto and light truck portfolio where we continue to experience higher than normal downgrades, ~~in the construction equipment portfolio.~~movement to nonaccrual status and charge-offs. We are inmaintaining communication with our customers to ~~gain a better~~enhance our understanding of our highest risk exposures and probable defaults. This quarter, we sent questionnaires to all of our bus customers in order to better understand their current situations, their customer bases and the likely long-term impact of the economic downturn on their business models, i.e. their ability to withstand reduced revenues for an extended period of time. As a result of the ~~responses and~~ discussions with ~~our~~ customers, we downgraded an additional ~~eleven~~12 bus accounts to special attention and placed ~~several of these~~an additional 18 accounts on nonaccrual status. We ~~anticipate further defaults~~continue to work with these customers as long as they aspire to stay in ~~our bus lending during~~business and have the ~~third quarter of 2020. Furthermore,~~wherewithal to maintain and insure their assets, as the bus collateral ~~may~~will be difficult to liquidate ~~particularly~~ in this environment. We believe our auto rental customers will continue to struggle; however, vehicle auctions are well established and are an effective means of liquidating collateral and used vehicle values, to date, have remained strong, so our loss exposure, with the exception of possible fraud, is well managed. Our local market customers have been buoyed in the short-term with funds from the PPP program. Thus far, we have not seen many downgrades or defaults in our commercial lending, but we anticipate this ~~will~~may change, particularly as businesses continue to ~~struggle.~~struggle and consumer preferences may 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 ~~low~~moderate, except the bus segment where we recognized net charge-offs of $4.25 million, but we continue to ~~build reserves~~maintain the allowance for loan and lease losses as we anticipate some of the current and future downgrades and defaults will eventually result in losses.

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

CAPITAL

As of ~~June 30, 2020,~~March 31, 2021, total shareholders’ equity was ~~$865.00~~$891.30 million, up ~~$36.72~~$4.45 million, or ~~4.43%~~0.50% from the ~~$828.28~~$886.85 million at December 31, ~~2019.~~2020. In addition to net income of ~~$34.92~~$28.11 million, other significant changes in shareholders’ equity during the first ~~six~~three months of ~~2020~~2021 included ~~$14.58~~$7.39 million of dividends ~~paid.~~paid and $6.62 million in common stock acquired for treasury. The accumulated other comprehensive income component of shareholders’ equity totaled ~~$19.89~~$7.24 million at ~~June 30, 2020,~~March 31, 2021, compared to ~~$5.17~~$18.37 million at December 31, ~~2019.~~2020. Our shareholders’ equity-to-assets ratio was ~~11.74%~~11.87% as of ~~June 30, 2020,~~March 31, 2021, compared to ~~12.51%~~12.12% at December 31, ~~2019.~~2020. Book value per common share rose to ~~$33.85~~$35.27 at ~~June 30, 2020,~~March 31, 2021, from ~~$32.47~~$34.93 at December 31, ~~2019.~~2020.

We declared and paid cash dividends per common share of ~~$0.28~~$0.29 during the ~~second~~first 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 ~~35.65%~~31.13%. 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 have temporarily suspended the repurchase of common shares from the open market. Management and the Board of Directors will evaluate future share repurchases and dividend payments based on a careful examination of facts and circumstances at such time and in accordance with the Company’s capital and dividend policy.

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.

~~Table of Contents~~

The actual capital amounts and ratios of 1st Source Corporation and 1st Source Bank as of ~~June 30, 2020,~~March 31, 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							Actual				Minimum Capital Adequacy				Minimum Capital Adequacy with Capital Buffer	To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		(Dollars in thousands)	Amount			Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk-Weighted Assets):	Total Capital (to Risk-Weighted Assets):																	Total Capital (to Risk-Weighted Assets):
1st Source Corporation	1st Source Corporation	$	934,880	15.58	%	$	479,935	8.00	%	$	629,915	10.50	%	$	599,919	10.00	%	1st Source Corporation	$	981,679		16.39	%	$	479,271	8.00	%	$	629,043	10.50	%	$	599,089	10.00	%
1st Source Bank	1st Source Bank	848,568		14.13		480,442		8.00		630,580		10.50		600,553		10.00		1st Source Bank	899,406			15.01		479,502		8.00		629,346		10.50		599,377		10.00
Tier 1 Capital (to Risk-Weighted Assets):	Tier 1 Capital (to Risk-Weighted Assets):																	Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	1st Source Corporation	859,152		14.32		359,951		6.00		509,931		8.50		479,935		8.00		1st Source Corporation	905,938			15.12		359,453		6.00		509,225		8.50		479,271		8.00
1st Source Bank	1st Source Bank	772,761		12.87		360,332		6.00		510,470		8.50		480,442		8.00		1st Source Bank	823,629			13.74		359,626		6.00		509,471		8.50		479,502		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):	Common Equity Tier 1 Capital (to Risk-Weighted Assets):																	Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	1st Source Corporation	765,494		12.76		269,964		4.50		419,943		7.00		389,947		6.50		1st Source Corporation	804,474			13.43		269,590		4.50		419,362		7.00		389,408		6.50
1st Source Bank	1st Source Bank	736,103		12.26		270,249		4.50		420,387		7.00		390,359		6.50		1st Source Bank	779,165			13.00		269,720		4.50		419,564		7.00		389,595		6.50
Tier 1 Capital (to Average Assets):	Tier 1 Capital (to Average Assets):																	Tier 1 Capital (to Average Assets):
1st Source Corporation	1st Source Corporation	859,152		12.12		283,609		4.00		N/A		N/A		354,511		5.00		1st Source Corporation	905,938			12.44		291,183		4.00		N/A		N/A		363,979		5.00
1st Source Bank	1st Source Bank	772,761		10.90		283,585		4.00		N/A		N/A		354,481		5.00		1st Source Bank	823,629			11.32		291,078		4.00		N/A		N/A		363,847		5.00

~~As part~~

Table of ~~the CARES Act,~~ Contents

PPP loan balances have been assigned a zero percent risk weight and therefore had no impact on our total risk-weighted assets at ~~June 30, 2020.~~March 31, 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 ~~June 30, 2020,~~March 31, 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 ~~June 30, 2020,~~March 31, 2021, we had ~~$55.48~~$55.00 million outstanding in FHLB advances and could borrow an additional ~~$550.54~~$504.37 million contingent on the FHLB activity-based stock ownership requirement. We also had no outstandings with the FRB and could borrow ~~$449.80~~$416.41 million as of ~~June 30, 2020.~~March 31, 2021.

Our loan to asset ratio was ~~77.29%~~73.52% at ~~June 30, 2020~~March 31, 2021 compared to ~~76.79%~~75.03% at December 31, ~~2019~~2020 and ~~76.83%~~76.16% at ~~June 30, 2019.~~March 31, 2020. Cash and cash equivalents totaled ~~$180.24~~$335.95 million at ~~June 30, 2020~~March 31, 2021 compared to ~~$83.37~~$243.05 million at December 31, ~~2019~~2020 and ~~$96.49~~$122.30 million at ~~June 30, 2019.~~March 31, 2020. The largest contributors to the increase in cash and cash equivalents was higher deposit balances ~~from PPP loan fundings, customer receipts from the government’s Economic Impact Payment program~~due to both individual and ~~the Treasury Department’s and Internal Revenue Service’s decision~~business customers’ propensity to ~~delay the deadline for tax filings and payments.~~save during times of uncertainty. At ~~June 30, 2020,~~March 31, 2021, the Consolidated Statements of Financial Condition was rate sensitive by ~~$303.41~~$334.21 million more assets than liabilities scheduled to reprice within one year, or approximately ~~1.09%~~1.11%. 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 ~~$807~~$700 million.

RESULTS OF OPERATIONS

Net income available to common shareholders for the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2020~~March 31, 2021 was ~~$18.50 million and $34.92~~$28.11 million, compared to ~~$23.39 million and $45.58~~$16.41 million for the same ~~periods~~period in ~~2019.~~2020. Diluted net income per common share was ~~$0.72 and $1.36~~$1.10 for the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2020,~~March 31, 2021, compared to ~~$0.91 and $1.76~~$0.64 for the same ~~periods~~period in ~~2019.~~2020. Return on average common shareholders’ equity was ~~8.23%~~12.74% for the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, compared to ~~11.75%~~7.81% in ~~2019.~~2020. The return on total average assets was ~~1.02%~~1.55% for the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, compared to ~~1.44%~~1.00% in ~~2019.~~

~~Table of Contents~~

2020.

Net income ~~decreased~~increased for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 compared to the first ~~six~~three 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 a decrease in~~ noninterest ~~expense.~~expense decreased. Details of the changes in the various components of net income are discussed further below.

Table of Contents

NET INTEREST INCOME

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

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY

INTEREST RATES AND INTEREST DIFFERENTIAL


												Three Months Ended																												Three Months Ended
		June 30, 2020										March 31, 2020												June 30, 2019									March 31, 2021							December 31, 2020	March 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate		(Dollars in thousands)	Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate		Average Balance		Interest Income/Expense		Yield/ Rate
ASSETS	ASSETS																			ASSETS
Investment securities available-for-sale:	Investment securities available-for-sale:																			Investment securities available-for-sale:
Taxable	Taxable	$	995,776	$	4,487	1.81	%	$	973,421	$	5,550	2.29	%	$	929,264	$	5,186	2.24	%	Taxable	$	1,193,583	$	3,987	1.35	%	$	1,056,727	$	3,940	1.48	%	$	973,421	$	5,550	2.29		%
Tax exempt⁽¹⁾	Tax exempt⁽¹⁾	49,534		286		2.32	%	57,219		325		2.28	%	71,878		437		2.44	%	Tax exempt(1)	37,394		214		2.32	%	41,345		237		2.28	%	57,219		325		2.28		%
Mortgages held for sale	Mortgages held for sale	27,016		198		2.95	%	11,294		96		3.42	%	12,014		127		4.24	%	Mortgages held for sale	14,285		86		2.44	%	17,844		120		2.68	%	11,294		96		3.42		%

Loans and leases, net of unearned discount⁽¹⁾	Loans and leases, net of unearned discount⁽¹⁾	5,565,160		58,700		4.24	%	5,098,397		61,520		4.85	%	5,001,392		65,565		5.26	%	Loans and leases, net of unearned discount(1)	5,499,009		57,860		4.27	%	5,517,707		64,075		4.62	%	5,098,397		61,520		4.85		%
Other investments	Other investments	89,525		316		1.42	%	41,463		346		3.36	%	53,323		499		3.75	%	Other investments	216,280		266		0.50	%	347,837		333		0.38	%	41,463		346		3.36		%
Total earning assets⁽¹⁾	Total earning assets⁽¹⁾	6,727,011		63,987		3.83	%	6,181,794		67,837		4.41	%	6,067,871		71,814		4.75	%	Total earning assets(1)	6,960,551		62,413		3.64	%	6,981,460		68,705		3.92	%	6,181,794		67,837		4.41		%
Cash and due from banks	Cash and due from banks	73,523						65,407						67,448						Cash and due from banks	75,178						75,055						65,407
Reserve for loan and lease losses		(124,186)						(112,239)						(102,787)
Allowance for loan and lease losses																				Allowance for loan and lease losses	(143,206)						(143,888)						(112,239)
Other assets	Other assets	509,058						476,159						455,212						Other assets	457,890						489,804						476,159
Total assets	Total assets	$	7,185,406					$	6,611,121					$	6,487,744					Total assets	$	7,350,413					$	7,402,431					$	6,611,121

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

Interest-bearing deposits	Interest-bearing deposits	$	4,248,478	$	8,265	0.78	%	$	4,076,270	$	10,851	1.07	%	$	4,137,118	$	12,978	1.26	%	Interest-bearing deposits	$	4,261,207	$	3,526	0.34	%	$	4,272,622	$	4,811	0.45	%	$	4,076,270	$	10,851	1.07		%
Short-term borrowings	Short-term borrowings	191,411		90		0.19	%	202,545		254		0.50	%	201,401		540		1.08	%	Short-term borrowings	176,726		36		0.08	%	222,699		90		0.16	%	202,545		254		0.50		%
Subordinated notes	Subordinated notes	58,764		835		5.71	%	58,764		884		6.05	%	58,764		928		6.33	%	Subordinated notes	58,764		818		5.65	%	58,764		824		5.58	%	58,764		884		6.05		%
Long-term debt and mandatorily redeemable securities	Long-term debt and mandatorily redeemable securities	81,766		659		3.24	%	77,973		853		4.40	%	71,308		764		4.30	%	Long-term debt and mandatorily redeemable securities	80,967		500		2.50	%	81,576		746		3.64	%	77,973		853		4.40		%
Total interest-bearing liabilities	Total interest-bearing liabilities	4,580,419		9,849		0.86	%	4,415,552		12,842		1.17	%	4,468,591		15,210		1.37	%	Total interest-bearing liabilities	4,577,664		4,880		0.43	%	4,635,661		6,471		0.56	%	4,415,552		12,842		1.17		%
Noninterest-bearing deposits	Noninterest-bearing deposits	1,562,100						1,196,106						1,127,794						Noninterest-bearing deposits	1,719,264						1,697,154						1,196,106
Other liabilities	Other liabilities	151,281						131,858						98,475						Other liabilities	115,034						147,703						131,858
Shareholders’ equity	Shareholders’ equity	862,209						844,724						789,009						Shareholders’ equity	894,553						884,530						844,724
Noncontrolling interests	Noncontrolling interests	29,397						22,881						3,875						Noncontrolling interests	43,898						37,383						22,881
Total liabilities and equity	Total liabilities and equity	$	7,185,406					$	6,611,121					$	6,487,744					Total liabilities and equity	$	7,350,413					$	7,402,431					$	6,611,121
Less: Fully tax-equivalent adjustments	Less: Fully tax-equivalent adjustments			(137)						(151)						(177)				Less: Fully tax-equivalent adjustments			(121)						(127)						(151)
Net interest income/margin (GAAP-derived)⁽¹⁾	Net interest income/margin (GAAP-derived)⁽¹⁾			$	54,001	3.23	%			$	54,844	3.57	%			$	56,427	3.73	%	Net interest income/margin (GAAP-derived)(1)			$	57,412	3.35	%			$	62,107	3.54	%			$	54,844	3.57		%
Fully tax-equivalent adjustments	Fully tax-equivalent adjustments			137						151						177				Fully tax-equivalent adjustments			121						127						151
Net interest income/margin - FTE⁽¹⁾	Net interest income/margin - FTE⁽¹⁾			$	54,138	3.24	%			$	54,995	3.58	%			$	56,604	3.74	%	Net interest income/margin - FTE(1)			$	57,533	3.35	%			$	62,234	3.55	%			$	54,995	3.58		%

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

Quarter Ended ~~June 30, 2020~~March 31, 2021 compared to the Quarter Ended ~~June 30, 2019~~March 31, 2020

The taxable-equivalent net interest income for the three months ended ~~June 30, 2020~~March 31, 2021 was ~~$54.14~~$57.53 million, ~~a decrease~~an increase of ~~4.36%~~4.61% over the same period in ~~2019.~~2020. The net interest margin on a fully taxable-equivalent basis was ~~3.24%~~3.35% for the three months ended ~~June 30, 2020,~~March 31, 2021, compared to ~~3.74%~~3.58% for the three months ended ~~June 30, 2019.~~March 31, 2020.

During the three month period ended ~~June 30, 2020,~~March 31, 2021, average earning assets increased ~~$659.14~~$778.76 million, up ~~10.86%~~12.60% over the comparable period in ~~2019.~~2020. Average interest-bearing liabilities increased ~~$111.83~~$162.11 million or ~~2.50%~~3.67%. The yield on average earning assets decreased 9277 basis points to ~~3.83%~~3.64% from ~~4.75%~~4.41% primarily due to lower rates on loans and leases and investment securities. Total cost of average interest-bearing liabilities decreased 5174 basis points to ~~0.86%~~0.43% from ~~1.37%~~1.17% 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 5023 basis points.

3537

Table of Contents

The largest contributor to the reduced yield on average earning assets for the three months ended ~~June 30, 2020,~~March 31, 2021, compared to the three months ended ~~June 30, 2019,~~March 31, 2020, was a decrease in yields on net loans and leases of ~~102~~58 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 1610 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 two basis points due to net interest reversals of $0.26 million in the second quarter of 2020.~~. Average net loans and leases increased ~~$563.77~~$400.61 million or ~~11.27%~~7.86% with the largest increase due to average PPP loans of ~~$464.38~~$410.29 million in the commercial and agricultural loan portfolio. ~~The construction equipment and commercial real estate portfolios also increased during the quarter as a result of market demand.~~ Total average investment securities increased ~~$44.17~~$200.34 million or ~~4.41%.~~19.44% with the largest increases in U.S. treasury and federal agency securities and mortgage-backed securities. Average mortgages held for sale increased ~~$15.00~~$2.99 million or ~~124.87%~~26.48%. 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 ~~$36.20~~$174.82 million or ~~67.89%~~421.62% from the ~~second~~first quarter of ~~2019.~~2020. The majority of the increase was attributable to Federal Reserve Bank excess balances.

Average interest-bearing deposits increased ~~$111.36~~$184.94 million or ~~2.69%~~4.54% for the ~~second~~first quarter of ~~2020~~2021 over the same period in ~~2019~~2020 primarily due to ~~government stimulus payments.~~consumer savings levels. The effective rate paid on average interest-bearing deposits decreased 4873 basis points to ~~0.78%~~0.34% from ~~1.26%~~1.07%. 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~~first quarter of ~~2019.~~2020. Average noninterest-bearing deposits grew ~~$434.31~~$523.16 million or ~~38.51%~~43.74% for the ~~second~~first quarter of ~~2020~~2021 over the same period in ~~2019~~2020 primarily due to PPP loan fundings in business accounts.

Average short-term borrowings decreased ~~$9.99~~$25.82 million or ~~4.96%~~12.75% for the ~~second~~first quarter of ~~2020~~2021 compared to the same period in ~~2019.~~2020. Interest paid on short-term borrowings decreased 8942 basis points. Interest paid on subordinated notes decreased 6240 basis points during the ~~second~~first quarter of ~~2020~~2021 from the same period a year ago due to a variable rate on one traunche. Average long-term debt and mandatorily redeemable securities balances increased ~~$10.46~~$2.99 million or ~~14.67%~~3.84%. Interest paid on long-term debt and mandatorily redeemable securities decreased ~~106~~190 basis points during the ~~second~~first quarter of ~~2020~~2021 from the same period in ~~2019~~2020 primarily due to lower rates on mandatorily redeemable securities.

Six Months Ended
June 30, 2020 June 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 $ 984,598 $ 10,037 2.05 % $ 919,398 $ 10,701 2.35 %
Tax exempt⁽¹⁾
53,377 611 2.30 % 75,007 909 2.44 %
Mortgages held for sale 19,155 294 3.09 % 10,429 228 4.41 %
Loans and leases, net of unearned discount⁽¹⁾
5,331,779 120,220 4.53 % 4,930,183 128,242 5.25 %
Other investments 65,494 662 2.03 % 47,740 937 3.96 %
Total earning assets⁽¹⁾
6,454,403 131,824 4.11 % 5,982,757 141,017 4.75 %
Cash and due from banks 69,465 65,677
Reserve for loan and lease losses (118,212) (102,245)
Other assets 492,608 443,421
Total assets $ 6,898,264 $ 6,389,610
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits $ 4,162,374 $ 19,116 0.92 % $ 4,036,578 $ 24,448 1.22 %
Short-term borrowings 196,978 344 0.35 % 226,252 1,471 1.31 %
Subordinated notes 58,764 1,719 5.88 % 58,764 1,856 6.37 %
Long-term debt and mandatorily redeemable securities 79,870 1,512 3.81 % 70,897 1,508 4.29 %
Total interest-bearing liabilities 4,497,986 22,691 1.01 % 4,392,491 29,283 1.34 %
Noninterest-bearing deposits 1,379,103 1,126,126
Other liabilities 141,570 85,899
Shareholders’ equity 853,467 782,370
Noncontrolling interests 26,138 2,724
Total liabilities and equity $ 6,898,264 $ 6,389,610
Less: Fully tax-equivalent adjustments (288) (359)
Net interest income/margin (GAAP-derived)⁽¹⁾
$ 108,845 3.39 % $ 111,375 3.75 %
Fully tax-equivalent adjustments 288 359
Net interest income/margin - FTE⁽¹⁾
$ 109,133 3.40 % $ 111,734 3.77 %
(1) See “Reconciliation of Non-GAAP Financial Measures” at the end of this section for additional information on this performance measure/ratio.

~~Table of Contents~~

~~Six Months Ended June 30, 2020 compared to the Six Months Ended June 30, 2019~~

The taxable-equivalent net interest income for the six months ended June 30, 2020 was $109.13 million, a decrease of 2.33% over the comparable period in 2019. The net interest margin on a fully taxable-equivalent basis was 3.40% compared to a net interest margin of 3.77% for the same period in 2019.

During the six month period ended June 30, 2020, average earning assets increased $471.65 million or 7.88% over the comparable period in 2019. Average interest-bearing liabilities increased $105.50 million or 2.40%. The yield on average earning assets decreased 64 basis points to 4.11% from 4.75% 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 33 basis points to 1.01% from 1.34%. The result to the net interest margin, or the ratio of net interest income to average earning assets, was a decrease of 37 basis points.

The largest contributor to the lower yield on average earning assets for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was a decrease in yields on net loans and leases of 72 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 nine basis points due to PPP loan balances that earn interest at 1.00% and negatively impacted by two basis points due to net interest reversals of $0.17 million in 2020 vs. net interest recoveries of $0.08 million in 2019. Average net loans and leases increased $401.60 million or 8.15% primarily due to average PPP loan balances of $232.19 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 $43.57 million or 4.38%. Average mortgages held for sale increased $8.73 million or 83.67%. 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 $17.75 million or 37.19%.

Average interest-bearing deposits increased $125.80 million or 3.12% for the first six months of 2020 over the same period in 2019 largely due to government stimulus payments in the second quarter. The effective rate paid on average interest-bearing deposits decreased 30 basis points to 0.92% compared to 1.22%. 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 $252.98 million or 22.46% for the first six months of 2020 over the same period in 2019 primarily due to PPP loan fundings in business accounts.

Average short-term borrowings decreased $29.27 million or 12.94% for the first six months of 2020 compared to the same period in 2019. Interest paid on short-term borrowings decreased 96 basis points. The decrease in short-term borrowings was primarily the result of lower borrowings with the FHLB. Interest paid on subordinated notes decreased 49 basis points due to a variable rate associated with one traunche. Average long-term debt and mandatorily redeemable securities increased $8.97 million or 12.66%. Interest paid on long-term debt and mandatorily redeemable securities decreased 48 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.

~~Table of Contents~~

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																Six Months Ended												Three Months Ended
(Dollars in thousands)	(Dollars in thousands)					June 30, 2020			March 31, 2020			June 30, 2019				June 30, 2020			June 30, 2019		(Dollars in thousands)				March 31, 2021			December 31, 2020			March 31, 2020
Calculation of Net Interest Margin	Calculation of Net Interest Margin																				Calculation of Net Interest Margin
(A)	(A)	Interest income (GAAP)	$	63,850		$	67,686		$	71,637			$	131,536		$	140,658		(A)	Interest income (GAAP)		$	62,292		$	68,578		$	67,686
		Fully tax-equivalent adjustments:																		Fully tax-equivalent adjustments:
(B)	(B)	- Loans and leases	83			90			93				173			188			(B)	- Loans and leases		81			82			90
(C)	(C)	- Tax-exempt investment securities	54			61			84				115			171			(C)	- Tax-exempt investment securities		40			45			61
(D)	(D)	Interest income - FTE (A+B+C)	63,987			67,837			71,814				131,824			141,017			(D)	Interest income - FTE (A+B+C)		62,413			68,705			67,837
(E)	(E)	Interest expense (GAAP)	9,849			12,842			15,210				22,691			29,283			(E)	Interest expense (GAAP)		4,880			6,471			12,842
(F)	(F)	Net interest income (GAAP) (A–E)	54,001			54,844			56,427				108,845			111,375			(F)	Net interest income (GAAP) (A–E)		57,412			62,107			54,844
(G)	(G)	Net interest income - FTE (D–E)	54,138			54,995			56,604				109,133			111,734			(G)	Net interest income - FTE (D–E)		57,533			62,234			54,995
(H)	(H)	Annualization factor	4.022			4.022			4.011				2.011			2.017			(H)	Annualization factor		4.056			3.978			4.022
(I)	(I)	Total earning assets	$	6,727,011		$	6,181,794		$	6,067,871			$	6,454,403		$	5,982,757		(I)	Total earning assets		$	6,960,551		$	6,981,460		$	6,181,794
		Net interest margin (GAAP-derived) (F*H)/I	3.23		%	3.57		%	3.73		%		3.39		%	3.75		%		Net interest margin (GAAP-derived) (F*H)/I		3.35		%	3.54		%	3.57		%
		Net interest margin - FTE (G*H)/I	3.24		%	3.58		%	3.74		%		3.40		%	3.77		%		Net interest margin - FTE (G*H)/I		3.35		%	3.55		%	3.58		%

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

The provision for ~~loan and lease~~credit losses for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 was ~~$10.38 million and $21.73~~$2.40 million compared to a provision for ~~loan and lease~~credit losses in the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 of ~~$4.25 million and $9.17~~$11.35 million. Net ~~recoveries~~charge-offs of ~~$0.11~~$3.50 million or ~~(0.01)%~~0.26% of average loans and leases were recorded for the ~~second~~first quarter ~~2020,~~2021, compared to net charge-offs of ~~$1.19~~$1.81 million or ~~0.10%~~0.14% of average loans and leases for the same quarter a year ago. Year-to-date net charge-offs of $1.70 million or 0.06% of average loans and leases have been recorded in 2020, compared to net charge-offs of $4.72 million or 0.19% of average loans and leases through June 30, 2019.

The provision for credit losses for the three months ended ~~June 30, 2020~~March 31, 2021 was principally driven by ongoing difficulties in the bus segment of the auto and light truck portfolio, as credit quality in the remaining portfolios was relatively unchanged to slightly improving. We continued to have COVID-19 related downgrades and increases in special attention loan balances and nonperforming ~~loans. Loan growth~~loans concentrated in our bus segment and remain concerned about the long-term prospects for the bus segment. We also remain concerned about 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 $33.78 million increase in outstanding loan balances this quarter was ~~related~~attributable to the expanded PPP loan program. ~~The Bank funded $592 million under this~~Loan balances net of PPP loans declined $58.50 million. As of quarter-end, PPP loans total $443.84 and necessitate minimal reserves as the program ~~which~~ carries a 100% SBA guarantee and a debt forgiveness ~~component by the CARES Act, thus PPP loans did not drive a material increase in the provision. The Bank established a small reserve against~~component. Impairment reserves for assets individually evaluated were reduced this ~~pool of loans~~quarter as our customers with larger impairments were able to ~~cover procedural and other unanticipated risks. Five accounts with loan balances~~liquidate assets for amounts greater than ~~$5 million were downgraded to special attention this quarter, three in~~anticipated, applying the auto and light truck portfolio, one in the construction equipment portfolio and one construction-related account which is included in the commercial and agricultural portfolio as our exposure is a line of credit secured by accounts receivable and inventory. Of these five accounts, two of the auto and light truck accounts and the line of credit were placed in nonaccrual status in June. The line of credit has a large impairment reserve and the nonperforming auto account also has an impairment reserve. The construction equipment account downgraded last quarter which had a sizeable impairment reserve continues to have a similar impairment reserve this quarter. We continued to have COVID-19 related downgrades this quarter, including all five large-dollar accounts plus numerous additional accounts with less exposure. There were 21 accounts greater than $100,000 downgraded to special attention this quarter compared to 29 last quarter and 40 accounts for all of 2019. The initial wave of customers experiencing difficulties related to shutdowns imposedproceeds to reduce ~~the spread of the coronavirus were primarily in the transportation (including auto rental and bus) and hotel industries. As of June 30, 2020, COVID-19 related loan modifications for~~ our bus lending were $70.05 million or 76% of our total bus loan balances and COVID-19 related loan modifications for the hotel industry were $83.33 million or 53% of our total hotel loan balances. This quarter, we also continued to see downgrades in these industries as well as in construction equipment. We extended PPP loans to 45 of our special attention customers aggregating $19.87 million.debt.

We continue to evaluate risks which may impact our loan portfolios. ~~Last~~During the first quarter of 2020, as a result of the coronavirus pandemic and resultant business shutdowns and unemployment spikes, we reviewed our loan portfolio segments, assessing the likely impact of COVID-19 on each segment and established specific qualitative adjustment factors which were reviewed and revised quarterly throughout 2020. We thoroughly reviewed these factors along with all our qualitative adjustments and forecast factors as of year-end and made several revisions and enhancements to our analysis. This quarter, we reviewed our factors and analysis and believe ~~continue to be~~the adjustments made at year-end remain pertinent. We have seen improvements in some areas, but there are still so many unknowns, such a high level of uncertainty regarding the spread of COVID-19 and its variant forms, that despite the success of the vaccines, we determined our year-end adjustments remain appropriate. We remain concerned that geopolitical events, particularly in the aftermath of the pandemic, will have the potential to ~~further~~ negatively impact the U.S. economy. ~~Current~~Congress is working through spending initiatives and 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 supply concerns raised during the pandemic and ongoing tariff disputes, particularly between China and the U.S. Political uncertainty continues in Latin America, with governments facing increased pressures ~~with~~from the pandemic and ~~ongoing corruption~~the likely slow economic recovery given difficulties encountered securing equitable vaccine access and distribution and millions falling into poverty, exacerbated by 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 ~~$160~~$178 million in foreign ~~exposure. The~~exposure, the majority of ~~our foreign exposure~~which is in Mexico and Brazil. ~~As we ended~~At the end of 2019, the Brazilian economy was on a path of gradual improvement and Mexico’s economy, although stronger, was beginning to exhibit some weaknesses. Now, considering the pandemic, both ~~are projected~~economies contracted in 2020 and Brazil is becoming more concerning as the country struggles to ~~contract in 2020.~~control the high COVID-19 case levels with weak government leadership. We continue to monitor individual customer performance and assess risks in the portfolio as a whole.

On ~~June 30, 2020,~~March 31, 2021, 30 day and over loan and lease delinquencies as a percentage of loan and lease balances were ~~0.60%~~0.12%, compared to ~~0.37%~~0.24% on ~~June 30, 2019.~~March 31, 2020. The ~~reserve~~allowance for loan and lease losses as a percentage of loans and leases outstanding at the end of the period was ~~2.31%~~2.53% compared to ~~2.05%~~2.35% one year ago. The ~~reserve~~allowance as a percentage of loans and leases outstanding, net of PPP loans, was ~~2.54%.~~2.74% compared to 2.73% at December 31, 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 six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ is located in Note 5 of the Consolidated Financial Statements.

~~A loan or lease is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments~~

Table 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 June 30, 2020 and December 31, 2019 is reflected in Note 4 of the Consolidated Financial Statements.Contents

~~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 June 30, 2020, we estimate an additional increase to the allowance for credit losses of between $0 million and $8 million which will be recognized through earnings after adoption. We believe that as of June 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 shelter in place orders, resultant business shutdowns and skyrocketing unemployment, 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. Additionally, the forecast factor adjustment and the life of loan methodology have a more significant impact on longer duration portfolios.

NONPERFORMING ASSETS

The following table shows nonperforming assets.


(Dollars in thousands)	(Dollars in thousands)	June 30, 2020		December 31, 2019		June 30, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020		March 31, 2020
Loans and leases past due 90 days or more	Loans and leases past due 90 days or more	$	256	$	309	$	156	Loans and leases past due 90 days or more	$	66	$	115	$	191
Nonaccrual loans and leases	Nonaccrual loans and leases	62,800		9,789		12,212		Nonaccrual loans and leases	58,513		60,388		26,301
Other real estate	Other real estate	303		522		543		Other real estate	369		359		362
Repossessions	Repossessions	6,132		8,623		8,799		Repossessions	2,214		1,976		9,020
Equipment owned under operating leases	Equipment owned under operating leases	57		—		—		Equipment owned under operating leases	1,647		1,695		—
Total nonperforming assets	Total nonperforming assets	$	69,548	$	19,243	$	21,710	Total nonperforming assets	$	62,809	$	64,533	$	35,874

Nonperforming assets as a percentage of loans and leases were ~~1.20%~~1.12% at ~~June 30, 2020, 0.37%~~March 31, 2021, 1.16% at December 31, ~~2019,~~2020, and ~~0.41%~~0.68% at ~~June 30, 2019.~~March 31, 2020. Excluding PPP loans, nonperforming assets as a percentage of loan and leases were ~~1.33%~~1.22% at ~~June 30, 2020, 0.37%~~March 31, 2021 and 1.24% at December 31, ~~2019, and 0.14% at June 30, 2019.~~2020. Nonperforming assets totaled ~~$69.55~~$62.81 million at ~~June 30, 2020, an increase~~March 31, 2021, a decrease of ~~261.42%~~2.67% from the ~~$19.24~~$64.53 million reported at December 31, ~~2019,~~2020, and a ~~220.35%~~75.08% increase from the ~~$21.71~~$35.87 million reported at ~~June 30, 2019.~~March 31, 2020. The ~~increase~~decrease in nonperforming assets during the first ~~six~~three months of ~~2020~~2021 was related to ~~higher~~lower nonaccrual loans and leases. The increase in nonperforming assets at ~~June 30,~~March 31, 2021 from March 31, 2020 ~~from June 30, 2019 also occurred primarily~~was related to an increase in nonaccrual loans and ~~leases.~~leases offset by lower repossessions.

The decrease in nonaccrual loans and leases at March 31, 2021 from December 31, 2020 occurred primarily in the auto rental division of the auto and light truck portfolio and the construction equipment portfolio offset by increases in the bus division of the auto and light truck portfolio. The increase in nonaccrual loans and leases at ~~June 30,~~March 31, 2021 from March 31, 2020 from December 31, 2019 occurred primarily in the auto and light truck, construction equipment and commercial and agricultural. During the first half of 2020, two relationships of a combined $25.70 million in the auto and light truck portfolio and two relationships of a combined $21.49 million in the construction equipment portfolio went into nonaccrual. The increase in nonaccrual loans and leases at June 30, 2020 from June 30, 2019 occurred primarily in the auto and light truck and construction ~~equipment.~~equipment portfolios. A summary of nonaccrual loans and leases and past due aging for the period ended ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 is located in Note 4 of the Consolidated Financial Statements.

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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~~ auto and light ~~trucks.~~trucks and aircraft. 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 March 31, 2021 compared to March 31, 2020 was primarily the result of the sale of repossessed aircrafts.

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


(Dollars in thousands)	(Dollars in thousands)	June 30, 2020		December 31, 2019		June 30, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020		March 31, 2020
Commercial and agricultural	Commercial and agricultural	$	—	$	—	$	16	Commercial and agricultural	$	—	$	—	$	—
Solar								Solar	—		—		—
Auto and light truck	Auto and light truck	630		1,865		3,810		Auto and light truck	1,414		1,120		1,165
Medium and heavy duty truck	Medium and heavy duty truck	—		—		554		Medium and heavy duty truck	—		—		—
Aircraft	Aircraft	5,450		6,707		4,400		Aircraft	750		750		7,808
Construction equipment	Construction equipment	35		35		—		Construction equipment	—		—		35
Commercial real estate	Commercial real estate	303		303		—		Commercial real estate	369		303		303
Residential real estate and home equity	Residential real estate and home equity	—		219		543		Residential real estate and home equity	—		56		59
Consumer	Consumer	17		16		19		Consumer	50		106		12
Total	Total	$	6,435	$	9,145	$	9,342	Total	$	2,583	$	2,335	$	9,382

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 June 30,												Six Months Ended June 30,								Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		$ Change	% Change		2020		2019		$ Change	% Change		(Dollars in thousands)	2021		2020		$ Change	% Change
Noninterest income:	Noninterest income:															Noninterest income:
Trust and wealth advisory	Trust and wealth advisory	$	5,589	$	5,583	6	0.11	%	$	10,437	$	10,441	(4)	(0.04)	%	Trust and wealth advisory	$	5,481	$	4,848	633	13.06	%
Service charges on deposit accounts	Service charges on deposit accounts	1,910		2,785		(875)	(31.42)	%	4,515		5,283		(768)	(14.54)	%	Service charges on deposit accounts	2,447		2,605		(158)	(6.07)	%
Debit card	Debit card	3,601		3,669		(68)	(1.85)	%	6,974		6,889		85	1.23	%	Debit card	4,182		3,373		809	23.98	%
Mortgage banking	Mortgage banking	3,315		999		2,316	NM		5,651		1,935		3,716	NM		Mortgage banking	3,901		2,336		1,565	66.99	%
Insurance commissions	Insurance commissions	1,695		1,518		177	11.66	%	3,576		3,692		(116)	(3.14)	%	Insurance commissions	2,152		1,881		271	14.41	%
Equipment rental	Equipment rental	5,990		7,809		(1,819)	(23.29)	%	12,620		15,791		(3,171)	(20.08)	%	Equipment rental	4,629		6,630		(2,001)	(30.18)	%
(Losses) gains on investment securities available-for-sale		(1)		—		(1)	NM		279		—		279	NM
Gains on investment securities available-for-sale																Gains on investment securities available-for-sale	—		280		(280)	NM
Other	Other	3,142		3,301		(159)	(4.82)	%	5,811		5,757		54	0.94	%	Other	3,077		2,669		408	15.29	%
Total noninterest income	Total noninterest income	$	25,241	$	25,664	(423)	(1.65)	%	$	49,863	$	49,788	75	0.15	%	Total noninterest income	$	25,869	$	24,622	1,247	5.06	%

NM = Not Meaningful

Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) ~~were flat~~increased during the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared with the same ~~periods~~period 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 ~~June 30, 2020,~~March 31, 2021, December 31, ~~2019,~~2020, and ~~June 30, 2019~~March 31, 2020 was ~~$4.20~~$4.90 billion, ~~$4.48~~$4.74 billion, and ~~$4.25~~$3.78 billion, respectively. Stock market recoveries helped improve the market value of trust assets under management.

Service charges on deposit accounts decreased for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 over the comparable ~~periods~~period in ~~2019.~~2020. The decrease in service charges on deposit accounts primarily reflects a lower volume of nonsufficient fund transactions ~~and reduced ATM~~partially offset by higher business deposit account fees. Higher deposit balances from ~~government stimulus payments~~elevated consumer savings levels in conjunction with the pandemic resulted in fewer overdrawn accounts.

Debit card income ~~was relatively flat~~improved in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 over the same ~~periods~~period a year ago. The majority of the improvement in debit card income was the result of an increased volume of debit card transactions.

Mortgage banking income increased in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 as compared to the same ~~periods~~period in ~~2019.~~2020. The increase was primarily caused by ~~increased gains~~better margins on a higher volume of loan sales as a result of more loans originated for the secondary ~~market offset by higher mortgage servicing rights amortization expense and a $0.55 million impairment charge on mortgage servicing rights.~~

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market.

Insurance commissions were higher during the three months ended ~~June 30, 2020~~March 31, 2021 compared to ~~the same period a year ago and were lower during the six months ended June 30, 2020 over~~ the same period a year ago. The increase ~~in insurance commissions during the second quarter~~ was ~~primarily~~mainly due to increased ~~business. The decrease over the first six months of 2020 was the result of a reduction in~~ contingent commissions ~~received offset by higher insurance commissions primarily from increased business.~~received.

Equipment rental income decreased for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 over the comparable ~~periods~~period in ~~2019.~~2020. The ~~decrease~~decline was the result of reduced leasing volume primarily in the construction equipment, aircraft and auto and light truck portfolios resulting in the average equipment rental portfolio decreasing by ~~18.3%~~30% over the same period a year ago.

Gains on investment securities available-for-sale during the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 were primarily from the sale of corporate securities in managing portfolio risk.

Other income ~~decreased~~increased for the three months ended ~~June 30, 2020~~March 31, 2021 compared to one year ~~ago and was relatively stable for the six months ended June 30, 2020 over the comparable period in 2019.~~ago. The ~~decrease during the second quarter~~increase 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.~~gains and increased brokerage fees and commissions.

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NONINTEREST EXPENSE

The following table shows the details of noninterest expense.


		Three Months Ended June 30,												Six Months Ended June 30,								Three Months Ended March 31,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		$ Change	% Change		2020		2019		$ Change	% Change		(Dollars in thousands)	2021		2020		$ Change	% Change
Noninterest expense:	Noninterest expense:															Noninterest expense:
Salaries and employee benefits	Salaries and employee benefits	$	23,999	$	23,787	212	0.89	%	$	48,400	$	47,282	1,118	2.36	%	Salaries and employee benefits	$	25,196	$	24,401	795	3.26	%
Net occupancy	Net occupancy	2,504		2,481		23	0.93	%	5,225		5,253		(28)	(0.53)	%	Net occupancy	2,719		2,721		(2)	(0.07)	%
Furniture and equipment	Furniture and equipment	6,258		6,289		(31)	(0.49)	%	12,665		12,313		352	2.86	%	Furniture and equipment	6,458		6,407		51	0.80	%
Depreciation – leased equipment	Depreciation – leased equipment	5,142		6,400		(1,258)	(19.66)	%	10,569		12,924		(2,355)	(18.22)	%	Depreciation – leased equipment	3,773		5,427		(1,654)	(30.48)	%
Professional fees	Professional fees	1,258		1,706		(448)	(26.26)	%	2,700		3,304		(604)	(18.28)	%	Professional fees	1,613		1,442		171	11.86	%
Supplies and communication	Supplies and communication	1,390		1,608		(218)	(13.56)	%	3,024		3,101		(77)	(2.48)	%	Supplies and communication	1,475		1,634		(159)	(9.73)	%
FDIC and other insurance	FDIC and other insurance	599		608		(9)	(1.48)	%	887		1,253		(366)	(29.21)	%	FDIC and other insurance	665		288		377	NM
Business development and marketing	Business development and marketing	1,121		1,678		(557)	(33.19)	%	2,480		2,627		(147)	(5.60)	%	Business development and marketing	997		1,359		(362)	(26.64)	%
Loan and lease collection and repossession	Loan and lease collection and repossession	838		230		608	NM		1,601		1,591		10	0.63	%	Loan and lease collection and repossession	129		763		(634)	(83.09)	%
Other	Other	1,716		2,566		(850)	(33.13)	%	3,809		2,909		900	30.94	%	Other	1,115		2,093		(978)	(46.73)	%
Total noninterest expense	Total noninterest expense	$	44,825	$	47,353	(2,528)	(5.34)	%	$	91,360	$	92,557	(1,197)	(1.29)	%	Total noninterest expense	$	44,140	$	46,535	(2,395)	(5.15)	%

NM = Not Meaningful

Salaries and employee benefits increased during the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to the same ~~periods~~period 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 offset by a decrease in group insurance ~~claims and incentive compensation.~~claims.

Net occupancy expense was ~~relatively~~ flat during the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to the same ~~periods~~period a year ago. Increased snow removal costs were offset by reduced premises repair expenses during the quarter.

Furniture and equipment expense, including depreciation, ~~was flat~~rose slightly during the three months ended ~~June 30, 2020 compared to one year ago and increased during the six months ended June 30, 2020~~March 31, 2021 compared to the same period a year ago. Furniture and equipment expense was higher in ~~the first six months of 2020~~2021 mainly due to higher ~~computer processing charges, increased~~ software maintenance costs ~~and a rise in general furniture and equipment expense from new branch openings/remodels and COVID-19 related items~~ offset by a reduction in mileage reimbursements and equipment depreciation.

Depreciation on leased equipment decreased for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to the same ~~periods~~period in ~~2019.~~2020. Depreciation on leased equipment correlates with the decrease in equipment rental income.

Professional fees ~~decreased~~increased during the ~~second~~first quarter ~~and first six months~~ of ~~2020~~2021 compared to the ~~same periods~~first quarter a year ago. The ~~decrease~~increase during the first quarter was mainly due to ~~reduced utilization of consulting services offset by an increase in board of director~~higher legal fees.

Supplies and communication decreased during the ~~second~~first quarter ~~and first six months~~ of ~~2020~~2021 compared to the same ~~periods~~period a year ago. The decrease resulted primarily from lower printing and postage costs and reduced telephone line and equipment expenses.

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FDIC and other insurance was ~~lower~~higher during the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to the same ~~periods~~period in ~~2019.~~2020. The ~~decrease~~increase in ~~2020~~2021 was mainly due to ~~$0.55 million in~~ FDIC insurance premium credits ~~received~~recognized during the first quarter of 2020 which was not present in ~~2020.~~2021.

Business development and marketing expense ~~decreased~~declined during the ~~second~~first quarter ~~and first six months~~ of ~~2020~~2021 compared to the same ~~periods~~period a year ago. The ~~decrease~~reduction during ~~the first six months of 2020~~2021 was primarily due to ~~lower business development expense as a result of~~ fewer business entertainment and travel opportunities tied to continued COVID-19 ~~precautions offset by higher marketing promotions compared to 2019.~~precautions.

Loan and lease collection and repossession expense ~~increased~~decreased during the ~~second quarter 2020~~three months ended March 31, 2021 compared to the same period in ~~2019 and was flat during the first half of 2020 compared to the first half of 2019.~~2020. The ~~increase in the second quarter~~decrease was mainly due to ~~higher~~lower general collection and repossession expenses, ~~related to the repossession of an aircraft~~fewer valuation adjustments on repossessed assets, and ~~fewer~~increased gains on the sale of repossessed assets.

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

INCOME TAXES

The provision for income taxes for the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2020~~March 31, 2021 was ~~$5.52 million and $10.68~~$8.64 million, compared to ~~$7.07 million and $13.83~~$5.16 million for the same ~~periods~~period in ~~2019.~~2020. The effective tax rate was ~~22.94%~~23.51% and ~~23.20%~~23.91% for the ~~quarter ended June 30, 2020 and 2019, respectively and 23.40% and 23.26% for the first six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risks faced by 1st Source since December 31, ~~2019.~~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 ~~June 30, 2020,~~March 31, 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 ~~second~~first 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.

~~Table of Contents~~

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

The coronavirus (COVID-19) outbreak may have an adverse impact on certain of our customers directly or indirectly. Entire industries within our loan and lease portfolio such as motor coach, shuttle bus and auto rental 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.

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~~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~~

~~April 01 - 30, 2020~~

—

~~859,374~~

~~May 01 - 31, 2020~~

—

~~859,374~~

~~June 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
January 01 - 31, 2021	13,426	$	39.84	13,426	679,502
February 01 - 28, 2021	138,421	42.80		138,421	541,081
March 01 - 31, 2021	3,610	44.96		3,610	537,471

* 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~~1,462,529 shares.

ITEM 3. Defaults Upon Senior Securities.

None

ITEM 4. Mine Safety Disclosures.

None

~~ITEM 5.Other Information.~~

~~None~~

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ITEM 5.Other Information.

None

ITEM 6. ~~Exhibits~~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

~~July 23, 2020~~April 22, 2021

/s/ CHRISTOPHER J. MURPHY III

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

DATE

~~July 23, 2020~~April 22, 2021

/s/ ANDREA G. SHORT

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


	Credit Quality Grades
(Dollars in thousands)	1-6		7-12		Total
June 30, 2020
Commercial and agricultural	$	1,650,853	$	59,859	$	1,710,712
Auto and light truck	512,482		51,124		563,606
Medium and heavy duty truck	282,038		2,394		284,432
Aircraft	757,575		24,585		782,160
Construction equipment	684,190		54,837		739,027
Commercial real estate	918,796		24,175		942,971
Total	$	4,805,934	$	216,974	$	5,022,908

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)	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
June 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	571		34		—		840		1,561		1		13		430		3,450
Recoveries	302		140		—		503		590		28		30		158		1,751
Net charge-offs (recoveries)	269		(106)		—		337		971		(27)		(17)		272		1,699
Provision (recovery of provision)	5,605		2,865		37		380		10,723		1,559		195		364		21,728
Balance, end of period	$	29,007	$	17,371	$	4,649	$	31,101	$	23,872	$	19,936	$	3,821	$	1,526	$	131,283

June 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	88		466		1,132		3,001		196		—		21		563		5,467
Recoveries	62		29		—		302		119		60		6		166		744
Net charge-offs (recoveries)	26		437		1,132		2,699		77		(60)		15		397		4,723
Provision (recovery of provision)	2,015		2,089		1,500		1,570		1,439		(8)		108		452		9,165
Balance, end of period	$	19,052	$	16,341	$	4,671	$	31,918	$	12,284	$	15,757	$	3,518	$	1,370	$	104,911