Market Overview

1st Source Corporation Reports Third Quarter Results, Cash Dividend Declared

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QUARTERLY HIGHLIGHTS

  • Net income improved to $19.89 million, up 15.75% over the third
    quarter of 2017. Diluted net income per common share improved to $0.76
    from the prior year's third quarter of $0.66.
  • Return on average assets increased to 1.27% and return on average
    common shareholders' equity increased to 10.50% from 1.19% and 9.61%,
    respectively in the third quarter of 2017.
  • Net charge-offs of $10.86 million and nonperforming assets to loans
    and leases of 1.00% compared to $0.16 million and 0.64%, respectively
    in the third quarter of 2017.
  • Average loans and leases grew $434.68 million, up 9.91% from the third
    quarter of 2017.
  • Average deposits grew $562.95 million, up 12.43% from the third
    quarter of 2017.
  • Net interest income increased $7.13 million, up 15.10% from the third
    quarter of 2017.
  • Noninterest income decreased $1.53 million, or 5.99% from the third
    quarter of 2017 (decreased 8.13% excluding leased equipment
    depreciation).
  • Noninterest expenses increased $2.88 million or 6.48% from the third
    quarter of 2017 (increased 7.57% excluding leased equipment
    depreciation).

1st Source Corporation (NASDAQ:SRCE), parent company of 1st Source
Bank, today reported third quarter net income of $19.89 million, an
improvement of 15.75% compared to $17.18 million reported in the third
quarter a year ago. This brought 2018 year-to-date net income to a
record of $60.97 million compared to $50.06 million in 2017, an increase
of 21.80%. Income before taxes was $24.92 million compared to $26.74
million in the third quarter of 2017 and $77.42 million for the first
nine months of 2018 compared to $77.81 million for the same period in
2017. The year-to-date pretax income comparison was positively impacted
by increased net interest income of $21.25 million primarily due to
rising lending rates, higher average loan and lease balances, and
recognition of a $0.62 million unaccreted purchase loan discount and
$0.41 million prepayment penalty on two separate early loan payoffs.
These positives were offset by a $9.40 million increase in the provision
for loan and lease losses to support loan and lease growth along with
higher charge-offs and a $12.09 million rise in noninterest expense
which includes a $1.29 million increase in repossessed asset write
downs. Non-recurring 2018 costs were approximately $3.65 million.

Diluted net income per common share for the third quarter of 2018 was
$0.76, versus $0.66 in the third quarter of 2017. Diluted net income per
common share for the first nine months of 2018 was $2.33 compared to
$1.92 earned a year earlier.

At its October 2018 meeting, the Board of Directors approved a cash
dividend of $0.25 per common share, up 25% from the $0.20 per common
share declared a year ago. The cash dividend is payable to shareholders
of record on November 5, 2018 and will be paid on November 15, 2018.

According to Christopher J. Murphy III, Chairman, "We are pleased with
our increase in revenue in the third quarter as 1st Source Corporation
experienced growth in average loans and leases and average deposits with
some month end seasonal adjustments. Average loans and leases were up a
solid 9.91% for the quarter, compared to the same period a year ago.
Average deposits also increased with strong growth of 12.43% from this
time last year. Net interest income has increased 15.10% from the third
quarter 2017 while noninterest income decreased 5.99% and noninterest
expense increased by 6.48% over the same quarter in 2017."

"Our biggest credit challenge in the quarter was with larger charge-offs
and write downs. We have written our assets down to what we believe are
realizable values. The majority of the charge-offs is from one large
syndicated aircraft account in which we are a small participant. This
credit is unique in both size and complexity within our portfolio."

"We were recently honored to be a part of the annual Jimmy and Rosalynn
Carter Work Project with Habitat for Humanity. Mishawaka, Indiana was
selected as the location for this week-long Carter Build event, and 1st
Source Bank sponsored one of the homes. Members of our staff from across
northern Indiana and southwestern Michigan volunteered their time and
talents to help build this home for a deserving family. Community
leadership is one of 1st Source's values and this was just one more way
we demonstrate it."

THIRD QUARTER 2018 FINANCIAL RESULTS

Loans

Average loans and leases of $4.82 billion increased $434.68 million, up
9.91% in the third quarter of 2018 from the year ago quarter and have
increased $52.07 million, up 1.09% from the second quarter. Year-to-date
average loans and leases of $4.73 billion increased $432.89 million, up
10.08% from the first nine months of 2017.

Deposits

Average deposits of $5.09 billion grew $562.95 million, up 12.43% for
the quarter ended September 30, 2018 from the year ago quarter and have
increased $129.75 million, up 2.62% compared to the second quarter.
Average deposits for the first nine months of 2018 were $4.92 billion,
an increase of $493.54 million, up 11.15% from the same period a year
ago.

Net Interest Income and Net Interest Margin

Third quarter 2018 net interest income of $54.36 million increased $7.13
million, up 15.10% from the third quarter a year ago and increased $1.19
million, up 2.24% from the second quarter. For the first nine months of
2018, tax-equivalent net interest income was $158.68 million, an
increase of $20.50 million, up 14.83% compared to the same period a year
ago.

Third quarter 2018 net interest margin was 3.69%, an improvement of 16
basis points from the 3.53% for the same period in 2017 and remained
stable with the second quarter. Third quarter 2018 net interest margin
on a fully tax-equivalent basis was 3.71%, an increase of 14 basis
points from the 3.57% for the same period in 2017 and also remained
stable with the second quarter.

Net interest margin for the first nine months of 2018 was 3.69%, an
increase of 17 basis points from the 3.52% for the same period in 2017.
Net interest margin on a fully tax-equivalent basis for the first nine
months of 2018 was 3.71%, an increase of 15 basis points from the 3.56%
for the same period in 2017.

Noninterest Income

Third quarter 2018 noninterest income of $24.06 million decreased $1.53
million, or 5.99% from the third quarter a year ago and was lower by
$0.96 million, or 3.85% from the second quarter. For the first nine
months of 2018, noninterest income was relatively flat at $72.89 million
compared to the same period a year ago.

Noninterest income during the three and nine months ended September 30,
2018 was lower compared to a year ago mainly due to reduced gains on the
sale of available-for-sale equity securities. Other factors include
decreased mortgage banking income, and lower customer swap fees offset
by higher equipment rental income resulting from an increase in the
average lease portfolio, improved debit card income due to growth in
those transactions, improved insurance commissions due to new business,
and increased trust and wealth advisory fees.

Noninterest Expense

Third quarter 2018 noninterest expense of $47.34 million increased $2.88
million or 6.48% from the third quarter a year ago and increased $1.47
million or 3.19% from the prior quarter. For the first nine months of
2018, noninterest expense was $138.78 million, an increase of $12.09
million, or 9.55% compared to the same period a year ago. Excluding
depreciation on leased equipment, noninterest expenses were up 7.57% and
10.12% for the third quarter and first nine months of 2018, respectively.

The increase in noninterest expense from the same periods a year ago was
primarily due to higher salaries as a result of normal merit increases
and incentive compensation, increased group insurance costs, a rise in
furniture, equipment, and technology costs due to increased software
maintenance and computer processing charges, higher depreciation on
leased equipment due to growth in the lease portfolio and higher loan
and lease collection expenses. In addition, non-recurring 2018 costs
were approximately $3.65 million due to consulting fees of $1.45 million
for a customer relationship management project, a regulatory compliance
project, and information technology projects, repossessed asset
valuation adjustments of $1.90 million, and trust losses of $0.30
million.

Credit

The reserve for loan and lease losses as of September 30, 2018 was 2.04%
of total loans and leases compared to 2.13% at June 30, 2018 and 2.10%
at September 30, 2017. Net charge-offs of $10.86 million were recorded
for the third quarter of 2018 compared with net charge-offs of $0.16
million in the same quarter a year ago and up from the $0.14 million of
net charge-offs in the second quarter. The majority of the third quarter
charge-offs was related to one relationship within the aircraft
portfolio. Year-to-date net charge-offs of $11.34 million have been
recorded in 2018, compared to net charge-offs of $0.53 million for the
first nine months of 2017.

The provision for loan and lease losses was $6.16 million for the third
quarter and $14.76 million for the first nine months of 2018, an
increase of $4.54 million and $9.40 million, respectively, compared with
the same periods in 2017. The ratio of nonperforming assets to loans and
leases was 1.00% as of September 30, 2018, compared to 0.64% on
September 30, 2017 and 0.89% on June 30, 2018.

Capital

As of September 30, 2018, the common equity-to-assets ratio was 11.92%,
compared to 11.71% at June 30, 2018 and 12.24% a year ago. The tangible
common equity-to-tangible assets ratio was 10.73% at September 30, 2018
and 10.52% at June 30, 2018 compared to 10.95% a year earlier. The
Common Equity Tier 1 ratio, calculated under banking regulatory
guidelines, was 12.38% at September 30, 2018 compared to 12.15% at
June 30, 2018 and 12.52% a year ago.

ABOUT 1ST SOURCE CORPORATION

1st Source common stock is traded on the NASDAQ Global Select Market
under "SRCE" and appears in the National Market System tables in many
daily newspapers under the code name "1st Src." Since 1863, 1st Source
has been committed to the success of its clients, individuals,
businesses and the communities it serves. For more information, visit www.1stsource.com.

1st Source serves the northern half of Indiana and southwest Michigan
and is the largest locally controlled financial institution
headquartered in the area. While delivering a comprehensive range of
consumer and commercial banking services through its community bank
offices, 1st Source has distinguished itself with highly personalized
services. 1st Source Bank also competes for business nationally by
offering specialized financing services for new and used private and
cargo aircraft, automobiles for leasing and rental agencies, medium and
heavy duty trucks, and construction equipment. The Corporation includes
80 banking centers, 22 1st Source Bank Specialty Finance Group locations
nationwide, eight Wealth Advisory Services locations and ten 1st Source
Insurance offices.

FORWARD LOOKING STATEMENTS

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 similar expressions indicate
forward-looking 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. 1st
Source cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made.

1st Source may make other written or oral forward-looking statements
from time to time. Readers are advised that various important factors
could cause 1st Source's actual results or circumstances for future
periods to differ materially from those anticipated or projected in such
forward-looking statements. Such factors, among others, include changes
in laws, regulations or accounting principles generally accepted in the
United States; 1st Source's competitive position within its markets
served; increasing consolidation within the banking industry; unforeseen
changes in interest rates; unforeseen downturns in the local, regional
or national economies or in the industries in which 1st Source has
credit concentrations; and other risks discussed in 1st Source's filings
with the Securities and Exchange Commission, including its Annual Report
on Form 10-K, which filings are available from the SEC. 1st Source
undertakes no obligation to publicly update or revise any
forward-looking statements.

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. Although these non-GAAP financial measures are
frequently used by investors to evaluate a financial institution, they
have limitations as analytical tools, and should not be considered in
isolation, or as a substitute for analyses of results as reported under
GAAP. These include taxable-equivalent net interest income (including
its individual components), net interest margin (including its
individual components), the efficiency ratio, tangible common
equity-to-tangible assets ratio and tangible book value per common
share. 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 and of the Company's operating efficiency. Other financial
holding companies may define or calculate these measures differently.

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. Net
interest income on a FTE basis is also used in the calculation of the
Company's efficiency ratio. The efficiency ratio, which is calculated by
dividing non-interest expense by total taxable-equivalent net revenue
(less securities gains or losses and lease depreciation), measures how
much it costs to produce one dollar of revenue. Securities gains or
losses and lease depreciation are excluded from this calculation to
better match revenue from daily operations to operational expenses.
Management considers the tangible common equity-to-tangible assets ratio
and tangible book value per common share as useful measurements of the
Company's equity.

See the table marked "Reconciliation of Non-GAAP Financial Measures" for
a reconciliation of certain non-GAAP financial measures used by the
Company with their most closely related GAAP measures.

 
1st SOURCE CORPORATION
3rd QUARTER 2018 FINANCIAL HIGHLIGHTS
(Unaudited - Dollars in thousands, except per share data)
  Three Months Ended       Nine Months Ended  
September 30,   June 30,   September 30, September 30,   September 30,
    2018   2018   2017       2018   2017  
AVERAGE BALANCES
Assets $   6,224,187 $   6,167,017 $   5,706,072 $   6,111,302 $   5,577,489
Earning assets 5,839,588 5,776,822 5,300,838 5,724,114 5,194,745
Investments 964,281 948,335
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