Market Overview

1st Source Corporation Reports Record Earnings for the Full Year and Fourth Quarter 2018, History of Increased Dividends Continues: up 23% from Fourth Quarter 2017

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FULL YEAR AND QUARTERLY HIGHLIGHTS

  • Net income improved to $82.41 million for the year of 2018, up 21.11%
    from 2017 and improved to $21.45 million for the fourth quarter of
    2018, up 19.18% over the fourth quarter of 2017.
  • Diluted net income per common share improved to $3.16 for the year of
    2018, up 21.54% from 2017 and improved to $0.82 for the fourth quarter
    of 2018, up 18.84% from the prior year's fourth quarter of $0.69.
  • Return on average assets increased to 1.34% and return on average
    common shareholders' equity increased to 11.09% for the full year of
    2018 from 1.21% and 9.69%, respectively in 2017. For the fourth
    quarter of 2018, return on average assets increased to 1.36% and
    return on average common shareholders' equity increased to 11.22% from
    1.23% and 9.93%, respectively in the fourth quarter of 2017.
  • Net charge-offs of $13.88 million for the full year of 2018 compared
    to $2.64 million in 2017 and $2.53 million in the fourth quarter of
    2018 compared to $2.11 million in the fourth quarter of 2017.
    Nonperforming assets to loans and leases of 0.71% at December 31, 2018
    compared to 0.67% at December 31, 2017.
  • Average loans and leases grew $421.88 million in the full year of
    2018, up 9.74% from 2017 and for the quarter, grew $389.20 million, up
    8.75% from the fourth quarter of 2017.
  • Average deposits grew $470.42 million in the full year of 2018, up
    10.47% from 2017 and for the quarter, grew $401.80 million, up 8.57%
    from the fourth quarter of 2017.
  • Net interest income increased $28.28 million in the full year of 2018,
    up 15.23% from 2017 and for the quarter, increased $7.03 million, up
    14.40% from the fourth quarter of 2017.
  • Noninterest income decreased $1.66 million in the full year of 2018,
    or 1.68% from 2017 and for the quarter, decreased $1.51 million, or
    5.89% from the fourth quarter of 2017 (decreased 3.66% for the year
    and 7.33% for the quarter excluding leased equipment depreciation).
  • Noninterest expenses increased $12.47 million in the full year of 2018
    or 7.17% from 2017 and for the quarter, increased $0.38 million or
    0.80% from the fourth quarter of 2017 (increased 7.69% for the year
    and 1.22% for the quarter excluding leased equipment depreciation).

1st Source Corporation (NASDAQ:SRCE), parent company of 1st Source
Bank, today reported a record high net income of $82.41 million for the
year of 2018, an improvement of 21.11% compared to $68.05 million earned
in 2017. Fourth quarter net income was $21.45 million, an increase of
19.18% compared to $17.99 million earned in the fourth quarter of 2017.
Income before taxes for the year of 2018 was $105.03 million, growing
3.62% compared to $101.36 million earned in 2017 and $27.61 million for
the fourth quarter of 2018, an improvement of 17.24% compared to $23.55
million for the same period in 2017. The annual pretax income comparison
was positively impacted by increased net interest income of $28.28
million primarily due to rising lending rates and higher average loan
and lease balances. These positives were offset by a $10.48 million
increase in the provision for loan and lease losses to support loan and
lease growth along with higher charge-offs and a $12.47 million rise in
noninterest expense. Non-recurring 2018 costs were approximately $3.68
million.

Diluted net income per common share for the year was a record high at
$3.16, up from the $2.60 earned a year earlier. Diluted net income per
common share for the fourth quarter was $0.82, up from the $0.69 earned
in the fourth quarter of the previous year.

At its January 2019 meeting, the Board of Directors approved a cash
dividend of $0.27 per common share, up 22.73% from the $0.22 per common
share declared a year ago. The cash dividend is payable to shareholders
of record on February 4, 2019 and will be paid on February 14, 2019.

According to Christopher J. Murphy III, Chairman, "1st Source
Corporation had back-to-back record years in 2018 and 2017! Also, 2018
was our 31st consecutive year of dividend growth. Reflecting
the strong economy on both a national and local level, average loans and
leases were up a solid 8.75% for the quarter compared to the same period
a year ago. Average deposits had strong growth of 8.57% from this time
last year. The net interest margin continued to improve with the rising
interest rate environment.

"Credit quality was moderate with net charge-offs of $2.53 million in
the fourth quarter of 2018. The majority of the charge-offs occurred in
the Auto and Light Truck and Aircraft portfolios and were somewhat
offset by a recovery in the Aircraft portfolio.

"In the final quarter of 2018, 1st Source's commitment to helping our
clients achieve security, build wealth, and realize their dreams using
straight talk and sound advice, along with our acclaimed personal
service, convenient branches and highly rated on-line and mobile
services, attracted many new clients who were frustrated by the
disruption and lack of transparency in their previous banking situation.
We welcomed our new clients to the Bank and appreciate the opportunity
to prove to them that we are the bank on which they can rely.

"Additionally, we are pleased with the success of our sustainability
efforts in the financing of solar installations across the country and
in testing them at our own locations. We are also pleased to be able to
help the many organizations across our region serving our clients and
neighbors. We provide financial and volunteer support helping assure a
strong social safety net, good health care, and promising education in
the markets we serve," Mr. Murphy concluded.

FULL YEAR AND FOURTH QUARTER 2018 FINANCIAL RESULTS

Loans

Annual average loans and leases of $4.76 billion increased $421.88
million, up 9.74% from the full year 2017. Quarterly average loans and
leases of $4.84 billion increased $389.20 million, up 8.75% in the
fourth quarter of 2018 from the year ago quarter and have increased
$13.56 million from the third quarter.

Deposits

Annual average deposits for 2018 were $4.96 billion, an increase of
$470.42 million, up 10.47% from 2017. Quarterly average deposits of
$5.09 billion grew $401.80 million, up 8.57% for the quarter ended
December 31, 2018 compared to the year ago quarter and have remained
relatively flat compared to the third quarter.

Net Interest Income and Net Interest Margin

For the twelve months of 2018, tax-equivalent net interest income was
$214.71 million, an increase of $27.28 million, up 14.56% compared to
the full year 2017. Fourth quarter 2018 tax-equivalent net interest
income of $56.03 million increased $6.79 million, up 13.78% from the
fourth quarter a year ago and increased $1.48 million, up 2.70% from the
third quarter.

Net interest margin for the year ending December 31, 2018 was 3.71%, an
increase of 17 basis points from the 3.54% for the year ending December
31, 2017. Net interest margin on a tax-equivalent basis for the year
ending December 31, 2018 was 3.73%, an increase of 16 basis points from
the 3.57% for the year ending December 31, 2017.

Fourth quarter 2018 net interest margin was 3.77%, an improvement of 20
basis points from the 3.57% for the same period in 2017 and an increase
of 8 basis points from the third quarter. Fourth quarter 2018 net
interest margin on a fully tax-equivalent basis was 3.78%, an increase
of 17 basis points from the 3.61% for the same period in 2017 and an
increase of 7 basis points from the 3.71% in the third quarter. The
improved yield during the quarter was positively impacted by 2 basis
points due to net interest recoveries of $0.31 million in the fourth
quarter of 2018 vs. net interest recoveries of $0.09 million during the
fourth quarter of 2017.

Noninterest Income

Noninterest income for the twelve months ended December 31, 2018 was
$97.05 million, down $1.66 million or 1.68% compared to the twelve
months ended December 31, 2017. Fourth quarter 2018 noninterest income
of $24.16 million decreased $1.51 million, or 5.89% from the fourth
quarter a year ago and was relatively flat from the third quarter.

Noninterest income during the three and twelve months ended December 31,
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, partnership gains, and improved insurance
commissions due to new business.

Noninterest Expense

Noninterest expense for the twelve months ended December 31, 2018 was
$186.47 million, an increase of $12.47 million, or 7.17% compared to the
same period a year ago. Fourth quarter 2018 noninterest expense of
$47.69 million was relatively flat from the fourth quarter a year ago
and from the prior quarter. Excluding depreciation on leased equipment,
noninterest expenses were up 1.22% and 7.69% for the fourth quarter and
twelve months ended December 31, 2018, respectively.

The increase in noninterest expense for 2018 from 2017 was primarily due
to higher salaries as a result of normal merit increases, higher
incentive compensation, and a slight increase in full-time equivalent
employees, 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 average lease portfolio and higher loan and lease
collection expenses offset by lower charitable contributions. In
addition, non-recurring 2018 costs were approximately $3.68 million due
to consulting fees of $1.82 million for a customer relationship
management project, a regulatory compliance project, and information
technology projects, repossessed asset valuation adjustments of $1.56
million, and trust losses of $0.30 million.

Credit

The reserve for loan and lease losses as of December 31, 2018 was 2.08%
of total loans and leases compared to 2.04% at September 30, 2018 and
2.10% at December 31, 2017. Net charge-offs that have been recorded for
the full year of 2018 were $13.88 million compared to net charge-offs of
$2.64 million in 2017. The majority of the 2018 charge-offs was related
to one relationship within the aircraft portfolio. Overall, Aircraft
accounted for 70% and Auto and Light Truck accounted for 23% of total
net charge-offs for the year. Net charge-offs of $2.53 million were
recorded for the fourth quarter of 2018 compared with net charge-offs of
$2.11 million in the same quarter a year ago and down from the $10.86
million of net charge-offs in the third quarter. The Auto and Light
Truck division recognized net charge-offs of $2.48 million in the fourth
quarter with the majority from one relationship. Aircraft recorded
charge-offs of $1.79 million offset by recoveries of $2.45 million.

The provision for loan and lease losses was $19.46 million for the
twelve months ended December 31, 2018 and $4.70 million for the fourth
quarter of 2018, an increase of $10.48 million and $1.08 million,
respectively, compared with the same periods in 2017. The ratio of
nonperforming assets to loans and leases was 0.71% as of December 31,
2018, compared to 1.00% on September 30, 2018 and 0.67% on December 31,
2017.

Capital

As of December 31, 2018, the common equity-to-assets ratio was 12.11%,
compared to 11.92% at September 30, 2018 and 12.20% a year ago. The
tangible common equity-to-tangible assets ratio was 10.92% at December
31, 2018 and 10.73% at September 30, 2018 compared to 10.94% a year
earlier. The Common Equity Tier 1 ratio, calculated under banking
regulatory guidelines, was 12.38% at December 31, 2018 and September 30,
2018 compared to 12.35% 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, 20 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.

(charts attached)

           
1st SOURCE CORPORATION
4th QUARTER 2018 FINANCIAL HIGHLIGHTS
(Unaudited - Dollars in thousands, except per share data)
 
Three Months Ended Twelve Months Ended
December 31, September 30, December 31, December 31, December 31,
    2018   2018   2017     2018   2017
AVERAGE BALANCES
Assets $ 6,270,544 $ 6,224,187 $ 5,818,837 $ 6,151,439 $ 5,638,322
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