1st Source Corporation Reports Earnings, History of Increased Dividends Continues

QUARTERLY HIGHLIGHTS

• Net income improved to $15.23 million and diluted net income per common share improved to $0.58 from the prior year's quarter.
• Return on average assets of 1.11% and return on average common shareholders' equity of 8.96%.
• Net charge-offs of $1.10 million and nonperforming assets to loans and leases of 0.70%.
• Average loans and leases grew $190.45 million or 4.81% from the fourth quarter of 2015.
• Average deposits grew $301.31 million or 7.35% from the fourth quarter of 2015.
• Net interest income increased slightly from the fourth quarter of 2015.
• Noninterest income increased $1.45 million or 6.96% from the fourth quarter of 2015 (increased 5.19% excluding leased equipment depreciation).
• Noninterest expenses were comparable to the fourth quarter of 2015 (decreased 1.65% excluding leased equipment depreciation).

South Bend, IN — 1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported net income of $57.79 million for the year of 2016, compared to $57.49 million in 2015. Fourth quarter net income was $15.23 million, an increase of 5.60% compared to $14.42 million in the fourth quarter of 2015. The year-to-date net income comparison was positively impacted by net gains of $1.80 million on investment securities available-for-sale and gains of $1.86 million on a partnership investment liquidation required by the Volcker Rule. These positives were offset by a reduction in net interest recoveries of $3.16 million and a higher provision for loan and lease losses of $3.67 million.

Diluted net income per common share for the year improved to $2.22 compared to $2.17 a year earlier. Diluted net income per common share for the fourth quarter was $0.58, compared to $0.55 per common share reported in the fourth quarter of the previous year.

At its January 2017 meeting, the 1st Source Board of Directors approved a cash dividend of $0.18 per common share. The cash dividend is payable to shareholders of record on February 6, 2017 and will be paid on February 15, 2017. Cash dividends for 2016 increased 7.30% over the previous year.

According to Christopher J. Murphy III, Chairman, “1st Source Corporation had a steady fourth quarter and 2016 was our 29th year of consecutive annual dividend growth. Credit quality remains stable and we have seen average deposits increase 7.35% from a year ago. Average loan and lease growth of 4.81% for the same quarterly period was a strong increase considering the acquisitions of a number of our clients. As an example, the consolidation occurring in the recreational vehicle industry and the auto rental industry has resulted in the sale of a number of our clients to substantianlly larger companies. These sales and mergers have resulted in loan payoffs as have the sale of local business customers with aging owners who took advantage of the improved economy to sell their businesses. For the year, average loans and leases grew by 7.20%.”

“This past quarter we launched a new mobile responsive website and smart watch apps for Android™ and Apple® watches. We also opened a new expanded banking center in Warsaw, Indiana, replacing our former downtown location and financed our first tax advantaged renewable energy solar projects.”

“We were once again identified for providing the best banking experience in the Midwest by The MSR Group, a top research firm specializing in the customer experience in retail banking. To determine this they interviewed thousands of customers of banks including the top 50 banks in the country. We are proud to have received this award for two consecutive years as it shows our commitment to delivering outstanding client service. We are committed to providing outstanding service to our clients whether they prefer to bank in person, online or with their mobile device.” Mr. Murphy concluded.

FOURTH QUARTER 2016 FINANCIAL RESULTS

Loans

Average loans and leases of $4.15 billion increased $190.45 million, or 4.81% in the fourth quarter of 2016 from the year ago quarter and have decreased slightly from the third quarter. Annual average loans and leases of $4.11 billion increased $276.36 million, or 7.20% from the same period in 2015.

Deposits

Average deposits of $4.40 billion grew $301.31 million, or 7.35% for the quarter ended December 31, 2016 from the year ago quarter and have increased $48.97 million, or 1.12% compared to the third quarter. Annual average deposits for 2016 were $4.30 billion an increase of $341.64 million or 8.62% from 2015.

Net Interest Income and Net Interest Margin

Fourth quarter 2016 net interest income of $43.38 million increased slightly from the fourth quarter a year ago and increased $0.69 million, or 1.61% from the third quarter. Net interest recoveries during the quarter were down $1.70 million from 2015, resulting in a 14 basis point reduction to the net interest margin.

Fourth quarter 2016 net interest margin was 3.39%, a decrease of 19 basis points from the 3.58% for the same period in 2015 and an increase of 4 basis points from the 3.35% in the third quarter. Fourth quarter 2016 net interest margin on a fully tax-equivalent basis was 3.42%, a decrease of 19 basis points from the 3.61% for the same period in 2015 and an increase of 3 basis points from the 3.39% in the third quarter.

For the twelve months of 2016, net interest income was $169.66 million, an increase of $3.14 million, or 1.88% compared to the same period a year ago. Net interest recoveries for 2016 were down $3.16 million from 2015, resulting in a 6 basis point reduction to the net interest margin.

Net interest margin for the year ending December 31, 2016 was 3.39%, a decrease of 18 basis points from the 3.57% for the year ending December 31, 2015. Net interest margin on a fully tax-equivalent basis for the year ending December 31, 2016 was 3.43%, a decrease of 17 basis points from the 3.60% for the year ending December 31, 2015.

Noninterest Income

Noninterest income increased $1.45 million or 6.96% and $5.63 million or 6.76% in the three and twelve month periods ended December 31, 2016, respectively over the same periods a year ago. The increase in noninterest income during the fourth quarter was mainly due to higher equipment rental income related to an increase in the average equipment rental portfolio and gains on the sale of available-for-sale equity securities, which was offset by lower monogram fund income. The increase in noninterest income during the twelve months of 2016 was primarily due to higher equipment rental income related to an increase in the average equipment rental portfolio, improved debit card income due to growth in those transactions, gains on the liquidation of a partnership investment required by the Volcker Rule and gains on the sale of available-for-sale equity securities, which was offset by lower monogram fund income and decreased customer swap fees.

Noninterest Expense

Noninterest expense was flat for the quarter ended December 31, 2016 and increased $4.53 million or 2.85% for the twelve months of 2016, respectively over the comparable periods a year ago. Excluding depreciation on leased equipment, annual noninterest expenses were up $1.13 million or 0.80%. The 2016 increase in noninterest expense was primarily due to higher depreciation on leased equipment, furniture and equipment expense and increased loan and lease collection and repossession expenses offset by reduced residential mortgage foreclosure expenses, losses on the sale of fixed assets and lower supplies and communication. Depreciation on leased equipment was higher as a result of an increase in the average equipment rental portfolio. Furniture and equipment expense was higher due to increased software maintenance costs, depreciation on new equipment with banking center remodels and computer processing charges. Loan and lease collection and repossession expenses increased mainly due to lower recoveries on repurchased mortgage loans, fewer gains on the sale of other real estate owned and repossessions and an increase in general collection and repossession expenses. Supplies and communication expense was lower primarily due to costs associated with replacing debit cards with embedded EMV chip cards in 2015 and a reduction in telephone charges. In addition, during the fourth quarter of 2016, business development and marketing expenses included $0.53 million of charitable contributions related to the gains on the sale of available-for-sale securities.

Credit

The reserve for loan and lease losses as of December 31, 2016 was 2.11% of total loans and leases compared to 2.13% at September 30, 2016 and 2.21% at December 31, 2015. Net charge-offs of $1.10 million were recorded for the fourth quarter of 2016 compared with net recoveries of $0.50 million in the same quarter a year ago. Net charge-offs for the full year were $5.40 million in 2016, compared to net recoveries of $0.88 in 2015.

The provision for loan and lease losses for the fourth quarter and full year of 2016 increased $0.74 million and $3.67 million, respectively compared with the same periods in 2015.

The ratio of nonperforming assets to net loans and leases was 0.70% as of December 31, 2016, up from the 0.50% on December 31, 2015 and comparable to the 0.68% on September 30, 2016.

Capital

As of December 31, 2016, the common equity-to-assets ratio was 12.26% compared to 12.30% at September 30, 2016 and 12.41% a year ago. The tangible common equity-to-tangible assets ratio was 10.89% at December 31, 2016 and 10.93% at September 30, 2016 compared to 10.96% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 12.59% at December 31, 2016 compared to 12.35% at September 30, 2016 and 12.39% a year ago. During 2016, the Company repurchased $8.03 million of common stock in several open market transactions. During the fourth quarter of 2016, accumulated other comprehensive income decreased $8.03 million as a result of the decrease in the market value of our investment securities available-for-sale given current market conditions. At December 31, 2016 approximately 53% of our investment securities portfolio will reprice in the next three years.

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 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 81 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.