What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-18 · 265 added, 332 removed, 614 unchanged (49% of the section changed)

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• Changes in the competitive environment among bank holding companies.

• The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, and insurance) with which we and our subsidiaries must comply.

• The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, insurance, and climate change) with which we and our subsidiaries must comply.

• The effect of changes in accounting policies and practices and auditing requirements, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters.

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As of December 31, 2020, we adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as current expected credit losses (CECL).

We elected to delay adoption from January 1, 2020 until year-end (as provided by the CARES Act) principally to gain a better understanding of how the CECL model reacts to the severely adverse conditions as a result of the COVID-19 pandemic.

The new accounting standard is being implemented at a time when we are experiencing conditions without historical precedent.

Measurement of Credit Losses on Financial Instruments, as amended, which replaced the incurred loss methodology with an expected loss methodology that is referred to as current expected credit losses (CECL).

The new accounting standard was implemented at a time when we were experiencing conditions without historical precedent.

Determining the appropriateness of the allowance is complex and requires judgement by management about the effect of matters that are inherently uncertain.

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Actual losses may differ from estimated amounts due to model inefficiencies or management’s inability to adequately determine appropriate model adjustment factors.

The new accounting standard further requires management to use forecasts about future economic conditions to determine the expected credit losses over the remaining life of the asset.

Forecast adjustments are fundamentally difficult to establish and, in the current environment, due to uncertainty given the national pandemic and the political landscape, the task is even more formidable.

The accounting standard further requires management to use forecasts about future economic conditions to determine the expected credit losses over the remaining life of the asset.

Forecast adjustments are fundamentally difficult to establish and, in the current environment, due to uncertainty given the ongoing pandemic and the spread of the highly contagious Omicron COVID variant, persistent supply chain bottlenecks, and inflationary concerns, the task is even more formidable.

Patterns from our history of normal business cycles are far less analogous to present economic conditions and consequently less relevant.

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Pursuant to our preexisting disaster recovery plan addressing potential pandemic outbreaks, we created a dedicated executive COVID-19 response team that is closely monitoring developments and providing guidance for additional precautions and initiatives.

We have divided departments among various locations to help ensure that infection will 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 held virtually this year and will again be held virtually in 2021.

Employees with health conditions putting them at higher risk of adverse effects from coronavirus infection have been given the opportunity to work remotely.

Additionally, travel has been restricted.

We are promoting social distancing, frequent hand washing, disinfection of all surfaces, and the use of masks or nose and mouth coverings have been mandated in all of our locations.

The majority of our banking center lobbies have been open only for advance appointments.

Banking center drive-ups, ATMs and online/mobile banking services continue to operate normally.

It remains undetermined how long our banking centers will operate at these service levels.

Infection rates in the communities we serve vary by region and we will make prudent decisions for the safety of our colleagues and our clients.

Initially, we divided departments among various locations to help ensure that infection would not spread across entire departments.

Additionally, we are encouraging virtual meetings and conference calls in place of in-person meetings, including our annual shareholder meeting which was held virtually again this year.

Employees with health conditions putting them at higher risk of adverse effects from coronavirus infection were given the opportunity to work remotely.

Travel was restricted and we promoted social distancing, frequent hand washing, disinfection of all surfaces, and the use of masks or nose and mouth coverings were mandated in all of our locations.

We continue to offer paid time off to all of our colleagues to schedule vaccinations.

As of early-February 2022, over 80% of our colleagues had received at least their first dose of vaccine.

In April 2021, we fully reopened our banking center lobbies 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 provide a more physically distanced alternative.

Although infection rates in the communities we serve vary by region, the positive impact that vaccinations have had on curbing the spread of the virus allowed us to begin bringing departments back together and to loosen travel restrictions for colleagues who are fully vaccinated.

Given the COVID-19 variants currently spreading, we are strongly advising our colleagues who are fully vaccinated to get vaccination boosters.

To show our appreciation for our colleagues who have been vaccinated, we announced a one-time reward of 10 shares of 1st Source Corporation common stock and $250 cash.

We will continue to make prudent decisions for the safety of our colleagues and our clients following recommended Centers for Disease Control and local health department guidance.

We are hopeful that infection rates will decline in the communities we serve as the percentage of fully vaccinated and boosted individuals continues to increase.

Loan and lease modifications

We began receiving requests from our borrowers for loan and lease deferrals in March.

We began receiving requests from our borrowers for loan and lease deferrals in March 2020 which declined over the remainder of 2020 and throughout 2021.

Modifications include the deferral of principal payments or the deferral of principal and interest payments for terms generally 90 - 180 days.

Requests are evaluated individually and approved modifications are based on the unique circumstances of each borrower.

We are committed to working with our clients to allow time to work through the challenges of this pandemic.

At this time, it is uncertain what future impact loan and lease modifications related to COVID-19 difficulties will have on our financial condition, results of operations and allowance for loan and lease losses.

The following table shows coronavirus loan and lease modification balances in deferment as of December 31, 2020, September 30, 2020 and June 30,2020, respectively.

We are committed to working with our clients to allow time to work through the

challenges of this pandemic.

The following table shows coronavirus loan and lease modification balances in deferment as of December 31, 2021 and December 31, 2020, respectively.

COVID-19 Related Loan and Lease Modifications

(Dollars in millions) December 31, 2020 September 30, 2020 June 30, 2020

Auto and light truck rental $ 5 $ 22 $ 224

Specialty vehicle (1)

Medium and heavy duty truck — 5 87

Aircraft 13 13 93

Construction 7 — 139

Commercial 83 63 210

Residential real estate and home equity — — 4

Consumer — — 8

Total loans and leases $ 129 $ 126 $ 840

(1) Includes buses, step vans and funeral cars.

The following table shows the coronavirus loan and lease modification balances by deferral type as of December 31, 2020.

(Dollars in millions) Principal Only Deferrals Principal and Interest Deferrals Total Modifications in Deferment Additional Modifications Expected (1)

Total Modifications Recorded Investment at

December 31, 2020 Total Modifications as a % of

December 31, 2020

Auto and light truck rental $ 1 $ 4 $ 5 $ 1 $ 6 $ 409 1 %

Specialty vehicle (2)

19 2 21 20 41 133 31 %

Medium and heavy duty truck — — — — — 279 — %

Aircraft 13 — 13 — 13 861 2 %

Construction 7 — 7 — 7 715 1 %

Commercial 20 63 83 18 101 2,449 4 %

Residential real estate and home equity — — — — — 511 — %

Consumer — — — — — 132 — %

Total loans and leases 60 69 129 39 168 5,489 3 %

PPP loans, net of unearned discount (3)

— — — — — 352 — %

Total loans and leases less PPP loans $ 60 $ 69 $ 129 $ 39 $ 168 $ 5,137 3 %

(1) Represents modifications which ended deferment during December 2020 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 December 31, 2020, COVID-19 related loan modifications for our bus lending were $40.23 million or 56.27% (includes $19.77 million whose modification period ended during December but we expect to grant further extensions) of our total bus loan balances.

COVID-19 related loan modifications for the hotel industry were $79.97 million or 50.69% (includes $12.33 million whose modification period ended during December 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 and below.

With the imposition of travel restrictions as a result of taking steps to slow the spread of COVID-19, our bus clients were immediately impacted resulting in numerous deferral requests.

We initially granted three-month deferrals to many of these clients, most of which were principal and interest deferrals.

During the year, we sent questionnaires to all of our bus clients in order to gain a better understanding of their situation, their customer base and the likely long-term impact of the economic downturn on their business model, i.e.

their ability to withstand reduced revenue for an extended period of time.

We differentiated our bus clients based on the underlying risks in their business models and management teams.

In order to differentiate collateral types, we created tiers from more desirable to less desirable collateral pools and valued the units accordingly, using deeper discount rates against collateral deemed less desirable.

We tried to assess our client’s outlook and their ability to manage through several more months of extreme distress.

We gathered information on how they are maintaining their assets and if the units are currently insured.

We are diligently working with these clients to try to keep them in business.

The CARES Act did not provide much benefit to this sector, however the recently enacted Coronavirus Response and Relief Supplemental Appropriations Act offers targeted transportation funds which are expected to afford some relief.

We have extended three rounds of three-month deferrals and will continue to agree to a fourth round of deferrals if we think that our borrowers can continue to support the maintenance and insurance of their units.

Generally, this round we are granting principal only deferrals and extending the deferral period for six months in the hopes that activity will begin to increase during the summer months of 2021.

Our intent is to repossess collateral as a last result.

If the borrower cannot maintain the assets, we will move to take them back either voluntarily or by legal action.

We expect long holding periods until we will be able to sell any repossessed units.

So far, we have limited repossessed bus assets, $1.09 million as of December 31, 2020, but this number will likely increase.

The following table shows the coronavirus loan and lease modification balances.

Modification terms generally ranged between three and six months depending on industry.

First Modification Second Modification Three or More Modifications

(Dollars in millions) Expired In Deferment Total Expired In Deferment (1)

Total Expired In Deferment (1)

(Dollars in millions) December 31, 2021 December 31, 2020

Auto and light truck rental $ — $ 5

Specialty vehicle (1)

89 — 89 74 2 76 44 39 83

Medium and heavy duty truck — —

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Residential real estate and home equity — —

Consumer 9 — 9 — — — — — —

Total loans and leases $ — $ 129

(1) Includes modifications which ended deferment during December 2020 and are in the process of receiving or expected to receive an extension.

(1) Includes buses, step vans and funeral cars.

Paycheck Protection Program (PPP) and Liquidity

As part of the CARES Act, approved by the President on March 27, 2020 and extended on July 4, 2020, the Small Business Administration (SBA) was authorized to guarantee loans under the PPP through August 8, 2020 for businesses who met the necessary eligibility requirements in order to keep their workers on the payroll.

We began accepting applications on April 3, 2020 and disbursed the final PPP loan on August 25, 2020.

As part of the CARES Act, approved by President Trump on March 27, 2020 and extended on July 4, 2020, the Small Business Administration (SBA) was authorized to guarantee loans under the PPP through August 8, 2020 for businesses who met the necessary eligibility requirements in order to keep their workers on the payroll.

We began accepting applications on April 3, 2020 and disbursed the final PPP loan on August 25, 2020 from the first round.

On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act was approved which authorized a second round of PPP loans.

We disbursed the final PPP loan on May 28, 2021 from the second round.

PPP loans are fully guaranteed by the SBA and as such do not represent a credit risk.

The following table shows PPP loan disbursements as of December 31, 2020.

Number of Loans $ of Loans (000's) Average Loan Size

Phase One 2,024 $ 520,583 $ 257,000

Phase Two 1,516 76,868 51,000

The following table shows PPP loans of December 31, 2021.

Number of Loans $ of Loans Originated Forgiveness/

Payments $ of Loans at

December 31, 2021

2020 PPP Loans 3,540 $ 597,451 $ 596,673 $ 778

2021 PPP Loans 3,239 261,459 186,446 75,013

Total 6,779 $ 858,910 $ 783,119 $ 75,791

As of December 31, 2020, PPP loan balances were $351.56 million which is net of an unearned discount of $6.37 million and located within the commercial and agricultural portfolio.

As of December 31, 2021, total PPP loans were $73.08 million which is net of an unearned discount of $2.71 million and located within the commercial and agricultural portfolio.

At December 31, 2021, specialty finance customers had $19.33 million of PPP loans and traditional commercial banking customers had $53.75 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, 1,972 loans were for $50,000 or less.

As of December 31, 2020, we had helped our clients secure forgiveness for $236.25 million and had submitted loan forgiveness requests to the SBA for over 60% of the total PPP loans amounts we funded during 2020.

Of the 3,540 PPP loans we originated in 2020, 1,972 loans were for $50,000 or less.

Of the 3,239 PPP loans we originated in 2021, 2,424 loans were for $50,000 or less.

As of December 31, 2021, we had submitted loan forgiveness requests to the SBA for over 99% of the total PPP loan amounts we funded during 2020 and over 75% of the total PPP loan amounts we funded during 2021.

We were able to secure loans for over 500 minority- and women-owned businesses, which represents approximately 15% of our overall efforts in this latest round of PPP funding.

Additionally, we helped fund almost 400 PPP loans to new customers during 2021.

On April 9, 2020, the FDIC, Federal Reserve and OCC created the Paycheck Protection Program Liquidity Facility (PPPLF) to bolster the effectiveness of the PPP by providing liquidity to and neutralizing the regulatory capital effects on participating financial institutions.

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Asset impairment

Our MSRs have experienced a decrease in their fair value as of December 31, 2020 resulting in year-to-date impairment charges of $0.81 million due to lower mortgage rates leading to faster prepayment speeds.

Our mortgage servicing rights (MSRs) had experienced a decrease in their fair value as of December 31, 2020 resulting in 2020 impairment charges of $0.81 million due to lower mortgage rates leading to faster prepayment speeds.

During the twelve months ended December 31, 2021, we recognized $0.81 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 are appropriate.

We evaluate goodwill for impairment during the fourth quarter of each year, with financial data as of September 30.

Based on the analysis performed as of October 1, 2019, we determined that goodwill for our reporting units was not impaired.

During the first quarter of 2020, management determined that the deterioration in general economic conditions as a result of the COVID-19 pandemic and responses thereto represented a triggering event prompting an evaluation of goodwill impairment.

Based on the analyses performed during the first, second, third, and fourth 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.

Business, Item 1A, Risk Factors for more information.

Allowance for loan and lease losses

During 2020, we experienced increasing downgrades and defaults as a result of COVID-19 as evidenced by increasing special attention and nonperforming loan balances.

Special attention loan balances increased $76.22 million since December 31, 2019 and we anticipate special attention levels to remain high with further downgrades in 2021.

Likewise, nonperforming loans increased $50.41 million since last year-end.

We are in communication with our clients to gain a better understanding of our highest risk exposures and probable defaults.

As a result of the discussions with our clients, we downgraded an additional 39 bus accounts to special attention and placed several of these accounts on nonaccrual status.

We anticipate defaults to continue into 2021 but at a reduced pace.

Furthermore, the bus collateral may 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 is well managed.

Some of our construction clients are impacted by low commodity prices, particularly for oil, which recently has shown some improvement.

Our local market clients have been buoyed in the short-term with funds from the PPP program.

The passage of the Coronavirus Response and Relief Supplemental Appropriations Act in late December will provide further stimulus for many of these clients.

Thus far, we have not seen many downgrades or defaults in our commercial lending, but we anticipate this could change particularly as businesses continue to struggle.

During the last recession, we also noted a delayed impact on our commercial lending as compared to our specialty finance lending.

Our losses for 2020 were moderate.

We continue to maintain the allowance for loan and lease losses at an appropriate level as we anticipate some of the current and future downgrades and defaults will eventually result in losses.

See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Credit Experience” and Part II, Item 8, Financial Statements and Supplementary Data — Note 5 of the Notes to Consolidated Financial Statements for more information.

During 2021, except for the bus segment of our auto and light truck portfolio, we experienced stable to improving credit quality.

Special attention loan balances decreased $78.48 million year-to-date and nonperforming loans decreased $21.55 million year-to-date.

The impact of COVID-19 has been particularly harsh on the bus segment of our auto and light truck portfolio where we continued to experience higher than normal downgrades, movement to nonaccrual status and charge-offs.

During the fourth quarter, we charged-off an additional $2.74 million on bus accounts bringing year-to-date net charge-offs to $7.16 million.

Many of our customers received long-awaited Coronavirus Economic Relief for Transportation Services (“CERTS”) funds and most have returned to normalized payment terms.

As of year-end, we had no delinquency in the bus segment.

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 this may change, if businesses struggle to get back to normal or consumer preferences potentially change.

During the last recession, we 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 report improved occupancy but at somewhat lower rates.

Our total loan losses remain moderate with net charge-offs of $5.15 million for the quarter and $8.86 million year-to-date.

During the third quarter, we noted the growth momentum was softening in the U.S.

a little earlier than we previously projected, which led us to revise our forecast adjustment to reflect the slowing economy.

We reviewed our forecast adjustment at year-end and believe the assumptions remain pertinent.

We continue to maintain the allowance for credit losses at a level we deem appropriate as some of the current and future downgrades and defaults may result in losses.

See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Provision and Allowance for Credit Losses” for more information.

EARNINGS SUMMARY

Net income available to common shareholders in 2020 was $81.44 million, down from $91.96 million in 2019 and down from $82.41 million in 2018.

Net income available to common shareholders in 2021 was $118.53 million, up from $81.44 million in 2020 and up from $91.96 million in 2019.

Diluted net income per common share was $4.70 in 2021, $3.17 in 2020, and $3.57 in 2019.

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Return on average common shareholders’ equity was 13.07% in 2021 versus 9.41% in 2020, and 11.50% in 2019.

Net income in 2020, as compared to 2019, was positively impacted by a $1.95 million or 0.87% increase in net interest income, a $2.76 million or 2.73% increase in noninterest income, a $1.64 million or 0.87% decrease in noninterest expense, and a $3.26 million or 11.58% decrease in income tax expense which was offset by a $20.17 million or 127.38% increase in provision for credit losses.

Net income in 2019 was positively impacted by a $9.96 million or 4.66% increase in net interest income, a $4.08 million or 4.20% increase in noninterest income, and a $3.63 million or 18.65% decrease in provision for credit losses which was offset by a $5.53 million or 24.44% increase in income tax expense and a $2.54 million or 1.36% increase in noninterest expense over 2018.

Net income in 2021, as compared to 2020, was positively impacted by a $10.82 million or 4.79% increase in net interest income, a $40.30 million or 111.95% decrease in the provision for credit losses, and a $1.22 million or 0.65% decrease in noninterest expense which was offset by a $3.80 million or 3.65% decrease in noninterest income and a $11.45 million or 46.01% increase in income tax expense.

Net income in 2020 was positively impacted by a $1.95 million or 0.87% increase in net interest income, a $2.76 million or 2.73% increase in noninterest income, a $1.64 million or 0.87% decrease in noninterest expense, and a $3.26 million or 11.58% decrease in income tax expense which was offset by a $20.17 million or 127.38% increase in provision for credit losses over 2019.

Dividends paid on common stock in 2021 amounted to $1.21 per share, compared to $1.13 per share in 2020, and $1.10 per share in 2019.

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The yield on average earning assets decreased 46 basis points to 3.48% for 2021 from 3.94% for 2020 primarily due to lower rates on loans and leases.

Total cost of average interest-bearing liabilities decreased 51 basis points to 0.82% during 2020 from 1.33% in 2019 as a result of the lower interest rate environment during 2020.

Total cost of average interest-bearing liabilities decreased 44 basis points to 0.38% during 2021 from 0.82% in 2020 as a result of the lower interest rate environment.

The result to the fully taxable-equivalent net interest margin was a decrease of 16 basis points.

The largest contributor to the decrease in the yield on average earning assets in 2020 was the 72 basis point decline in the loan and lease portfolio yield primarily due to market conditions as a result of 2020 Federal Reserve interest rate decreases.

Average net loans and leases increased $463.28 million or 9.27% in 2020 from 2019 while the yield decreased to 4.44%.

The largest contributor to the increase in average net loans and leases was Paycheck Protection Program average loan balances of $376.43 million in 2020.

Although the stated interest rate on PPP loans was 1.0%, the PPP impact on the overall loan and lease yield was immaterial due to the recognition of $12.06 million in related loan fees during 2020.

During 2020, the tax-equivalent yield on investment securities available-for-sale decreased 42 basis points to 1.81% while the average balance grew $43.40 million.

Average mortgages held for sale increased $5.03 million during 2020 while the yield decreased 100 basis points.

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 $67.87 million during 2020 while the yield decreased 211 basis points.

The decrease in yield for mortgages held for sale and other investments was primarily a result of higher outstanding balances at lower rates.

The largest contributor to the decrease in the yield on average earning assets in 2021 was the decline in the investment securities yield and the other investments yield primarily due to market conditions as a result of 2020 Federal Reserve interest rate decreases and increases in excess liquidity due to government stimulus programs.

During 2021, the tax-equivalent yield on investment securities available-for-sale decreased 53 basis points to 1.28% while the average balance grew $385.32 million or 36.42% with the largest increases in U.S.

treasury and federal agency securities and mortgage-backed securities due to continued investment of excess liquidity.

Average mortgages held for sale decreased $3.60 million or 17.46% during 2021 while the yield decreased 28 basis points.

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 $298.29 million or 209.89% during 2021 while the yield decreased 59 basis points.

The average balance increase in other investments was primarily a result of excess liquidity held at the Federal Reserve Bank.

The yield on net loans and leases was positively impacted by 15 basis points in 2021 due to the recognition of $16.84 million of fees on PPP loans which have been forgiven by the SBA or paid down by customers offset by PPP loan balances outstanding which earn interest at 1.00%.

Average net loans and leases decreased $25.62 million or 0.47% in 2021 from 2020 while the yield decreased to 4.32%.

The largest contributor to the decrease in average net loans and leases was Paycheck Protection Program average loan balances of $293.99 million in 2021 compared to $376.43 million in 2020.

Average interest-bearing deposits increased $254.46 million or 6.05% during 2021 while the effective rate paid on those deposits decreased 44 basis points.

The increased average balance was primarily due to the impact of government stimulus programs on consumer savings levels.

The decline 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 demand deposits increased $359.06 million or 30.65% during 2020.

Average short-term borrowings decreased $4.75 million during 2020 while the effective rate paid decreased 68 basis points.

The decrease in short-term borrowings was primarily the result of decreased borrowings with the Federal Home Loan Bank.

Average long-term debt and mandatorily redeemable securities balances increased $9.58 million during 2020 as the effective rate decreased 53 basis points primarily due to lower rates on mandatorily redeemable securities.

Average noninterest-bearing demand deposits increased $351.47 million or 22.96% during 2021 due primarily to PPP loan fundings as business customers remain cautious with their funds and spending.

Average short-term borrowings decreased $14.44 million or 7.18% during 2021 while the effective rate paid decreased 20 basis points.

The decrease in short-term borrowings was primarily the result of lower borrowings with the Federal Home Loan Bank.

Interest paid on subordinated notes decreased 17 basis points due to a variable rate on one tranche.

Average long-term debt and mandatorily redeemable securities balances decreased $1.87 million or 2.32% during 2021 as the effective rate decreased 41 basis points primarily due to lower rates on mandatorily redeemable securities.

The following table provides an analysis of net interest income and illustrates interest income earned and interest expense charged for each major component of interest earning assets and the interest bearing liabilities.

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Short-term borrowings:

Securities sold under agreements to repurchase 180,610 112 0.06 % 173,398 317 0.18 % 139,101 356 0.26 %

Other short-term borrowings 6,119 3 0.05 % 27,767 200 0.72 % 66,810 1,578 2.36 %

Subordinated notes 58,764 3,267 5.56 % 58,764 3,367 5.73 % 58,764 3,677 6.26 %

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Short-term borrowings:

Securities sold under agreements to repurchase 13 (218) (205)

Other short-term borrowings (90) (107) (197)

Subordinated notes — (100) (100)

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Short-term borrowings:

Securities sold under agreements to repurchase 76 (115) (39)

Other short-term borrowings (629) (749) (1,378)

Subordinated notes — (310) (310)

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Net interest income - FTE $ 23,830 $ (22,019) $ 1,811

Noninterest Income — Noninterest income increased $2.76 million or 2.73% in 2020 from 2019 following a $4.08 million or 4.20% increase in 2019 over 2018.

Noninterest Income — Noninterest income decreased $3.80 million or 3.65% in 2021 from 2020 following a $2.76 million or 2.73% increase in 2020 over 2019.

The following table shows noninterest income for the most recent three years ended December 31.

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Equipment rental 16,647 23,380 30,741

Gains (losses) on investment securities available-for-sale 279 — (345)

(Losses) gains on investment securities available-for-sale (680) 279 —

Other 12,560 11,949 13,019

Total noninterest income $ 100,092 $ 103,889 $ 101,130

Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased $0.42 million or 2.04% in 2020 from 2019 compared to a $0.38 million or 1.80% decrease in 2019 over 2018.

Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased $2.67 million or 12.64% in 2021 from 2020 compared to a $0.42 million or 2.04% increase in 2020 over 2019.

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 December 31, 2021 and 2020 was $5.33 billion and $4.74 billion, respectively.

Stock market recoveries during the fourth quarter of 2020 helped improve the market value of trust assets under management.

Strong stock market performance and new business results in 2021 helped improve the market value of trust assets under management.

At December 31, 2021, these trust assets were comprised of $3.44 billion of personal and agency trusts and estate administration assets, $1.21 billion of employee benefit plan assets, $556.63 million of individual retirement accounts, and $115.28 million of custody assets.

Service charges on deposit accounts decreased by $1.53 million or 13.85% in 2020 from 2019 compared to an increase of $0.56 million or 5.32% in 2019 from 2018.

Service charges on deposit accounts increased by $1.10 million or 11.64% in 2021 from 2020 compared to a decrease of $1.53 million or 13.85% in 2020 from 2019.

The increase in service charges on deposit accounts in 2021 was primarily due to higher customer ATM fees from an increased volume of transactions and a change in the fees charged.

As well as increased business deposit account fees offset by a decrease in consumer nonsufficient fund transactions.

Economic recovery led to a corresponding improvement in consumer and business activity.

The decrease in service charges on deposit accounts in 2020 was primarily due to a lower volume of nonsufficient fund transactions and reduced ATM fees.

The increase in service charges on deposit accounts in 2019 primarily reflects a higher volume of nonsufficient fund transactions.

Debit card income improved $3.14 million or 20.97% in 2021 from 2020 compared to an increase of $0.77 million or 5.45% in 2020 from 2019.

The increase in 2021 and 2020 was mainly the result of an increased volume of debit card transactions.

Mortgage banking income increased $10.98 million or 233.63% in 2020 over 2019, compared to a $0.85 million or 22.22% increase in 2019 from 2018.

We had $0.81 million of MSR impairment in 2020 as a result of increased prepayment speeds compared to none in 2019 or 2018.

Debit card transactions in 2021 were helped significantly by the reopened economy driving increased consumer activity.

Mortgage banking income decreased $3.85 million or 24.58% in 2021 over 2020, compared to a $10.98 million or 233.63% increase in 2020 from 2019.

We had $0.81 million of MSR impairment recoveries in 2021 as a result of reduced prepayment speeds compared to $0.81 million of MSR impairment charges in 2020 and none in 2019.

During 2021, 2020 and 2019, we determined that no permanent write-down was necessary for previously recorded impairment on MSRs.

During 2020, mortgage banking income increased primarily due to better margins on a higher volume of loan sales as a result of more loans originated for the secondary market offset by the $0.81 million of MSR impairment charges.

During 2019, mortgage banking income increased primarily due to improved gains on a higher volume of loans sold as a result of more loans originated for the secondary market.

During 2021, mortgage banking income decreased primarily due to reduced margins on a lower volume of loan sales.

During 2020, mortgage banking income increased primarily due to better margins on a higher volume of loan sales as a result of more loans originated for the secondary market.

Insurance commissions grew $0.22 million or 3.16% in 2021 compared to 2020 and improved $0.26 million or 3.90% in 2020 compared to 2019.

The increase in 2021 was primarily due to higher contingent commissions received due to achieving sales goals set forth by various carrier incentive programs.

The increase in 2020 was primarily due to new business offset by a reduction in contingent commissions received.

The increase in insurance commissions during 2019 was mainly due to an increase in the book of business and higher contingent commissions received resulting from increased sales and lower client claims.

Equipment rental income generated from operating leases decreased by $6.73 million or 28.80% during 2021 from 2020 compared to a decrease of $7.36 million or 23.95% during 2020 from 2019.

The average equipment rental portfolio decreased 23.36% in 2020 over 2019 as a result of reduced leasing volume primarily in the construction equipment, aircraft, and auto and light truck portfolios and decreased 3.48% in 2019 over 2018 as a result of reduced leasing volume primarily in the construction and medium and heavy duty truck portfolios offset by a slight increase in the specialty vehicle portfolio.

The average equipment rental portfolio decreased 29.16% in 2021 over 2020 as a result of reduced leasing volume primarily in the construction equipment and the auto and light truck portfolios due to changing customer preferences and decreased 23.36% in 2020 over 2019 as a result of reduced leasing volume primarily in the construction equipment, aircraft, and auto and light truck portfolios.

In 2021 and 2020, the decrease in rental income was offset by a similar decrease in depreciation on equipment owned under operating leases.

Losses on the sale of investment securities available-for-sale during 2021 were $0.68 million.

Gains on the sale of investment securities available-for-sale during 2020 were $0.28 million.

There were no sales of investment securities available-for-sale for the year ended 2019.

Sales of investment securities available-for-sale resulted in net losses of $0.35 million for the year ended 2018.

Gains on the sale of investment securities available-for-sale in 2020 were primarily from the sale of corporate securities in managing portfolio risk.

During 2018, losses on the sale of investment securities available-for-sale were primarily the result of repositioning the investment portfolio during the first quarter in response to tax reform.

Other income decreased $1.07 million or 8.22% in 2020 from 2019 compared to an increase of $2.66 million or 25.64% in 2019 from 2018.

Losses in 2021 and gains in 2020 on the sale of investment securities available-for-sale were primarily from the sale of corporate securities in managing portfolio risk.

Other income increased $0.61 million or 5.11% in 2021 from 2020 compared to a decrease of $1.07 million or 8.22% in 2020 from 2019.

The increase in 2021 was mainly a result of higher brokerage fees and commissions and a rise in partnership investment gains offset by reduced customer swap fees and lower bank owned life insurance policy claims.

The decline in 2020 was mainly a result of nonrecurring rental income on a repossessed asset of $0.96 million during 2019, which was not present in 2020, and a decrease in customer swap fees offset by higher gains on partnership investments.

The improvement in 2019 was mainly a result of nonrecurring rental income on a repossessed asset of $0.96 million, higher claim proceeds from bank owned life insurance, and an increase in customer swap fees.

The increase was also helped by personal property tax reimbursements on leased equipment from lessees of $0.73 million that were reported gross as required by the new leasing standard effective January 1, 2019.

Noninterest Expense — Noninterest expense decreased $1.64 million or 0.87% in 2020 over 2019 following a $2.54 million or 1.36% increase in 2019 from 2018.

Noninterest Expense — Noninterest expense decreased $1.22 million or 0.65% in 2021 over 2020 following a $1.64 million or 0.87% decrease in 2020 from 2019.

The following table shows noninterest expense for the most recent three years ended December 31.

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Employee salaries increased $2.93 million or 3.54% in 2021 from 2020 compared to an increase of $4.71 million or 6.03% in 2020 from 2019.

The increase in 2021 was mainly a result of higher base salaries due to normal merit increases and a rise in incentive compensation including a one-time special reward to COVID-19 vaccinated employees announced at the end of 2021 offset by a decrease in commission compensation primarily in our residential mortgage area.

The increase in 2020 was mainly a result of higher base salaries due to normal merit increases, a rise in commission compensation primarily in our residential mortgage area as well as a one-time special award made to most employees at the end of 2020 as recognition for the dedication they have shown in serving our clients and embracing their role as essential workers.

The increase in 2019 was mainly a result of higher base salaries due to normal merit increases and a slight increase in full-time equivalent employees offset by a decrease in incentive compensation due to fewer vestings of share-based compensation arrangements.

Employee benefits decreased $0.25 million or 1.31% in 2020 from 2019, compared to a $2.25 million or 13.38% increase in 2019 from 2018.

During 2020, group insurance costs decreased as a result of overall lower health insurance claims experience offset by higher company contributions to employee retirement accounts.

In 2019, group insurance costs increased as a result of overall higher health insurance claims experience, administrative expenses and stop loss premiums and higher company contributions to employee retirement accounts.

Occupancy expense declined $0.25 million or 2.39% in 2020 from 2019, compared to an increase of $0.49 million or 4.85% in 2019 from 2018.

Employee benefits increased $1.32 million or 7.05% in 2021 from 2020, compared to a $0.25 million or 1.31% decrease in 2020 from 2019.

During 2021, company contributions to employee retirement accounts increased due to higher salaries during 2021 and a rise in group insurance costs as healthcare access and usage increased from levels in 2020.

In 2020, group insurance costs decreased as a result of overall lower health insurance claims experience offset by higher company contributions to employee retirement accounts.

Occupancy expense rose $0.25 million or 2.41% in 2021 from 2020, compared to a decrease of $0.25 million or 2.39% in 2020 from 2019.

The increased expense in 2021 was primarily the result of higher premises repairs and cleaning offset by lower real estate taxes and reduced lease expenses.

The reduced expense in 2020 was primarily the result of lower repair expenses offset by increased building depreciation.

The higher expense in 2019 was primarily the result of the Company leasing office space in its former headquarters building which sold during the first quarter of 2019 offset by reduced snow removal costs and lower utility expenses compared to 2018.

Furniture and equipment expense, including depreciation, grew by $0.17 million or 0.65% in 2021 from 2020 compared to an increase of $0.87 million or 3.52% in 2020 from 2019.

The higher expense in 2021 was primarily due to computer processing charges and increased software maintenance expense offset by a reduction in furniture and equipment depreciation.

The higher expense in 2020 was primarily due to computer processing charges and increased software maintenance expense offset by a reduction in equipment depreciation.

The higher expense in 2019 was primarily due to increased software maintenance costs.

Depreciation on equipment owned under operating leases decreased $6.51 million or 32.22% in 2021 from 2020, following a $4.93 million or 19.60% decrease in 2020 from 2019.

In 2021 and 2020, depreciation on equipment owned under operating leases correlated with the change in equipment rental income.

Professional fees declined $0.64 million or 9.13% in 2020 from 2019, compared to a $0.73 million or 9.48% decrease in 2019 from 2018.

The lower expense in 2020 was primarily due to reduced utilization of consulting services offset by an increase in board of directors fees.

The lower expense in 2019 compared to 2018 was primarily due to reduced utilization of consulting services as 2018 projects were completed.

Supplies and communications expense decreased $0.89 million or 13.81% in 2020 from 2019, and increased $0.13 million or 2.12% in 2019 from 2018.

Professional fees increased $2.36 million or 37.34% in 2021 from 2020, compared to a $0.64 million or 9.13% decrease in 2020 from 2019.

The higher expense in 2021 was primarily due to a rise in legal fees and increased utilization of consulting services for technology projects.

The lower expense in 2020 compared to 2019 was primarily due to reduced utilization of consulting services offset by an increase in board of directors fees.

Supplies and communications expense increased $0.38 million or 6.81% in 2021 from 2020, and decreased $0.89 million or 13.81% in 2020 from 2019.

The increase during 2021 was due to higher postage and shipping fees and a rise in printing costs offset by reduced telephone line and equipment expenses.

The decline during 2020 was due to lower printing costs, telephone line and equipment expenses and postage fees.

The increase in 2019 resulted primarily from higher printing costs were offset by lower telephone service expenses.

FDIC and other insurance expense increased $0.81 million or 45.18% in 2020 from 2019 and decreased $1.13 million or 38.59% in 2019 from 2018.

The increase in 2020 and the decrease in 2019 was mainly due to $0.88 million in FDIC insurance premium credits received during 2019 compared to $0.55 million in 2020.

Business development and marketing expenses declined $2.15 million or 34.05% in 2020 from 2019 and increased $0.19 million or 3.13% in 2019 from 2018.

FDIC and other insurance expense increased $0.07 million or 2.72% in 2021 from 2020 and increased $0.81 million or 45.18% in 2020 from 2019.

The increase in 2021 was mainly the result of $0.55 million in FDIC insurance premium credits received during 2020 which were not present in 2021 offset by a one-time $0.38 million recovery of an incurred but not reported insurance reserve in 2021.

The increase in 2020 was mainly due to $0.88 million in FDIC insurance premium credits received during 2019 compared to $0.55 million in 2020.

Business development and marketing expenses rose $3.86 million or 92.76% in 2021 from 2020 and declined $2.15 million or 34.05% in 2020 from 2019.

The higher expense in 2021 was mainly the result of a charitable contribution of $3.00 million made during 2021 to support COVID-19 initiatives and increased business development expense as a result of more business entertainment and travel opportunities tied to fewer COVID-19 restrictions.

The lower expense in 2020 was mainly the result of decreased business development expense as a result of fewer business entertainment and travel opportunities tied to COVID-19 precautions and a reduction in marketing promotions.

The higher expense in 2019 was mainly the result of additional marketing promotions.

Loan and lease collection and repossession expenses decreased $0.30 million or 8.91% in 2020 from 2019 compared to an increase of $0.03 million or 0.80% in 2019 from 2018.

Loan and lease collection and repossession expenses decreased $3.07 million or 99.03% in 2021 from 2020 compared to a decrease of $0.30 million or 8.91% in 2020 from 2019.

Loan and lease collection and repossession expense was lower in 2021 primarily due to lower general collection and repossession expenses, fewer valuation adjustments on repossessed assets and higher gains on the sale of repossessed assets.

Loan and lease collection and repossession expense was lower in 2020 primarily due to fewer valuation adjustments on repossessed assets offset by increased general collection and repossession expenses.

The increase in 2019 was mainly due to increased valuation adjustments on repossessed assets and fewer gains on the sale of repossessed assets offset by less legal fees on collection and repossession activity.

Other expenses were higher by $1.37 million or 20.94% in 2020 as compared to 2019 and increased $0.06 million or 0.86% in 2019 as compared to 2018.

Other expenses were lower by $2.97 million or 37.61% in 2021 as compared to 2020 and increased $1.37 million or 20.94% in 2020 as compared to 2019.

The reduction in 2021 was primarily the result of a lower provision for interest rate swaps with customers, a decrease in the provision of unfunded loan commitments, and fewer losses on operating lease equipment offset by reduced gains on the sale of operating lease equipment and higher employee training expenses due to fewer COVID-19 travel restrictions.

The increase in 2020 was primarily the result of lower gains on the sale of fixed assets, a rise in the provision for unfunded loan commitments, a higher provision for interest rate swaps with customers, and a loss on operating lease equipment offset by lower employee training expenses due to COVID-19 travel precautions and higher gains of the sale of operating lease equipment.

The increase in 2019 was mainly the result of higher credit report and appraisal fees on greater loan volume, an increase in the interest rate swap valuation provision and higher professional membership dues and subscriptions offset by a $1.31 million gain on the sale of a fixed asset.

Additionally, other expense during 2019 included personal property taxes on leased equipment of $0.73 million that are reported gross as required by the new leasing standard effective January 1, 2019.

Income Taxes — 1st Source recognized income tax expense in 2021 of $36.33 million, compared to $24.88 million in 2020, and $28.14 million in 2019.

The effective tax rate in 2021 was 23.45% compared to 23.40% in 2020, and 23.42% in 2019.

The 2018 provision for income taxes included a $0.80 million benefit from a state tax settlement and a $0.88 million benefit from finalization of the provisional amounts recorded at December 31, 2017 related to the impact of the federal tax rate change.

The impact of those items resulted in an effective rate decrease from 23.13% to 21.53% during 2018.

For a detailed analysis of 1st Source’s income taxes see Part II, Item 8, Financial Statements and Supplementary Data — Note 17 of the Notes to Consolidated Financial Statements.

FINANCIAL CONDITION

Loan and Lease Portfolio — The following table shows 1st Source’s loan and lease distribution at the end of each of the last five years as of December 31.

Loan and Lease Portfolio — The following table shows 1st Source’s loan and lease distribution at the end of each of the last two years as of December 31.

(Dollars in thousands) 2021 2020

Commercial and agricultural $ 918,712 $ 1,186,118

Solar 348,302 292,604

Auto and light truck 603,775 542,369

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Total loans and leases $ 5,346,214 $ 5,489,301

At December 31, 2020, 10.8% of total loans and leases were concentrated with non-owner occupied commercial real estate.

At December 31, 2021, there were no concentrations within the loan portfolio of 10% or more of total loans and leases.

Loans and leases, net of unearned discount, at December 31, 2021, were $5.35 billion and were 66.03% of total assets, compared to $5.49 billion and 75.03% of total assets at December 31, 2020.

Average loans and leases, net of unearned discount, increased $463.28 million or 9.27% and increased $244.91 million or 5.15% in 2020 and 2019, respectively.

PPP loans, net of unearned discount, at December 31, 2020 were $351.56 million and were located in the Commercial and agricultural lending portfolio.

Commercial and agricultural lending, excluding those loans secured by real estate but including PPP loans, increased $345.93 million or 30.54% in 2020 over 2019.

Commercial and agricultural lending outstandings were $1.48 billion and $1.13 billion at December 31, 2020 and December 31, 2019, respectively.

Most of the 2020 growth was attributed to PPP loans provided to our existing clients.

Excluding PPP loans, commercial and agricultural lending outstandings were essentially flat in 2020 as business borrowers generally adopted a more conservative outlook, resulting in conserving cash and reducing borrowings.

These reductions were mostly offset by increases within our solar loan and lease portfolio, which grew by $129.01 million or 78.86% to $292.60 million as that business line has continued to have positive momentum.

Average loans and leases, net of unearned discount, decreased $25.62 million or 0.47% and increased $463.28 million or 9.27% in 2021 and 2020, respectively.

PPP loans, net of unearned discount, at December 31, 2021 and 2020 were $73.08 million and $351.56 million, respectively, and were located in the Commercial and agricultural lending portfolio.

Commercial and agricultural lending, excluding those loans secured by real estate but including PPP loans, decreased $267.41 million or 22.54% in 2021 over 2020.

Commercial and agricultural lending outstandings were $918.71 million and $1.19 billion at December 31, 2021 and December 31, 2020, respectively.

The 2021 decline was attributed exclusively to loan forgiveness and customer pay downs on PPP loans.

Excluding PPP loans, commercial and agricultural outstandings were $845.63 million and $834.56 million, respectively.

Excluding PPP loans, commercial and agricultural lending outstandings increased 1.33% in 2021 as business borrowers generally adopted a more conservative outlook, resulting in conserving cash and reducing borrowings.

Solar loans and leases increased $55.70 million or 19.04% in 2021 over 2020.

Solar loan and lease outstandings were $348.30 million and $292.60 million at December 31, 2021 and 2020, respectively.

The increase during 2021 was due to continued positive momentum in this business line.

We expect that momentum to continue into 2022.

Auto and light truck loans decreased $46.44 million or 7.89% in 2020 over 2019.

Auto and light truck loans increased $61.41 million or 11.32% in 2021 over 2020.

At December 31, 2021, auto and light truck loans had outstandings of $603.78 million and $542.37 million at December 31, 2020.

This decrease was primarily attributable to original equipment manufacturer (OEM) cancellations of new vehicles allocated to the auto rental industry due to the pandemic impact on business and sharply reduced leisure travel from the COVID-19 pandemic, and borrowers cancelled orders in the Spring and aggressively reduced fleet sizes given the strong used car market.

Additionally, the cancellation of leisure and business events and travel restrictions had a negative impact on our bus customers.

These negatives were offset by strong work truck sales to customers in the logistics space.

This increase was primarily attributable to customers maintaining their fleet levels due to concerns that sufficient cars will not be available in the spring.

Additionally, we gained significant new client relationships in the auto and light truck rental and step van portfolios including the refinancing of seasoned debt from industry participants exiting certain geographic locations offset by a reduction in our bus lending portfolio through large pay downs and charge-offs during the year.

Medium and heavy duty truck loans and leases decreased $19.43 million or 6.96% in 2021.

Medium and heavy duty truck financing at December 31, 2021 and 2020 had outstandings of $259.74 million and $279.17 million, respectively.

The decrease at December 31, 2020 from December 31, 2019 can be mainly attributed to normal runoff of loans and leases that were not replaced due to pricing discipline.

The decrease at December 31, 2021 from December 31, 2020 can be mainly attributed to normal runoff and some early payoffs of loans and leases, industry-wide limited fleet availability, and our ongoing pricing discipline.

Aircraft financing at year-end 2021 increased $36.94 million or 4.29% from year-end 2020.

Aircraft financing at December 31, 2021 and 2020 had outstandings of $898.40 million and $861.46 million, respectively.

The increase during 2020 was due to higher domestic outstandings of $81.60 million offset by lower foreign outstandings of $4.18 million.

The increase during 2021 was due to higher domestic outstandings of $23.69 million and foreign outstandings of $13.25 million.

Our 2021 originations increased as demand was bolstered by a greater acceptance of business jets as a safe and efficient alternative to commercial air travel during the COVID-19 pandemic, drawing a number of first time entrants to private aircraft ownership.

Our foreign outstandings held relatively flat year over year.

Our foreign outstandings increased 7.36% year over year.

Our foreign loan and lease outstandings, all denominated in U.S.

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Construction equipment financing at December 31, 2021 had outstandings of $754.27 million, compared to outstandings of $714.89 million at December 31, 2020.

The growth in this category was primarily due to significant new client relationships.

Commercial loans secured by real estate, of which approximately 51% is owner occupied, increased $61.69 million or 6.79% in 2020 over 2019.

The growth in this category was primarily due to significant new client relationships and continued growth with existing customers.

Commercial loans secured by real estate, of which approximately 54% is owner occupied, decreased $40.52 million or 4.18% in 2021 over 2020.

Commercial loans secured by real estate outstanding at December 31, 2021 were $929.34 million and $969.86 million at December 31, 2020.

The increase in 2020 was driven by modest growth of owner occupied borrowings, within certain business sectors of our markets.

Our non-owner occupied real estate portfolio also experienced growth due to funding several projects to existing clients that had been in our pipeline.

That growth was primarily within the commercial office/warehousing and the commercial, residential and multi-family segments.

The decrease in 2021 was driven by more modest growth of owner occupied borrowings, within certain business sectors of our markets.

Our non-owner occupied real estate portfolio declined slightly as some stabilized projects took advantage of low market rates and refinanced via the secondary markets.

In addition, some of our newer projects have been delayed due to labor and material shortages.

Residential real estate and home equity loans were $500.59 million at December 31, 2021 and $511.38 million at December 31, 2020.

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Residential mortgage and home equity outstandings were lower in 2021 due to favorable secondary market conditions.

Many clients took advantage of low secondary market rates to lock in their payments versus the variable rates of home equity lines of credit.

Consumer loans decreased $7.99 million or 5.73% in 2020 over 2019.

The trends from 2020 continued in 2021 as clients continued to take advantage of low secondary market rates to lock in their payments versus the variable rates of home loan equity lines.

Consumer loans increased $1.63 million or 1.24% in 2021 over 2020.

Consumer loans outstanding at December 31, 2021, were $133.08 million and $131.45 million at December 31, 2020.

The decrease during 2020 was primarily due to a variety of market factors.

Many clients were hesitant to borrow as uncertainty lingered with the COVID-19 pandemic.

In addition, because of initial declines in sales, many automobile manufacturers offered zero percent, or close to, financing options.

Finally, we saw a decrease in applications for unsecured loans in 2020 compared to 2019.

The following table shows the maturities of loans and leases in the categories of commercial and agricultural, auto and light truck, medium and heavy duty truck, aircraft and construction equipment outstanding as of December 31, 2020.

(Dollars in thousands) 0-1 Year 1-5 Years Over 5 Years Total

Volumes modestly increased as consumer spending improved as clients learned how to live with the COVID-19 pandemic.

In addition, an increase in new and used car prices resulted in an increase in average loan size.

The following table shows the contractual maturities of loans and leases outstanding as of December 31, 2021 as well as classification according to the sensitivity to changes in interest rates.

(Dollars in thousands) 0-1 Year 1-5 Years 5-15 Years Over 15 Years Total

Commercial and agricultural

Fixed rate $ 180,827 $ 188,686 $ 9,490 $ — $ 379,003

Variable rate 312,654 206,331 20,714 10 539,709

Total commercial and agricultural 493,481 395,017 30,204 10 918,712

Fixed rate 50,493 29,115 1,645 — 81,253

Variable rate 72,995 148,656 45,028 370 267,049

Total solar 123,488 177,771 46,673 370 348,302

Auto and light truck

Fixed rate 121,893 196,145 5,321 1 323,360

Variable rate 121,350 159,058 7 — 280,415

Total auto and light truck 243,243 355,203 5,328 1 603,775

Medium and heavy duty truck

Aircraft 182,386 617,589 61,485 861,460

Fixed rate 90,089 166,139 2,347 — 258,575

Variable rate 944 221 — — 1,165

Total medium and heavy duty truck 91,033 166,360 2,347 — 259,740

Fixed rate 96,278 523,343 9,673 — 629,294

Variable rate 77,213 135,691 56,203 — 269,107

Total aircraft 173,491 659,034 65,876 — 898,401

Construction equipment

Fixed rate 230,645 463,889 11,938 — 706,472

Variable rate 9,887 26,255 11,659 — 47,801

Total construction equipment 240,532 490,144 23,597 — 754,273

Commercial real estate

Fixed rate 99,522 351,944 38,711 190 490,367

Variable rate 56,018 193,455 176,340 13,161 438,974

Total commercial real estate 155,540 545,399 215,051 13,351 929,341

Residential real estate and home equity

Consumer 67,450 63,485 512 131,447

Total $ 1,842,132 $ 2,979,136 $ 668,033 $ 5,489,301

The following table shows amounts due after one year are also classified according to the sensitivity to changes in interest rates.

Rate Sensitivity (Dollars in thousands)

Fixed Rate Variable Rate Total

1 – 5 Years $ 2,184,711 $ 794,425 $ 2,979,136

Over 5 Years 222,318 445,715 668,033

Total $ 2,407,029 $ 1,240,140 $ 3,647,169

Fixed rate 78,320 171,133 94,012 12,679 356,144

Variable rate 37,059 67,756 38,802 829 144,446

Total residential real estate and home equity 115,379 238,889 132,814 13,508 500,590

Fixed rate 52,350 60,575 133 — 113,058

Variable rate 16,844 3,177 1 — 20,022

Total consumer 69,194 63,752 134 — 133,080

Total loans and leases

Fixed rate 1,000,417 2,150,969 173,270 12,870 3,337,526

Variable rate 704,964 940,600 348,754 14,370 2,008,688

Total loans and leases $ 1,705,381 $ 3,091,569 $ 522,024 $ 27,240 $ 5,346,214

During 2021, approximately 68% of the Bank’s residential mortgage originations were sold into the secondary market.

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Our liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was $0.22 million and $0.33 million as of December 31, 2021 and 2020, respectively.

Our expense (recovery) for repurchase losses, included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $0.03 million in 2020 compared to $0.01 million in 2019 and $(0.10) million in 2018.

Our (recovery) expense for repurchase losses, included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $(0.09) million in 2021 compared to $0.03 million in 2020 and $0.01 million in 2019.

The mortgage repurchase liability represents our best estimate of the loss that we may incur.

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Allowance for Credit Losses — As of December 31, 2020, we adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):

The allowance for loan and lease losses considers the historical loss experience, current conditions, and reasonable and supportable forecasts.

To estimate expected loan and lease losses under CECL, we used a broader range of data than under previous U.S.

generally accepted accounting principles.

We were able to access loan data over a long-time horizon, generally back to Q4 2007, thus capturing most of the economic business cycle which includes the Great Recession and the subsequent long slow recovery which supports full lifetime losses.

The allowance for credit losses considers the historical loss experience, current conditions, and reasonable and supportable forecasts.

To estimate expected loan and lease losses under CECL, we use a broader range of data than under previous U.S.

We are able to access loan data over a long-time horizon, generally back to the fourth quarter of 2007, thus capturing most of the economic business cycle which includes the Great Recession and the subsequent long slow recovery which supports full lifetime losses.

The CECL methodology requires our loan portfolio to be segregated into pools based on similar risk characteristics.

We evaluated each portfolio, establishing numerous segments.

We then reviewed risk characteristics for each segment, noting that some pools were either too small for meaningful analysis or contained risk characteristics similar to other pools.

We evaluate each portfolio, establishing numerous segments.

We then review risk characteristics for each segment, noting that some pools were either too small for meaningful analysis or contained risk characteristics similar to other pools.

Thus, some pools were consolidated.

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We also have a forecast adjustment that includes key economic factors affecting our portfolios such as growth in gross domestic product, unemployment rates, housing market trends, commodity prices, and inflation.

Forecast adjustments were difficult to establish due to unprecedented uncertainty given the national emergency due to the pandemic, the worldwide resurgence of COVID-19 and the tumultuous political landscape.

Patterns from our history of business cycles, particularly the Great Recession of 2008, are not particularly relevant due to the extraordinary monetary and fiscal stimulus provided by the U.S.

Forecast adjustments were difficult to establish due to unprecedented uncertainty given the national emergency due to the pandemic, the Omicron COVID variant spreading across the globe, the ongoing supply chain disruptions and inflation reaching a 39-year high.

Patterns from our history of business cycles, mainly the Great Recession of 2008, are not particularly relevant due to the extraordinary monetary and fiscal stimulus provided by the U.S.

government and the Federal Reserve.

Nonetheless, recent indicators have been discouraging with high unemployment and jobless claims ticking up, signaling the economy may again be stalling.

The current political turmoil, impeachment concerns and ongoing strife in the Middle East, cause increased uncertainty.

Recent indicators, beginning late in the third quarter, have been somewhat discouraging with increasing inflation and slowing job growth, signaling the economy may be slowing.

The current political turmoil, the growing confrontation between China and the U.S., and ongoing strife in the Middle East, cause increased uncertainty.

Collateral values are significant to underwriting our specialty finance portfolios and volatility or declining values pose a threat.

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World economies are generally in a recession due to the pandemic and challenges persist.

Current concerns include ongoing tariff wars, high numbers of COVID-19 cases, corruption scandals and political uncertainty in Latin American countries, particularly Brazil and Mexico where we have a presence with our aircraft lending, the competitive and complex nature of U.S.-China relations, the geopolitical tensions with Russia, and the persistent threats of terrorist attacks.

Current concerns include high numbers of COVID-19 cases, corruption scandals and political uncertainty in Latin American countries, the competitive and complex nature of U.S.-China relations, the geopolitical tensions with Russia, the persistent threats of terrorist attacks, and in Brazil and Mexico where we have a presence with our aircraft lending, significant inflation particularly in Brazil and concerns with global supply chain disruptions impeding auto production in Mexico are concerning.

We include a factor in our qualitative adjustments for global risk, as we are increasingly aware of the threat that global concerns may affect our customers.

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We believe there is a risk of negative consequences for our borrowers that would affect their ability to repay their financial obligations.

Therefore, we continue to include a factor for global risk in our analysis for 2020.

Therefore, we continued to include a factor for global risk in our analysis for 2021.

The following discussion focuses on relevant economic conditions and various circumstances impacting the December 31, 2021 allowance for loan and lease losses of each of our loan and lease segments.

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The outlook for the portfolio is guarded.

We have some exposure to the hospitality industry, which continues to suffer from low occupancy and reduced rates.

Restaurants are barely getting by;

those that were able to refocus on carry-out business are likely to be able to sustain operations and take advantage of stimulus funds.

We have some exposure to the hospitality industry, which has come back better than anticipated but continues to suffer from reduced rates and, to a lesser extent, lower occupancy.

Restaurants continue to struggle as COVID cases surge.

The recreational vehicle industry which is centered in our footprint is going strong and our customers engaged in manufacturing for and supplying to the industry are doing well.

Consumer and small business confidence deteriorated in December, as the resurgence of COVID-19 remains a drag on confidence.

Our entry into solar financing over four years ago continues to look promising and gain momentum in terms of performance of existing projects financed, loan growth opportunities and overall credit quality.

The outlook for our agricultural portfolio has improved with stronger commodity prices, particularly for corn and beans, and with projected higher incomes for farmers after five years of decline.

Small business confidence increased slightly in December as business owners expect the economy to improve somewhat in the next six months.

The outlook for our agricultural portfolio has improved with stronger commodity prices, particularly for corn and beans, and with projected higher incomes for farmers for the second consecutive year.

Increasing input prices will likely result in thinner but still profitable margins next year.

Our customers have had favorable growing conditions which have resulted in strong crop yields.

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We reviewed the historical loss ratios and assessed the environmental factors and concentration issues affecting these portfolios and believe the qualitative adjustments we made to our allowance ratios are appropriate and adequate.

Auto and light truck – Our auto and light truck portfolio was immediately impacted by the national emergency caused by the pandemic and subsequent shutdowns, shelter in place and social distancing mandates.

Numerous customers requested deferrals, either principal and interest skips or interest only modifications.

The auto rental industry had the advantage of a strong used car market;

thus, customers were able to reduce their fleets at reasonable values.

For some van rental customers, the situation was different as low roof passenger vans experienced reduced demand with social distancing concerns.

The losses in the portfolio were concentrated in the bus sector as several accounts were placed in non-accrual status and included several write-downs.

We increased our COVID-19 related qualitative adjustments for the bus segment each quarter through year-end.

Our CECL methodology captures the movement from the grade 1-6 risk rated pool to the grade 7-12 special attention pool and the current losses;

however, we believe the remaining credit risk in the portfolio to be more consistent with our 2020 experience than what is reflected in the historical loss ratio, thus we increased our qualitative adjustments as we more fully realized the severity and duration of the situation.

The auto rental portion of the portfolio continues to be threatened by ongoing consolidation in the rental car industry which remains a threat to portfolio growth.

On the other hand, collateral values have been relatively stable.

We did add a qualitative adjustment for COVID-19 impacts, but a significantly lesser adjustment than for the bus segment.

Medium and heavy duty truck – We experienced ongoing stability in the medium and heavy duty truck portfolio.

Solar – Our entry into solar financing over five years ago continues to look promising and gain momentum in terms of performance of existing projects financed, loan growth opportunities and overall credit quality.

Risks include construction and developer related risks and delays, site issues, climate and weather risks, regulatory problems and permitting issues, as well as risks related to utility companies and their ability and willingness to facilitate the solar customer tying into the grid, among others.

To date, we have not incurred any losses in this portfolio.

Auto and light truck – Our auto and light truck portfolio was initially impacted by the national emergency caused by the pandemic and subsequent shutdowns, shelter in place and social distancing mandates but rebounded due to vehicle shortages supporting strong rental rates and high used car values.

Loan outstandings remain strong as customers are maintaining their fleet levels through the slower winter months as they are concerned that they will not be able to get sufficient cars in the spring.

Like last year, the losses in the portfolio were concentrated in the bus sector where we continued to place additional accounts into non-accrual status and recognized several write-downs.

Collateral values, particularly for motor coaches, plummeted in this sector.

At year-end, we reviewed our special attention accounts and charged-off exposures on non-accrual accounts which we felt would not be cured via payments over the next six months.

Long-term, there is still significant uncertainty.

Some of the bus portfolio customers will likely not be able to adapt to the new environment and may experience further losses.

We reviewed the annual historical incurred losses and the life of the loan calculated historical loss ratios as of year-end and adjusted our qualitative factors downward given that loss rates are increasing because of the large charge-off volumes during the past two years and our expectation is that future losses will be lower than our recent experience.

We believe we appropriately recognized the losses in our portfolio and that peak charge-offs occurred in 2021 and note special attention balances were 38% lower at year-end 2021 than 2020;

however, we remain concerned and therefore continue to use qualitative adjustments to recognize bus segment risks.

The auto rental portion of the portfolio continues to be more stable and we did not make adjustments to the qualitative factors in the auto rental segment.

Medium and heavy duty truck – We experienced ongoing credit quality stability in the medium and heavy duty truck portfolio.

We recognized sizable losses during 2009 and the first half of 2010;

however, since then we have had only two charge-offs, one small account in 2018 and a mid-sized credit in 2019.

The industry experienced revenue decreases in 2020 due to COVID-19 job losses, declining trade volumes and oil price declines eliminating surcharges.

However, the situation improved in the latter half of the year, buoyed by e-commerce and a robust residential housing market, closing the year on an ongoing upswing with December tonnage showing increases month-over-month and year-over-year.

The prospects for an improved 2021 are strong with anticipated GDP growth, stimulus funds coming from the Coronavirus Response and Relief Supplemental Appropriations Act and the potential for additional stimulus from the $1.9 trillion pandemic relief package proposed by the new president.

Truck chassis sales were expected to experience a cyclical decline in 2020, which they did and to a greater extent than projected due to the pandemic.

There are clear indications for a sales resurgence in 2021, potentially enhancing loan growth opportunities in this portfolio, although interest rate pressures continue.

COVID-19 transformed e-commerce, benefiting the trucking industry.

The industry continues to struggle with ongoing driver shortages and elevated Class 8 tractor order backlogs due to microchip shortages.

Loan growth opportunities are stymied by lack of new equipment and competitive rate pressures.

We believe our reserve ratios for this portfolio are appropriate.

Aircraft – Another area of concern continues to be our aircraft portfolio, which was among the sectors affected most by the sluggish economy following the Great Recession.

This sector was immediately impacted by COVID-19 related shutdowns, the ongoing impact of which was disparate depending on our borrowers’ business focus.

Tourism came to an abrupt halt and has not come back due to social distancing requirements.

Business travel is down.

Private jet providers appeal to a segment of the market that wishes to either minimize exposure to COVID-19 or avoid the hassles of contending with disrupted airline schedules.

Cargo carriers were initially negatively impacted but are seeing improvement with increased movement of goods.

This sector was immediately impacted by COVID-19 related shutdowns and business travel remains thwarted.

However, private jet providers appeal to a segment of the market that wishes to either minimize exposure to COVID-19 or to avoid contending with disrupted airline schedules.

Aircraft collateral values, particularly those in our niche, have strengthened in this economic cycle.

In this portfolio we also have $193 million of foreign exposure, primarily in Mexico and Brazil.

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The Mexican economy had contracted prior to the pandemic shock.

Manufacturing registered a significant decline at the outset of the pandemic but is recovering due to economic activity picking up in the U.S.

and normalization of trade relations with the U.S.

Mexico’s economic growth is hindered by a lack of significant fiscal relief measures.

Furthermore, growth continues to be threatened by drug trafficking and related violence.

Brazil’s economic recovery was interrupted by the pandemic as GDP plunged in the second quarter of 2020.

However, the rebound during the third quarter portends well for continued improvement into 2021, tempered by uncertainties in the global economy.

The slowed U.S.

economic growth and significantly reduced business travel presents headwinds for the business aviation industry.

Collateral values seem to be holding so far, except for older models.

Manufacturing registered a significant decline at the outset of the pandemic but is currently experiencing robust growth, partly due to the spillover effect of economic activity in the U.S.

Growth continues to be threatened by drug trafficking and related violence.

Brazil’s economic recovery was interrupted by the pandemic as GDP plunged in the second quarter of 2020 and the country continues to struggle to achieve minimal growth and is further hampered by increased inflation fears and political uncertainties.

Our historical loss ratios reflect our high and volatile loss histories.

Accordingly, we adjusted the historical ratios for current conditions, principally uncertainty and, to a lesser extent, collateral concerns, and believe they are appropriate.

We adjusted the historical ratios for current conditions, principally decreased collateral concentration risk due to strong aircraft values and robust credit underwriting, partially offset by uncertain economic conditions in foreign markets.

We believe the ratios as adjusted are appropriate.

Construction equipment – Our construction equipment portfolio historically has been characterized by stable credit quality;

however, we have some exposure to mining and frac sand and these sectors have not performed well, resulting in increased special attention outstandings, non-accrual loans and a sizable charge-off in this portfolio in 2020.

however, recently we have had increased concerns as there have been unanticipated downgrades to special attention in each of the last three quarters.

The construction industry benefited from growth in private residential construction and a lesser impact of COVID-19 related shutdowns than many industries.

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Historically, 1st Source has experienced less volatility in this portfolio than the industry as losses have been mitigated by appropriate underwriting and a global market for used construction equipment.

The potential continued infrastructure spending as we emerge from this recession could have a positive impact for the industry used equipment markets.

The underlying risk has not changed significantly for most segments in this portfolio;

our qualitative adjustments are similar to last year.

Commercial real estate – Similar to the commercial portfolio, our commercial real estate loans are concentrated in our local market with local customers, with approximately fifty-one percent of the Bank’s exposure being owner occupied facilities where we are the primary relationship bank for our customers.

The potential continued infrastructure spending as we emerge from this recession could have a positive impact for the industry’s used equipment markets.

We did modify our qualitative factors to recognize the increased volume of accounts moving into special attention.

Commercial real estate – Similar to the commercial portfolio, our commercial real estate loans are concentrated in our local market with local customers, with approximately 54% of the Bank’s exposure being owner occupied facilities where we are the primary relationship bank for our customers.

Nevertheless, we were not immune to the dramatic declines in real estate values following the Great Recession of 2008, similar to other U.S.

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From 2012 through 2021, we have experienced small recoveries in the portfolio with the exception of 2018 when we realized a small loss.

We reviewed our qualitative adjustments and believe they are appropriate and adequate this year-end.

We reviewed our qualitative adjustments and made some modifications as we are concerned stimulus funds may be delaying problem recognition in our owner-occupied segment resulting in a slight increase in our qualitative adjustment, and a detailed review of our hotel portfolio indicated reduced COVID-related concerns relative to when the factor was originally established.

We believe our ratios as adjusted are appropriate and adequate as of December 31, 2021.

Residential real estate and home equity – Our residential real estate and home equity portfolio consists of loans to individuals in the communities we serve.

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Home equity loans are also advanced in compliance with regulatory guidelines and the Bank’s credit policy.

Losses in these portfolios have been miniscule since 2013, but we did experience losses during the housing crises.

Losses in these portfolios have been minuscule since 2013, but we did experience losses during the housing crises.

We reviewed our qualitative adjustments, which are primarily for reasonable and supportable forecasts, and believe they are appropriate and adequate.

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The allowance for loan and lease losses at December 31, 2021, totaled $127.49 million and was 2.38% of loans and leases, compared to $140.65 million or 2.56% of loans and leases at December 31, 2020 and $111.25 million or 2.19% of loans and leases at December 31, 2019.

Our Day 1 adjustment as of January 1, 2020 for CECL adoption was an increase to the allowance for loan and lease losses of $2.58 million and $0.78 million for the unfunded loan commitments liability.

It is our opinion that the allowance for loan and lease losses was appropriate to absorb current expected credit losses inherent in the loan and lease portfolio as of December 31, 2021.

Charge-offs for loan and lease losses were $12.52 million for 2021, compared to $13.97 million for 2020 and $7.59 million for 2019.

We had one notable loss in the construction equipment portfolio, one in the auto rental segment of the auto and light truck portfolio and several small losses which were sizeable when aggregated in the bus segment of the auto and light truck portfolio.

The provision for credit losses was $36.00 million for 2020, compared to $15.83 million for 2019 and $19.46 million for 2018 to accommodate net charge-offs, loan and lease growth and, for 2020, increased credit risk due to the pandemic.

The following table summarizes our loan and lease loss experience for each of the last five years ended December 31.

We had one notable loss in the commercial and agricultural portfolio and several small losses which were sizeable when aggregated in the bus segment of the auto and light truck portfolio.

The (recovery of) provision for credit losses was $(4.30) million for 2021, compared to $36.00 million for 2020 and $15.83 million for 2019 to accommodate net charge-offs, loan and lease growth and, for 2021, decreased credit risk relative to our expectations principally due to significant government stimulus payments.

The following table summarizes our loan and lease loss experience for each of the last three years ended December 31.

(Dollars in thousands) 2021 2020 2019

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Net charge-offs (recoveries) 8,859 9,185 5,048

Provision for loan and lease losses 36,001 15,833 19,462 8,980 5,833

(Recovery of) provision for loan and lease losses (4,303) 36,001 15,833

Balance at end of period $ 127,492 $ 140,654 $ 111,254

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The following table shows the amount of such components of the allowance for loan and lease losses at December 31 and the ratio of such loan and lease categories to total outstanding loan and lease balances.

2020 2019 2018 2017 2016

(Dollars in thousands) Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases

Commercial and agricultural $ 15,409 17.18 % $ 16,680 21.61 %

$ 22,229 26.94 % $ 23,671 22.27 % $ 17,063 22.20 % $ 16,228 20.54 % $ 14,668 19.40 %

Solar 6,585 6.51 5,549 5.33

Auto and light truck 19,624 11.30 28,926 9.88

28,926 9.88 14,400 11.58 14,689 11.58 10,103 10.97 8,064 9.83

Medium and heavy duty truck 6,015 4.87 6,400 5.09

6,400 5.09 4,612 5.80 4,303 5.86 4,844 6.56 4,740 7.04

Aircraft 33,628 16.80 34,053 15.69

Construction equipment 19,673 14.11 19,166 13.02

19,166 13.02 14,120 13.87 10,922 13.34 9,343 12.44 8,207 11.84

Commercial real estate 19,691 17.38 22,758 17.67

Residential real estate and home equity 5,084 9.36 5,374 9.32

5,374 9.32 3,609 10.46 3,425 10.83 3,666 11.62 3,550 12.46

Consumer 1,783 2.49 1,748 2.39

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During 2021, interest income on nonaccrual loans and leases would have increased by approximately $2.62 million compared to $3.49 million in 2020 if these loans and leases had earned interest at their full contractual rate.

Nonperforming assets at December 31, 2020 increased from December 31, 2019, mainly due to increases in nonaccrual loans and leases offset by decreases in repossessions.

Repossessions consisted mainly of charter buses which are included in our auto and light truck portfolio.

Other real estate decreased due to sales of existing properties outpacing foreclosures.

Nonperforming assets at December 31, 2021 decreased from December 31, 2020, mainly due to decreases in nonaccrual loans and leases and in repossessions.

Repossessions consisted mainly of construction equipment.

We had no other real estate as all such properties were sold prior to year-end.

Nonperforming assets at December 31 (Dollars in thousands)

2020 2019 2018 2017 2016

Loans past due over 90 days $ 249 $ 115

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0.77 % 1.16 %

Potential Problem Loans — Potential problem loans consist of loans that are performing but for which management has concerns about the ability of a borrower to continue to comply with repayment terms because of the borrower’s potential operating or financial difficulties.

Management monitors these loans closely and reviews their performance on a regular basis.

As of December 31, 2021 and 2020, we had $1.23 million and $16.60 million, respectively, in loans of this type which are not included in either of the non-accrual or 90 days past due loan categories.

At December 31, 2020, potential problem loans consisted of six credit relationships two of which are bus accounts and one of which is a hotel.

The other three relationships are without any commonalities with regard to industry or collateral.

Weakness in these companies’ operating performance and payment patterns have caused us to heighten attention given to these credits.

At December 31, 2021, potential problem loans consisted of one credit relationship in the construction equipment segment of our loan portfolio.

Weakness in the borrowers’ operating performance and payment patterns have caused us to heighten attention given to this credit.

INVESTMENT PORTFOLIO

The amortized cost of securities at year-end 2020 increased 13.49% from 2019, following a 2.95% increase from year-end 2018 to year-end 2019.

The amortized cost of securities at December 31, 2020 was $1.17 billion or 16.04% of total assets, compared to $1.03 billion or 15.61% of total assets at December 31, 2019.

The following table shows the amortized cost of securities available-for-sale as of December 31.

The amortized cost of securities available-for-sale at year-end 2021 increased 59.90% from 2020, following a 13.49% increase from year-end 2019 to year-end 2020.

The amortized cost of securities available-for-sale at December 31, 2021 was $1.88 billion or 23.17% of total assets, compared to $1.17 billion or 16.04% of total assets at December 31, 2020.

The following table shows the amortized cost of investment securities available-for-sale as of December 31.

(Dollars in thousands) 2021 2020

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54% in the year 2021;

22% in the year 2020;

9% in the years 2018 and 2019;

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Total deposits $ 6,342,527 $ 5,736,602 $ 5,276,736

The following table shows the estimated scheduled maturities of the portion of time deposits in U.S.

offices in excess of the FDIC insurance limit and time deposits that are otherwise uninsured.

(Dollars in thousands)

Under 3 Months $ 45,880

4 – 6 Months 71,928

7 – 12 Months 76,050

Over 12 Months 111,621

Total $ 305,479

See Part II, Item 8, Financial Statements and Supplementary Data — Note 10 of the Notes to Consolidated Financial Statements for additional information on deposits.

SHORT-TERM BORROWINGS

The following table shows the distribution of our short-term borrowings and the weighted average interest rates thereon at the end of each of the last three years.

Also provided are the maximum amount of borrowings and the average amount of borrowings, as well as weighted average interest rates for the last three years.

The following table shows the distribution of our short-term borrowings and the weighted average interest rates thereon at the end of each of the last two years.

Also provided are the maximum amount of borrowings and the average amount of borrowings, as well as weighted average interest rates for the last two years.

(Dollars in thousands) Federal Funds Purchased and Securities Repurchase Agreements Commercial Paper Federal Home Loan Bank Advances Other

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Weighted average interest rate during the year 0.19 % 0.23 % 0.87 % — % 0.26 %

Weighted average interest rate for outstanding amounts at December 31, 2019 0.23 % 0.29 % 1.61 % — % 0.42 %

Balance at December 31, 2018 $ 113,627 $ 4,325 $ 80,000 $ 1,392 $ 199,344

Maximum amount outstanding at any month-end 148,002 5,590 225,000 2,740 381,332

Average amount outstanding 135,670 4,805 122,592 1,974 265,041

Weighted average interest rate during the year 0.30 % 0.29 % 1.97 % — % 1.07 %

Weighted average interest rate for outstanding amounts at December 31, 2018 0.47 % 0.29 % 2.57 % — % 1.30 %

Weighted average interest rate for outstanding amounts at December 31, 2020 0.08 % 0.13 % N/A — % 0.08 %

LIQUIDITY AND CAPITAL RESOURCES

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While regulatory capital adequacy ratios exclude unrealized gains (losses), it does impact our equity as reported in the audited financial statements.

The unrealized gains on available-for-sale securities, net of income taxes, were $18.37 million and $5.17 million at December 31, 2020 and 2019, respectively.

The unrealized (losses) gains on available-for-sale securities, net of income taxes, were $(9.86) million and $18.37 million at December 31, 2021 and 2020, respectively.

Other Liquidity — 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.

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1st Source Bank has established relationships with several banks to provide short term borrowings in the form of federal funds purchased.

At December 31, 2020, we borrowed zero in the federal funds market.

At December 31, 2021, we had no borrowings in the federal funds market.

We could borrow $245.00 million in additional funds for a short time from these banks on a collective basis.

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Further discussion of these commitments is included in Part II, Item 8, Financial Statements and Supplementary Data — Note 18 of the Notes to Consolidated Financial Statements.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited consolidated selected quarterly statement of operations data for the years ended December 31, 2020 and 2019.

Three Months Ended (Dollars in thousands, except per share amounts)

March 31 June 30 September 30 December 31

Interest income $ 67,686 $ 63,850 $ 62,917 $ 68,578

Interest expense 12,842 9,849 8,049 6,471

Net interest income 54,844 54,001 54,868 62,107

Provision for credit losses* 11,353 10,375 9,303 4,970

Gains (losses) on investment securities available-for-sale 280 (1) — —

Income before income taxes 21,578 24,042 26,563 34,158

Net income 16,418 18,526 20,054 26,463

Net income available to common shareholders 16,413 18,502 20,058 26,464

Diluted net income per common share 0.64 0.72 0.78 1.03

Interest income $ 69,021 $ 71,637 $ 72,676 $ 69,543

Interest expense 14,073 15,210 15,481 14,247

Net interest income 54,948 56,427 57,195 55,296

Provision for loan and lease losses 4,918 4,247 3,717 2,951

Gains on investment securities available-for-sale — — — —

Income before income taxes 28,950 30,491 32,137 28,576

Net income 22,196 23,417 24,448 21,954

Net income available to common shareholders 22,196 23,385 24,438 21,941

Diluted net income per common share 0.86 0.91 0.95 0.86

* ASU 2016-13 adopted during the fourth quarter of 2020 with a cumulative effect adjustment dated January 1, 2020 therefore September 30, 2020, June 30, 2020, and March 31, 2020 provision amounts reflect the incurred loss calculation.

Net income available to common shareholders was $26.46 million for the fourth quarter of 2020, compared to the $21.94 million of net income available to common shareholders reported for the fourth quarter of 2019.

Diluted net income per common share for the fourth quarter of 2020 amounted to $1.03, compared to $0.86 per common share reported in the fourth quarter of 2019.

Net interest margin was 3.54% for the fourth quarter of 2020 and 3.51% for the fourth quarter of 2019.

Net interest income was $62.11 million for the fourth quarter of 2020 up 12.32% from 2019’s fourth quarter.

Net interest margin on a fully taxable-equivalent basis was 3.55% for the fourth quarter of 2020 and 3.52% for the fourth quarter of 2019.

Tax-equivalent net interest income was $62.23 million for the fourth quarter of 2020, up 12.22% from 2019’s fourth quarter.

Our provision for credit losses was $4.97 million in the fourth quarter of 2020 compared to $2.95 million in the fourth quarter of 2019.

Net charge-offs were $3.72 million for the fourth quarter 2020, compared to net charge-offs of $0.64 million a year ago.

Noninterest income for the fourth quarter of 2020 was $25.99 million, compared to $25.58 million for the fourth quarter of 2019.

Noninterest expense for the fourth quarter of 2020 was $48.96 million and was $49.35 million in the fourth quarter 2019.

Quantitative and Qualitative Disclosures about Market Risk.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis