QUARTERLY HIGHLIGHTS

• Net income was $27.39 million for the quarter, down $715,000 or 2.54% from the first quarter of 2021. Diluted net income per common share was $1.10, equal to the prior year’s first quarter of $1.10.

• Cash dividend of $0.31 per common share was approved, up 3.33% from the $0.30 per common share declared a year ago.

• Small Business Administration (SBA) forgiveness and customer pay downs of Paycheck Protection Program (PPP) loans amounted to approximately $36.61 million during the quarter which contributed to the recognition of $1.47 million in PPP-related loan fees in the quarter down from $132.91 million in forgiveness and $3.98 million in fees in the first quarter of 2021.

• Average loans and leases net PPP loans grew $68.82 million, up 1.32% from December 31, 2021 and $185.66 million, up 3.65% from March 31, 2021.

• Mortgage banking income was $1.38 million, down $2.52 million, or 64.70% from the first quarter a year ago. Demand for mortgages declined as refinancing slowed and inventory of homes for sale remains low.

1st Source Corporation (NASDAQ: SRCE), parent company of 1st Source Bank, today reported quarterly net income of $27.39 million for the first quarter of 2022, down 2.54% from the $28.11 million reported in the first quarter a year ago. Diluted net income per common share for the first quarter of 2022 and 2021 was $1.10.

At its April 2022 meeting, the Board of Directors approved a cash dividend of $0.31 per common share, up 3.33% from the $0.30 per common share declared a year ago. The cash dividend is payable to shareholders of record on May 3, 2022 and will be paid on May 13, 2022.

Christopher J. Murphy III, Chairman and Chief Executive Officer, commented, “We are pleased with our financial performance during the quarter. Average loans grew $185.66 million or 3.65% net of Paycheck Protection Program (PPP) loans from the first quarter last year. We continue to help clients finalize the forgiveness process with the SBA and plan to work through the remaining balances in the second quarter. The expected reduction in PPP loan fees and mortgage income had the largest impact on our net income results. After adjusting for the impact of PPP loans, our first quarter 2022 net interest margin increased 17 basis points from the fourth quarter of 2021 while maintaining stable loan and lease quality. We are hopeful that the Federal Reserve can successfully decelerate runaway inflation through prudent monetary policy as we move further into 2022 and beyond.

“We were thrilled to learn during the first quarter that Forbes had named 1st Source among ‘America’s Best Midsize Employers’ for the second consecutive year. The list consists of 500 companies with 1,000 employees or more. This ranking was compiled via a survey in partnership with Statista. Sixty thousand participants were asked to rate, on a scale of zero to 10, their willingness to recommend their employer to others. Respondents were also asked to rate their companies on factors such as working conditions, development opportunities and compensation. It’s long been our goal to provide a values-based workplace and culture that uplifts and encourages every team member. We hope that our colleagues are proud to be part of that culture, and the achievement of being named among the top midsize employers in the country once again lets us know our efforts are making a difference.

“Clearly, the past two years have proven to be difficult as we all faced, and continue to face, the challenges of the COVID-19 pandemic. We’ve worked hard to keep our 1st Source family healthy while providing our clients with the exceptional quality service they expected from us. We were recently able to relax our masking and gathering protocols following the CDC’s recent guideline changes and the overall high inoculation rate among our team, and our colleagues have enjoyed interacting with each other, our clients and our communities more freely as of late. As always, we will continue to monitor the information available to us and make decisions with the best interests of all those we interact with in mind, but it has been nice to get back to a sense of normalcy in how we conduct business,” Mr. Murphy concluded.

FIRST QUARTER 2022 FINANCIAL RESULTS

Loans

First quarter average loans and leases of $5.32 billion increased $185.66 million, up 3.65% net of PPP loans from the year ago quarter and increased $68.82 million, up 1.32% net of PPP loans from the previous quarter. PPP forgiveness and customer payments totaled $36.61 million in the first quarter of 2022. PPP loans of $37.94 million remained outstanding which is net of $1.24 million in unearned fees as of March 31, 2022. The aircraft, auto and light truck and construction equipment portfolios all grew in the first quarter of 2022 compared to the first quarter of 2021 and the previous quarter.

Deposits

Average deposits of $6.62 billion grew $636.40 million for the quarter ended March 31, 2022, up 10.64% from the year ago quarter and decreased $83.71 million, down 1.25% from the previous quarter. Deposit growth over the last year came from all areas - business, consumer and public fund deposits while brokered deposits have declined over the year.

Net Interest Income and Net Interest Margin

First quarter 2022 tax-equivalent net interest income of $59.73 million increased $2.19 million, or 3.81% from the first quarter a year ago and decreased $0.45 million, or 0.75% from the fourth quarter of 2021. We recognized $1.47 million in PPP loan fees during the first quarter of 2022 compared to $3.98 million in the first quarter of 2021.

First quarter 2022 net interest margin was 3.17%, a decrease of 18 basis points from the 3.35% for the same period in 2021 and an increase of eight basis points from the previous quarter. On a fully tax-equivalent basis, first quarter 2022 net interest margin was 3.18%, a decrease of 17 basis points from the 3.35% for the same period in 2021 and was higher by nine basis points compared to the previous quarter. Fees for PPP loans had a positive impact on the net interest margin of six basis points for the current quarter compared to a positive impact of 10 basis points in the same period a year ago. Additionally, lower interest expense on mandatorily redeemable securities due to book value adjustments had a positive six basis point impact on the net interest margin during the first quarter of 2022.

During the prior quarter, PPP loans had a positive impact on the net interest margin of 16 basis points, and we recognized $3.58 million in PPP loan fees during that quarter. Although the margin continues to experience pressure from the low interest rate environment, the Federal Reserve’s 25 basis point interest rate increase during the quarter and its signaling of additional rate increases throughout the remainder of 2022 could contribute to some relief.

Noninterest Income

First quarter 2022 noninterest income of $23.15 million decreased $2.72 million, or 10.53% from the first quarter a year ago and decreased $0.68 million, or 2.87% from the fourth quarter of 2021.

Noninterest income was lower compared to the first quarter a year ago mainly from reduced mortgage banking income resulting from a lower balance of loans originated and sold in the secondary market as well as a lower margin recognized on those loans. Equipment rental income continued to shrink as demand for leases declined. This was offset by higher trust and wealth advisory fees and a rise in service charges on deposit accounts.

The decrease in noninterest income from the prior quarter was mainly due to decreased mortgage banking income as described above, reduced debit card income and lower equipment rental income offset by increased insurance commissions due to seasonal contingent commissions received and higher partnership investment gains.

Noninterest Expense

First quarter 2022 noninterest expense of $45.34 million increased $1.20 million, or 2.71% from the first quarter a year ago and decreased $3.41 million, or 7.00% from the prior quarter.

The increase in noninterest expense from the first quarter a year ago was mainly the result of a higher loan loss provision for unfunded loan commitments, higher business development costs tied to fewer COVID-19 restrictions and increased data processing charges offset by decreased leased equipment depreciation as the average equipment rental portfolio continues to decline.

The decrease in noninterest expense from the prior quarter was primarily the result of lower salaries and wages due to a one-time special COVID-19 vaccination reward in the prior quarter, reduced commission compensation, and decreased legal and professional consulting fees offset by an increased loan loss provision for unfunded loan commitments, higher snow removal costs due to seasonal weather conditions and increased data processing.

Credit

The allowance for loan and lease losses as of March 31, 2022 was 2.41% of total loans and leases compared to 2.38% at December 31, 2021 and 2.53% at March 31, 2021. The allowance calculation includes PPP loans which are guaranteed by the SBA. Excluding these loans from the calculation results in an allowance of 2.43% at March 31, 2022, compared to 2.42% at December 31, 2021 and 2.74% at March 31, 2021. Net recoveries of $0.23 million were recorded for the first quarter of 2022 compared with net charge-offs of $3.50 million in the same quarter a year ago and $5.15 million of net charge-offs in the prior quarter. The majority of recoveries during the quarter were related to the aircraft portfolio.

The provision for credit losses was $2.23 million for the first quarter of 2022, a decrease of $0.17 million compared with the same period in 2021 and an increase of $3.35 million from the previous quarter. The ratio of nonperforming assets to loans and leases was 0.66% as of March 31, 2022, compared to 0.77% on December 31, 2021 and 1.12% on March 31, 2021. Excluding PPP loans, the ratio of non-performing assets to loans and leases was 0.67% at March 31, 2022, 0.78% at December 31, 2021 and 1.22% at March 31, 2021. While nonperforming assets showed improvement during the quarter, the allowance for loan and lease losses increased at March 31, 2022 due to economic uncertainty stemming from the war in Ukraine, inflationary pressures and prolonged supply chain disruptions.

Capital

As of March 31, 2022, the common equity-to-assets ratio was 10.79%, compared to 11.32% at December 31, 2021 and 11.87% a year ago. The tangible common equity-to-tangible assets ratio was 9.85% at March 31, 2022 compared to 10.39% at December 31, 2021 and 10.87% a year earlier. The Common Equity Tier 1 ratio, calculated under banking regulatory guidelines, was 13.88% at March 31, 2022 compared to 13.72% at December 31, 2021 and 13.43% a year ago. During the first quarter of 2022, 45,419 shares were repurchased for treasury reducing common shareholders’ equity by $2.18 million.

Book value per share declined to $34.97 primarily due to non-credit-related, negative market value adjustments to our investment securities available-for-sale portfolio during the quarter. Market value adjustments were the result of changes in interest rates, market spreads and market conditions subsequent to purchase.

ABOUT 1ST SOURCE CORPORATION

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

1st Source serves the northern half of Indiana and southwest Michigan and is the largest locally controlled financial institution headquartered in the area. While delivering a comprehensive range of consumer and commercial banking services through its community bank offices, 1st Source has distinguished itself with highly personalized services. 1st Source Bank also competes for business nationally by offering specialized financing services for new and used private and cargo aircraft, automobiles for leasing and rental agencies, medium and heavy-duty trucks, and construction equipment. The Corporation includes 79 banking centers, 18 1st Source Bank Specialty Finance Group locations nationwide, nine Wealth Advisory Services locations and 10 1st Source Insurance offices.

FORWARD LOOKING STATEMENTS

Except for historical information contained herein, the matters discussed in this document express “forward-looking statements.” Generally, the words “believe,” “contemplate,” “seek,” “plan,” “possible,” “assume,” “hope,” “expect,” “intend,” “targeted,” “continue,” “remain,” “estimate,” “anticipate,” “project,” “will,” “should,” “indicate,” “would,” “may” and similar expressions indicate forward-looking statements. Those statements, including statements, projections, estimates or assumptions concerning future events or performance, and other statements that are other than statements of historical fact, are subject to material risks and uncertainties. 1st Source cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.

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

NON-GAAP FINANCIAL MEASURES

The accounting and reporting policies of 1st Source conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures are used by management to evaluate and measure the Company’s performance. Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. These include taxable-equivalent net interest income (including its individual components), net interest margin (including its individual components), the efficiency ratio, tangible common equity-to-tangible assets ratio and tangible book value per common share. Management believes that these measures provide users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency. Other financial holding companies may define or calculate these measures differently.

Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a FTE basis is also used in the calculation of the Company’s efficiency ratio. The efficiency ratio, which is calculated by dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or losses and lease depreciation), measures how much it costs to produce one dollar of revenue. Securities gains or losses and lease depreciation are excluded from this calculation to better match revenue from daily operations to operational expenses. Management considers the tangible common equity-to-tangible assets ratio and tangible book value per common share as useful measurements of the Company’s equity.

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

Category: Earnings

(charts attached)

(1) See “Reconciliation of Non-GAAP Financial Measures” for more information on this performance measure/ratio.

(2) Calculated as common shareholders’ equity divided by common shares outstanding at the end of the period.

(3) Calculated under banking regulatory guidelines.