10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                to                                

Commission file number 0-6233

(Exact name of registrant as specified in its charter)

Indiana	35-1068133
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 North Michigan Street, South Bend, Indiana	46601
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (574) 235-2000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock — without par value	The NASDAQ Stock Market LLC

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2018 was $1,055,910,322

The number of shares outstanding of each of the registrant’s classes of stock as of February 15, 2019: Common Stock, without par value — 25,804,596 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2019 Proxy Statement for the 2019 annual meeting of shareholders to be held April 18, 2019, are incorporated by reference into Part III.

TABLE OF CONTENTS

Part I
Item 1.	Business		3
Item 1A.	Risk Factors		10
Item 1B.	Unresolved Staff Comments		15
Item 2.	Properties		15
Item 3.	Legal Proceedings		15
Item 4.	Mine Safety Disclosures		15
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16
Item 6.	Selected Financial Data		17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		37
Item 8.	Financial Statements and Supplementary Data		38
		Reports of Independent Registered Public Accounting Firm	38
		Consolidated Statements of Financial Condition	39
		Consolidated Statements of Income	40
		Consolidated Statements of Comprehensive Income	41
		Consolidated Statements of Shareholders’ Equity	41
		Consolidated Statements of Cash Flows	42
		Notes to Consolidated Financial Statements	43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		79
Item 9A.	Controls and Procedures		79
Item 9B.	Other Information		79
Part III
Item 10.	Directors, Executive Officers and Corporate Governance		80
Item 11.	Executive Compensation		80
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		80
Item 13.	Certain Relationships and Related Transactions, and Director Independence		80
Item 14.	Principal Accounting Fees and Services		80
Part IV
Item 15.	Exhibits and Financial Statement Schedules		81
Signatures			83
Certifications

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Part I

Item 1. Business.

1ST SOURCE CORPORATION

1st Source Corporation, an Indiana corporation incorporated in 1971, is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries (collectively referred to as “1st Source”, “we”, and “our”), a broad array of financial products and services. 1st Source Bank (“Bank”), its banking subsidiary, offers commercial and consumer banking services, trust and wealth advisory services, and insurance to individual and business clients through most of our 80 banking center locations in 17 counties in Indiana and Michigan and Sarasota County in Florida. 1st Source Bank’s Specialty Finance Group, with 22 locations nationwide, offers specialized financing services for new and used private and cargo aircraft, automobiles and light trucks for leasing and rental agencies, medium and heavy duty trucks and construction equipment. While our lending portfolio is concentrated in certain equipment types, we serve a diverse client base. We are not dependent upon any single industry or client. At December 31, 2018, we had consolidated total assets of $6.29 billion, total loans and leases of $4.84 billion, total deposits of $5.12 billion, and total shareholders’ equity of $762.08 million.

Our principal executive office is located at 100 North Michigan Street, South Bend, Indiana 46601 and our telephone number is (574) 235-2000. Access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports is available, free of charge, at www.1stsource.com soon after the material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

1ST SOURCE BANK

1st Source Bank is a wholly owned subsidiary of 1st Source Corporation that offers a broad range of consumer and commercial banking services through its lending operations, retail branches, and fee based businesses.

Commercial, Agricultural, and Real Estate Loans — 1st Source Bank provides commercial, small business, agricultural, and real estate loans to primarily privately owned business clients mainly located within our regional market area. Loans are made for a wide variety of general corporate purposes, including financing for industrial and commercial properties, financing for equipment, inventories and accounts receivable, renewable energy financing, and acquisition financing. Other services include commercial leasing, treasury management services and retirement planning services.

Consumer Services — 1st Source Bank provides a full range of consumer banking products and services through our banking centers and at 1stsource.com. In a number of our markets, 1st Source also offers insurance products through 1st Source Insurance offices. The traditional banking services include checking and savings accounts, certificates of deposits and Individual Retirement Accounts. 1st Source offers a full line of on-line and mobile banking products which includes person-to-person payments, outside account aggregation, money management budgeting solution and bill payment. As an added convenience, a strategically located Automated Teller Machine network serves our customers and supports the debit and credit card programs of the bank. Consumers also have the ability to obtain consumer loans, real estate loans and lines of credit in any of our banking centers or on-line. Finally, 1st Source offers a variety of financial planning, financial literacy and other consultative services to our customers.

Trust and Wealth Advisory Services — 1st Source Bank provides a wide range of trust, investment, agency, and custodial services for individual, corporate, and not-for-profit clients. These services include the administration of estates and personal trusts, as well as the management of investment accounts for individuals, employee benefit plans, and charitable foundations.

Specialty Finance Group Services — 1st Source Bank, through its Specialty Finance Group, provides a broad range of comprehensive equipment loan and lease products addressing the financing needs of a broad array of companies. This group can be broken down into four areas: new and used aircraft; auto and light trucks; construction equipment; and medium and heavy duty trucks.

Aircraft financing consists of financings for new and used general aviation aircraft (including helicopters) for private and corporate aircraft users, aircraft distributors and dealers, air charter operators, air cargo carriers, and other aircraft operators. For many years, on a limited and selective basis, 1st Source Bank has provided international aircraft financing, primarily in Mexico and Brazil. Aircraft finance receivables generally range from $500,000 to $20 million with fixed or variable interest rates and terms of one to ten years.

The auto and light truck division (including specialty vehicles such as motor coaches, shuttle buses, step vans, work trucks and funeral cars) consists of fleet financings to automobile and light truck rental companies, commercial leasing companies, and single unit to fleet financing for users of specialty vehicles. The auto and light truck finance receivables generally range from $50,000 to $25 million with fixed or variable interest rates and terms of one to eight years.

Construction equipment financing includes financing of equipment (i.e., asphalt and concrete plants, bulldozers, excavators, cranes and loaders, etc.) to the construction industry. Construction equipment finance receivables generally range from $50,000 to $20 million with fixed or variable interest rates and terms of one to seven years.

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The medium and heavy duty truck division provides fleet financing for highway tractors, medium duty trucks (including environmental vehicles) and trailers to the commercial trucking industry. Medium and heavy duty truck finance receivables generally range from $50,000 to $20 million with fixed or variable interest rates and terms of three to seven years.

The group also generates equipment rental income through the leasing of construction equipment, various types of trucks, vans, automobiles, motor coaches, shuttle buses and other equipment through operating leases to clients.

In addition to loan and lease financings during 2018, the group had average total deposits of approximately $137 million.

SPECIALTY FINANCE GROUP SUBSIDIARIES

The Specialty Finance Group also consists of separate wholly owned subsidiaries of 1st Source Bank which include: Michigan Transportation Finance Corporation, 1st Source Specialty Finance, Inc., SFG Aircraft, Inc., 1st Source Intermediate Holding, LLC, SFG Commercial Aircraft Leasing, Inc., and SFG Equipment Leasing Corporation I.

1ST SOURCE INSURANCE, INC.

1st Source Insurance, Inc. is a wholly owned subsidiary of 1st Source Bank that provides insurance products and services to individuals and businesses covering corporate and personal property, casualty insurance, and individual and group health and life insurance. 1st Source Insurance, Inc. has ten offices.

1ST SOURCE CORPORATION INVESTMENT ADVISORS, INC.

1st Source Corporation Investment Advisors, Inc. (Investment Advisors) is a wholly owned subsidiary of 1st Source Bank that provides investment advisory services for trust and investment clients of 1st Source Bank. Investment Advisors is registered as an investment advisor with the SEC under the Investment Advisors Act of 1940. Investment Advisors serves strictly in an advisory capacity and as such, does not hold any client securities.

OTHER CONSOLIDATED SUBSIDIARIES

We have other subsidiaries that are not significant to the consolidated entity.

1ST SOURCE MASTER TRUST

Our unconsolidated subsidiary includes 1st Source Master Trust. This subsidiary was created for the purpose of issuing $57.00 million of trust preferred securities and lending the proceeds to 1st Source. We guarantee, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities.

COMPETITION

The activities in which we and the Bank engage are highly competitive. Our businesses and the geographic markets we serve require us to compete with other banks, some of which are affiliated with large bank holding companies headquartered outside of our principal market. We generally compete on the basis of client service and responsiveness to client needs, available loan and deposit products, the rates of interest charged on loans and leases, the rates of interest paid for funds, other credit and service charges, the quality of services rendered, the convenience of banking facilities, and in the case of loans and leases to large commercial borrowers, relative lending limits.

In addition to competing with other banks within our primary service areas, the Bank also competes with other financial service companies, such as credit unions, industrial loan associations, securities firms, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit organizations, and other enterprises.

Additional competition for depositors’ funds comes from United States Government securities, private issuers of debt obligations, and suppliers of other investment alternatives for depositors. Many of our non-bank competitors are not subject to the same extensive Federal and State regulations that govern bank holding companies and banks. Such non-bank competitors may, as a result, have certain advantages over us in providing some services.

We compete against these financial institutions by being convenient to do business with, and by taking the time to listen and understand our clients’ needs. We deliver personalized, one-on-one banking through knowledgeable local members of the community always keeping the clients’ best interest in mind while offering a full array of products and highly personalized services. We rely on our history and our reputation in northern Indiana dating back to 1863.

EMPLOYEES

At December 31, 2018, we had approximately 1,150 employees on a full-time equivalent basis. We provide a wide range of employee benefits and consider employee relations to be good.

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ENVIRONMENTAL SUSTAINABILITY

1st Source embraces our responsibility to be a good steward of the environment. We have an approach that protects and conserves our natural resources though methods such as:

Developing business practices that protect and conserve natural resources — We use responsible, reputable, and monitored e-recyclers for our electronic assets. All computers, including desktops, laptops, and monitors, are properly recycled.

We are conscious of our paper usage, recognizing that we depend on printed materials for important day-to-day office work, client communications, and acquiring new clients. Increasingly, consumers demand more environmentally sustainable options and prefer online statements and correspondence rather that printed materials. The majority of the paper used in our facilities is recycled through our secure shred program and in 2018 we recycled 268,000 pounds of paper.

Additionally, we are utilizing various sustainable practices in some of our facilities such as LED lights, daylight harvesting sensors, programmable thermostats, 95% or higher efficiency furnace systems, drip irrigation, 90% recycled mats, and sustainable landscaping and irrigation systems. In an effort to reduce our carbon footprint, we will utilize solar panels in two of our banking centers for supplemental sustainable power. These banking centers expect to supplement approximately 20% of their total electrical usage with renewable solar power.

Embracing opportunities for new products, services and partnerships — In 2018, we continued our focus on renewable energy sources through lending and investment partnerships with renewable energy providers. We recognize the opportunities and complexities associated with energy financing and understand the value of innovative technology that leverages the wind and sun, which are sustainable from an environmental and financial perspective. We will continue to finance and invest in sustainable opportunities, and we will explore new opportunities to develop products and solutions that support our clients and advance sustainability.

Adopting new technologies — We encourage our clients to take advantage of our online and mobile banking tools. Our ATM devices allow clients to make deposits without the need for an envelope. This reduces the use of paper, which again reduces emissions throughout our supply chain.

To help reduce emissions associated with travel, we have tools that help clients choose the banking center and ATM’s closest to them. In addition, mobile deposit features are available to our clients, enabling them to deposit checks into their accounts using their mobile devices.

Many of these approaches can create long-term value for our clients and shareholders through increased revenues, reduced costs and improved convenience.

REGULATION AND SUPERVISION

General — 1st Source and the Bank are extensively regulated under Federal and State law. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on our business and our prospective business. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. We are unable to predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, economic controls, or new Federal or State legislation may have in the future.

We are a registered bank holding company under the Bank Holding Company Act of 1956, as amended (BHCA), and, as such, we are subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (Federal Reserve). We are required to file annual reports with the Federal Reserve and to provide the Federal Reserve such additional information as it may require.

The Bank, as an Indiana state bank and member of the Federal Reserve System, is supervised by the Indiana Department of Financial Institutions (DFI) and the Federal Reserve. As such, 1st Source Bank is regularly examined by and subject to regulations promulgated by the DFI and the Federal Reserve. Because the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance to the Bank, we are also subject to supervision and regulation by the FDIC (even though the FDIC is not our primary Federal regulator).

Bank Holding Company Act — Under the BHCA our activities are limited to business so closely related to banking, managing, or controlling banks as to be a proper incident thereto. We are also subject to capital requirements applied on a consolidated basis in a form substantially similar to those required of the Bank. The BHCA also requires a bank holding company to obtain approval from the Federal Reserve before (i) acquiring, or holding more than 5% voting interest in any bank or bank holding company, (ii) acquiring all or substantially all of the assets of another bank or bank holding company, or (iii) merging or consolidating with another bank holding company.

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The BHCA also restricts non-bank activities to those which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. As discussed below, the Gramm-Leach-Bliley Act (GLBA), which was enacted in 1999, established a distinct type of bank holding company known as a “financial holding company” that has powers that are not otherwise available to bank holding companies.

Capital Standards — The Federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks. If capital falls below the minimum levels established by these guidelines, a bank holding company or bank must submit an acceptable plan for achieving compliance with the capital guidelines and, until its capital sufficiently improves, will be subject to denial of applications and appropriate supervisory enforcement actions. The various regulatory capital requirements that we are subject to are disclosed in Part II, Item 8, Financial Statements and Supplementary Data — Note 20 of the Notes to Consolidated Financial Statements.

In July 2013, the Federal Reserve and other federal banking agencies approved final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for all U.S. banks and for bank holding companies with greater than $500 million in assets. Under these final rules, minimum requirements will increase for both the quantity and quality of capital held by 1st Source and the Bank. The rules include a new common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%, and a minimum leverage ratio of 4.0%. The final rules also require a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. A three-year phase in period for the capital buffer requirement began in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis.

The final rules also increase the required capital for certain categories of assets, including higher-risk construction real estate loans and certain exposures related to securitizations. The final rules do not, however, adopt the changes in the proposed rule to the risk weights assigned to certain mortgage loan assets. The final rules instead adopt the risk weights for residential mortgages under the existing general risk-based capital rules, which assign a risk weight of either 50% (for most first-lien exposures) or 100% for other residential mortgage exposures. Similarly, the final rules do not adopt the proposed rule’s elimination of Tier 1 treatment of trust preferred securities for banking organizations with less than $15 billion in assets as of December 31, 2010. Instead, the final rules permit these banking organizations to retain non-qualifying Tier 1 capital trust preferred securities issued prior to May 19, 2010, subject generally to a limit of 25% of Tier 1 capital.

These new minimum capital ratios became effective for us on January 1, 2015 and will be fully phased-in on January 1, 2019. As of December 31, 2018, we were in compliance with all applicable regulatory capital requirements. Management also believes that, as of that date, we would have met all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis had those requirements been currently in effect.

Prompt Corrective Action Regulations — The FDIC’s prompt corrective action regulations establish five capital levels for financial institutions (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”), and impose mandatory regulatory scrutiny and limitations on institutions that are less than adequately capitalized. At December 31, 2018, the Bank was categorized as “well capitalized,” meaning that our total risk-based capital ratio exceeded 10.00%, our Tier 1 risk-based capital ratio exceeded 8.00%, our common equity Tier-1 risk-based capital ratio exceeded 6.50%, our leverage ratio exceeded 5.00%, and we are not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure.

FDIC Deposit Insurance Assessments —The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was signed into law on July 21, 2010, changed how the FDIC calculates deposit insurance premiums payable by insured depository institutions. The Dodd-Frank Act directs the FDIC to calculate the deposit insurance assessments payable by each insured depository institution based generally upon the institution’s average total consolidated assets minus its average tangible equity during the assessment period. Previously, an institution’s assessments were based on the amount of its insured deposits. The minimum deposit insurance fund rate will increase from 1.15% to 1.35% by September 30, 2020, and the cost of the increase will be borne by depository institutions with assets of $10 billion or more. The Dodd-Frank Act also provides the FDIC with discretion to determine whether to pay rebates to insured depository institutions when its deposit insurance reserves exceed certain thresholds.

Securities and Exchange Commission (SEC) and The NASDAQ Stock Market (NASDAQ) — We are under the jurisdiction of the SEC and certain state securities commissions for matters relating to the offering and sale of our securities and our investment advisory services. We are subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. We are listed on the NASDAQ Global Select Market under the trading symbol “SRCE,” and we are subject to the rules of NASDAQ for listed companies.

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Interstate Branching — The Dodd-Frank Act expanded the authority of a state or national bank to open offices in other states. A state or national bank may now open a de novo branch in a state where the bank does not already operate a branch if the law of the state where the branch is to be located would permit a state bank chartered by that state to open the branch. This provision removed restrictions under prior law that restricted a state or national bank from expanding into another state unless the laws of the bank’s home state and the laws of the other state both permitted out-of-state banks to open de novo branches.

Gramm-Leach-Bliley Act of 1999 — The GLBA removed barriers to affiliations among banks, insurance companies, the securities industry, and other financial service providers, and provides greater flexibility to these organizations in structuring such affiliations. The GLBA also expanded the types of financial activities a bank may conduct through a financial subsidiary and established a distinct type of bank holding company, known as a financial holding company, which may engage in an expanded list of activities that are “financial in nature.” These activities include securities and insurance brokerage, securities underwriting, insurance underwriting, and merchant banking. A bank holding company may become a financial holding company only if all of its subsidiary financial institutions are well-capitalized and well-managed and have at least a satisfactory Community Reinvestment Act (CRA) rating. While we meet these standards, we do not currently intend to file notice with the Federal Reserve to become a financial holding company or to engage in expanded financial activities through a financial subsidiary of the Bank. The GLBA also includes privacy protections for nonpublic personal information held by financial institutions regarding their customers, and establishes a system of functional regulation that makes the Federal Reserve the “umbrella supervisor” for holding companies, and other federal and state agencies the supervisor of the holding company’s subsidiaries.

Financial Privacy — In accordance with the GLBA, Federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about customers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third-party. The privacy provisions of the GLBA affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We are also subject to various state laws that generally require us to notify any customer whose personal financial information may have been released to an unauthorized person as the result of a breach of our data security policies and procedures.

USA Patriot Act of 2001 — The USA Patriot Act of 2001 (USA Patriot Act) substantially broadened the scope of anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations on financial institutions. The regulations adopted by the Treasury under the USA Patriot Act require financial institutions to maintain appropriate controls to combat money laundering activities, perform due diligence of private banking and correspondent accounts, establish standards for verifying customer identity, and provide records related to suspected anti-money laundering activities upon request from federal authorities. A financial institution’s failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches, and could also have other serious legal and reputational consequences for the institution. We have established policies, procedures and systems designed to comply with these regulations.

Regulations Governing Capital Adequacy — The Federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks. If capital falls below the minimum levels established by these guidelines, a bank holding company or bank will be required to submit an acceptable plan for achieving compliance with the capital guidelines and will be subject to denial of applications and appropriate supervisory enforcement actions. The various regulatory capital requirements that we are subject to are disclosed in Part II, Item 8, Financial Statements and Supplementary Data — Note 20 of the Notes to Consolidated Financial Statements.

Community Reinvestment Act — The Community Reinvestment Act of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the Federal banking regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. Federal banking regulators are required to consider a financial institution’s performance in these areas as they review applications filed by the institution to engage in mergers or acquisitions or to open a branch or facility.

Regulations Governing Extensions of Credit — The Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to 1st Source or our subsidiaries, or investments in our securities and on the use of our securities as collateral for loans to any borrowers. These regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. Further, the BHCA, certain regulations of the Federal Reserve, state laws and many other Federal laws govern the extensions of credit and generally prohibit a bank from extending credit, engaging in a lease or sale of property, or furnishing services to a customer on the condition that the customer obtain additional services from the bank’s holding company or from one of its subsidiaries.

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The Bank is also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders, or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and subject to credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with non affiliates, and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. The Bank is also subject to certain lending limits and restrictions on overdrafts to such persons.

Reserve Requirements — The Federal Reserve requires all depository institutions to maintain reserves against their transaction account deposits. For 2019, the Bank must maintain reserves of 3.00% against net transaction accounts greater than $16.30 million and up to $124.20 million (subject to adjustment by the Federal Reserve) and reserves of 10.00% must be maintained against that portion of net transaction accounts in excess of $124.20 million. These amounts are indexed to inflation and adjusted annually by the Federal Reserve.

Dividends — The ability of the Bank to pay dividends is limited by state and Federal laws and regulations that require the Bank to obtain the prior approval of the DFI and the Federal Reserve Bank of Chicago before paying a dividend that, together with other dividends it has paid during a calendar year, would exceed the sum of its net income for the year to date combined with its retained net income for the previous two years. The amount of dividends the Bank may pay may also be limited by certain covenant agreements and by the principles of prudent bank management. See Part II, Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for further discussion of dividend limitations.

Monetary Policy and Economic Control — The commercial banking business in which we engage is affected not only by general economic conditions, but also by the monetary policies of the Federal Reserve. Changes in the discount rate on member bank borrowing, availability of borrowing at the “discount window,” open market operations, the imposition of changes in reserve requirements against member banks’ deposits and assets of foreign branches, and the imposition of, and changes in, reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the Federal Reserve. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments, and deposits, and such use may affect interest rates charged on loans and leases or paid on deposits. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to do so in the future. The monetary policies of the Federal Reserve are influenced by various factors, including economic growth, inflation, unemployment, short-term and long-term changes in the international trade balance, and in the fiscal policies of the U.S. Government. Future monetary policies and the effect of such policies on our future business and earnings, and the effect on the future business and earnings of the Bank cannot be predicted.

Sarbanes-Oxley Act of 2002 — The Sarbanes-Oxley Act of 2002 (SOA) includes provisions intended to enhance corporate responsibility and protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws, and which increase penalties for accounting and auditing improprieties at public traded companies. The SOA generally applies to all companies that file or are required to file periodic reports with the SEC under the Exchange Act.

Among other things, the SOA creates the Public Company Accounting Oversight Board as an independent body subject to SEC supervision with responsibility for setting auditing, quality control, and ethical standards for auditors of public companies. The SOA also requires public companies to make faster and more-extensive financial disclosures, requires the chief executive officer and the chief financial officer of public companies to provide signed certifications as to the accuracy and completeness of financial information filed with the SEC, and provides enhanced criminal and civil penalties for violations of the Federal securities laws.

The SOA also addresses functions and responsibilities of audit committees of public companies. The statute, by mandating certain stock exchange listing rules, makes the audit committee directly responsible for the appointment, compensation, and oversight of the work of the company’s outside auditor, and requires the auditor to report directly to the audit committee. The SOA authorizes each audit committee to engage independent counsel and other advisors, and requires a public company to provide the appropriate funding, as determined by its audit committee, to pay the company’s auditors and any advisors that its audit committee retains. The SOA also requires public companies to prepare an internal control report and assessment by management, along with an attestation to this report prepared by the company’s independent registered public accounting firm, in their annual reports to stockholders.

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Consumer Financial Protection Laws — The Bank is subject to a number of federal and state consumer financial protection laws and regulations that extensively govern its transactions with consumers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, and the Service Members Civil Relief Act. 1st Source Bank must also comply with applicable state usury laws and other laws prohibiting unfair and deceptive acts and practices. These laws, among other things, require disclosures of the cost of credit and the terms of deposit accounts, prohibit discrimination in credit transactions, regulate the use of credit report information, restrict the Bank’s ability to raise interest rates and subject the Bank to substantial regulatory oversight. Violations of these laws may expose us to liability from potential lawsuits brought by affected customers. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce these consumer financial protection laws, in which case we may be subject to regulatory sanctions, civil money penalties, and customer rescission rights. Failure to comply with these laws may also cause the Federal Reserve or DFI to deny approval of any applications we may file to engage in merger and acquisition transactions with other financial institutions.

Dodd-Frank Wall Street Reform and Consumer Protection Act — The Dodd-Frank Act, which was signed into law in 2010, significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that profoundly affected the regulation of community banks, thrifts, and small bank and thrift holding companies. Among other things, these provisions relaxed rules on interstate branching, allow financial institutions to pay interest on business checking accounts, and impose heightened capital requirements on bank and thrift holding companies. The Dodd-Frank Act also includes several corporate governance provisions that apply to all public companies, not just financial institutions. These include provisions mandating certain disclosures regarding executive compensation and provisions addressing proxy access by shareholders.

The Dodd-Frank Act also establishes the Consumer Financial Protection Bureau (CFPB) as an independent entity within the Federal Reserve and transferred to the CFPB primary responsibility for administering substantially all of the consumer compliance protection laws formerly administered by other federal agencies. The Dodd-Frank Act also authorizes the CFPB to promulgate consumer protection regulations that will apply to all entities, including banks, that offer consumer financial services or products. It also includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payment penalties.

The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, including some that may affect our business in substantial and unpredictable ways. We have incurred higher operating costs in complying with the Dodd -Frank Act, and we expect that these higher costs will continue for the foreseeable future. Our management continues to monitor the ongoing implementation of the Dodd-Frank Act and as new regulations are issued, will assess their effect on our business, financial condition, and results of operations.

The Volcker Rule — The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and from investing and sponsoring hedge funds and private equity funds. The provision of the statute imposing these restrictions is commonly called the “Volcker Rule.” The regulations implementing the Volcker Rule require institutions to conform their activities to the requirements of the Volcker Rule by July 21, 2015, and to conform their investments in certain “legacy covered funds” by July 21, 2017. These regulations exempt the Bank, as a bank with less than $10 billion in total consolidated assets that does not engage in any covered activities other than trading in certain government, agency, state or municipal obligations, from any significant compliance obligations under the Volcker Rule.

Liquidity Requirements — Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio, or LCR, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio, or NSFR, is designed to promote more medium and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements are expected to incentivize banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.

In September 2015, the federal bank regulators approved final rules implementing the LCR for advanced approaches banking organizations (i.e,. banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure) and a modified version of the LCR for bank holding companies with at least $50 billion in total consolidated assets that are not advanced approach banking organizations, neither of which would apply to 1st Source or the Bank. The federal bank regulators have not yet proposed rules to implement the NSFR, but the Federal Reserve has stated its intent to adopt a version of this measure as well.

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2018 Regulatory Reform — In May 2018, the Economic Growth, Regulatory Reform and Consumer Protection Act (Regulatory Relief Act), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for the Bank and 1st Source.

The Regulatory Relief Act, among other things, expands the definition of qualified mortgages a financial institution may hold and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “community bank leverage ratio” of between 8% and 10%. Any qualifying depository institution or its holding company that exceeds this community bank leverage ratio will be considered to have met generally applicable leverage and risk-based regulatory requirements. Further, any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” for purposes of the prompt corrective action rules. In addition, the Regulatory Relief Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the proprietary trading prohibitions in the Volcker Rule, mortgage disclosures, and risk weights for certain high-risk commercial real estate loans.

It is difficult at this time to predict when or how any new standards under the Regulatory Relief Act will ultimately be applied to the Bank or 1st Source or what specific impact the Regulatory Relief Act and the yet-to-be-written implementation rules and regulations will have on the Bank or 1st Source.

Pending Legislation — Because of concerns relating to competitiveness and the safety and soundness of the banking industry, Congress often considers a number of wide-ranging proposals for altering the structure, regulation, and competitive relationships of the nation’s financial institutions. We cannot predict whether or in what form any proposals will be adopted or the extent to which our business may be affected.

Item 1A. Risk Factors.

An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that we believe affect us are described below. See “Forward Looking Statements” under Item 7 of this report for a discussion of other important factors that can affect our business.

Credit Risks

We are subject to credit risks relating to our loan and lease portfolios — We have certain lending policies and procedures in place that are designed to optimize loan and lease income within an acceptable level of risk. Our management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing our management with frequent reports related to loan and lease production, loan quality, concentrations of credit, loan and lease delinquencies, and nonperforming and potential problem loans and leases. Diversification in the loan and lease portfolios is a means of managing risk associated with fluctuations in economic conditions.

We maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to our management. The loan and lease review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.

Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. We seek to minimize these risks through our underwriting standards. We obtain financial information and perform credit risk analysis on our customers. Credit criteria may include, but are not limited to, assessments of income, cash flows, collateral, and net worth; asset ownership; bank and trade credit references; credit bureau reports; and operational history.

Commercial real estate or equipment loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and generate positive cash flows. Our management examines current and projected cash flows of the borrower to determine the ability of the borrower to repay their obligations as agreed. Underwriting standards are designed to promote relationship banking rather than transactional banking. Most commercial and industrial loans are secured by the assets being financed or other business assets; however, some loans may be made on an unsecured basis. Our credit policy sets different maximum exposure limits both by business sector and our current and historical relationship and previous experience with each customer.

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We offer both fixed-rate and adjustable-rate consumer mortgage loans secured by properties, substantially all of which are located in our primary market area. Adjustable-rate mortgage loans help reduce our exposure to changes in interest rates; however, during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase as a result of repricing and the increased payments required from the borrower. Additionally, some residential mortgages are sold into the secondary market and serviced by our principal banking subsidiary, 1st Source Bank.

Consumer loans are primarily all other non-real estate loans to individuals in our regional market area. Consumer loans can entail risk, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets. In these cases, any repossessed collateral may not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy.

The 1st Source Specialty Finance Group loan and lease portfolio consists of commercial loans and leases secured by construction and transportation equipment, including aircraft, autos, trucks, and vans. Finance receivables for this Group generally provide for monthly payments and may include prepayment penalty provisions.

Our construction and transportation related businesses could be adversely affected by slowdowns in the economy. Clients who rely on the use of assets financed through the Specialty Finance Group to produce income could be negatively affected, and we could experience substantial loan and lease losses. By the nature of the businesses these clients operate in, we could be adversely affected by rapid increases or decreases in fuel costs, terrorist and other potential attacks, and other destabilizing events. These factors could contribute to the deterioration of the quality of our loan and lease portfolio, as they could have a negative impact on the travel and transportation sensitive businesses for which our specialty finance businesses provide financing.

Our aircraft portfolio has foreign exposure, particularly in Mexico and Brazil. We establish exposure limits for each country through a centralized oversight process, and in consideration of relevant economic, political, social and legal risks. We monitor exposures closely and adjust our country limits in response to changing conditions. Currency fluctuations could have a negative impact on our client’s cost of paying dollar denominated debts and, as a result, we could experience higher delinquency in this portfolio. Also, since some of the relationships in this portfolio are large, a slowdown in these markets could have a significant adverse impact on our performance.

In addition, our leasing and equipment financing activity is subject to the risk of cyclical downturns, industry concentration and clumping, and other adverse economic developments affecting these industries and markets. This area of lending, with transportation in particular, is dependent upon general economic conditions and the strength of the travel, construction, and transportation industries.

Our reserve for loan and lease losses may prove to be insufficient to absorb probable losses in our loan and lease portfolio — In the financial services industry, there is always a risk that certain borrowers may not repay borrowings. The determination of the appropriate level of the reserve for loan and lease losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Our reserve for loan and lease losses may not be sufficient to cover the loan and lease losses that we may actually incur. If we experience defaults by borrowers in any of our businesses, our earnings could be negatively affected. Changes in local economic conditions could adversely affect credit quality, particularly in our local business loan and lease portfolio. Changes in national or international economic conditions could also adversely affect the quality of our loan and lease portfolio and negate, to some extent, the benefits of national or international diversification through our Specialty Finance Group’s portfolio. In addition, bank regulatory agencies periodically review our reserve for loan and lease losses and may require an increase in the provision for loan and lease losses or the recognition of further loan or lease charge-offs based upon their judgments, which may be different from ours.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, which replaces the existing “incurred loss” model for recognizing credit losses with the Current Expected Credit Loss (CECL) model. The CECL model becomes effective for fiscal years beginning after December 15, 2019 and differs significantly from the “incurred loss” model under current GAAP. Upon adoption, CECL could have a material adverse effect on our financial condition and results of operations. A further discussion about CECL is disclosed in Part II, Item 8, Financial Statements and Supplementary Data - Note 2 of the Notes to Consolidated Financial Statements.

The soundness of other financial institutions could adversely affect us — Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due us. Any such losses could have a material adverse effect on our financial condition and results of operations.

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Market Risks

Fluctuations in interest rates could reduce our profitability and affect the value of our assets — Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and leases and investments, and interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice-versa. In addition, the individual market interest rates underlying our loan and lease and deposit products may not change to the same degree over a given time period. If market interest rates should move contrary to our position, earnings may be negatively affected. In addition, loan and lease volume and quality and deposit volume and mix can be affected by market interest rates as can the businesses of our clients. Changes in levels of market interest rates could have a material adverse effect on our net interest spread, asset quality, origination volume, and overall profitability. Additionally, changes in levels of market interest rates could cause our debt securities available-for-sale to move into unrealized loss positions which is a negative component of total shareholders’ equity.

Market interest rates are beyond our control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, may negatively affect our ability to originate loans and leases, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately could affect our earnings.

Adverse changes in economic conditions could impair our financial condition and results of operations — We are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, unemployment, and the strength of the U.S. economy and the local economies in which we operate, all of which are beyond our control. A deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services.

Changes in economic conditions may negatively impact the fees generated by our trust and wealth advisory business — Trust and wealth advisory fees are largely based on the size of client relationships and the market value of assets held under management. Changes in general economic conditions and in the financial and securities markets may negatively impact the value of our clients’ wealth management accounts and the market value of assets held under management. Market declines, reductions in the value of our clients’ accounts, and the loss of wealth management clients may negatively impact the fees generated by our trust and wealth management business and could have an adverse effect on our business, financial condition and results of operations.

Liquidity Risks

We could experience an unexpected inability to obtain needed liquidity — Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities and is essential to a financial institution’s business. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. If we become unable to obtain funds when needed, it could have a material adverse effect on our business, financial condition, and results of operations. Additionally, under Indiana law governing the collateralization of public fund deposits, the Indiana Board for Depositories determines which financial institutions are required to pledge collateral based on the strength of their financial ratings. We have been informed that no collateral is required for our public fund deposits. However, the Board of Depositories could alter this requirement in the future, which could adversely affect our liquidity depending on the amount of collateral we may be required to pledge.

We rely on dividends from our subsidiaries — We receive substantially all of our revenue from dividends from our subsidiaries, including, primarily, the Bank. These dividends are the principal source of funds we use to pay dividends on our common stock and interest and principal on our debt. Various federal and state laws and regulations limit the amount of dividends our subsidiaries may pay to us. In the event our subsidiaries are unable to pay dividends to us, we may not be able to service debt, pay other obligations, or pay dividends on our common stock. Our inability to receive dividends from our subsidiaries could have a material adverse effect on our business, financial condition and results of operations.

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Operational Risks

Our risk management framework could be ineffective and could have a material adverse effect on our ability to mitigate risks and/or losses — We have established a risk management framework to identify and manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, credit, market, liquidity, operational, legal/compliance, and reputational risks. Our framework also includes financial, analytical and forecasting modeling methodologies which involve significant management assumptions and judgment that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Additionally, our Board of Directors has adopted a risk appetite statement in consultation with management which sets forth certain thresholds and limits to govern our overall risk profile. There can be no assurance that our risk management framework will be effective under all circumstances or that it will adequately identify, manage or limit any risk of loss to us. Any such failure in our risk management framework could have a material adverse effect on our business, financial condition, and results of operations.

We are dependent upon the services of our management team — Our future success and profitability is substantially dependent upon our management and the banking acumen of our senior executives. We believe that our future results will also depend in part upon our ability to attract and retain highly skilled and qualified management. We are especially dependent on a limited number of key management personnel, many of whom do not have employment agreements with us. The loss of the chief executive officer and other senior management and key personnel could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals. Many of these senior officers have primary contact with our clients and are important in maintaining personalized relationships with our client base. The unexpected loss of services of one or more of these key employees could have a material adverse effect on our operations and possibly result in reduced revenues if we were unable to find suitable replacements promptly. Competition for senior personnel is intense, and we may not be successful in attracting and retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to our businesses and could have a material adverse effect on our businesses, financial condition, and results of operations.

Technology security breaches — Information security risks have increased due to the sophistication and activities of organized crime, hackers, terrorists and other external parties and the use of online, telephone, and mobile banking channels by clients. Any compromise of our security could deter our clients from using our banking services. We rely on security systems to provide the protection and authentication necessary to effect secure transmission of data against damage by theft, fire, power loss, telecommunications failure or similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms, and other disruptive problems caused by hackers. Computer break-ins, phishing and other disruptions of customer or vendor systems could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure. We maintain a cyber insurance policy that is designed to cover a majority of loss resulting from cyber security breaches.

The risk of business email compromises where perpetrators pose as company executives or vendors in order to dupe company personnel into sending large sums of money to accounts controlled by the perpetrators represents a continuing threat. Information security awareness training is completed annually by all employees to ensure continued employee engagement on mitigating risks. These precautions may not protect our systems from compromises or breaches of our security measures that could result in damage to our reputation and business.

We depend on the services of a variety of third-party vendors to meet data processing and communication needs and we have contracted with third parties to run their proprietary software on our behalf. While we perform reviews of security controls instituted by the vendor in accordance with industry standards and institute our own internal security controls, we rely on continued maintenance of the controls by the outside party to safeguard our customer data.

Additionally, we issue debit cards which are susceptible to compromise at the point of sale via the physical terminal through which transactions are processed and by other means of hacking. The security and integrity of these transactions are dependent upon the retailers’ vigilance and willingness to invest in technology and upgrades. Issuing debit cards to our clients exposes us to potential losses which, in the event of a data breach at one or more major retailers may adversely affect our business, financial condition, and results of operations.

We continually encounter technological change — The financial services industry is constantly undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better service clients and reduce costs. Our future success depends, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands, as well as create additional efficiencies within our operations. Many of our large competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services quickly or be successful in marketing these products and services to our clients. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

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Our accounting estimates rely on analytical and forecasting models — The processes we use to estimate our probable loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.

Legal/Compliance Risks

We are subject to extensive government regulation and supervision — Our operations are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible change. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulation or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs and limit the types of financial services and products we may offer. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

Changes in accounting standards could impact reported earnings — Current accounting and tax rules, standards, policies and interpretations influence the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on us, such as bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board and various taxing authorities, responding by adopting and/or proposing substantive revision to laws, regulations, rules, standards, policies and interpretations. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. A change in accounting standards may adversely affect our reported financial condition and results of operations.

Our investments and/or financings in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our financial results — We invest and/or finance certain tax-advantaged projects promoting affordable housing, community redevelopment and renewable energy sources. Our investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. We are subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, will fail to meet certain government compliance requirements and will not be able to be fully realized. The possible inability to realize these tax credits and other tax benefits can have a negative impact on our financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside of our control, including changes in the applicable tax code and the ability of the projects to be completed and properly managed.

Substantialownership concentration — Our directors, executive officers and 1st Source Bank, as trustee, collectively hold a significant ownership concentration of our common shares. Due to this significant level of ownership among our affiliates, our directors, executive officers, and 1st Source Bank, as trustee, may be able to influence the outcome of director elections or impact significant transactions, such as mergers or acquisitions, or any other matter that might otherwise be favored by other shareholders.

The fact that certain significant shareholders have additional shares registered for sale may depress market prices of our common stock — We have filed a registration statement with the SEC covering the potential sale by 1st Source Bank as trustee of certain trusts established for the benefit of the extended families of two of the children of Ernestine Raclin. Such holders may choose to sell their remaining registered shares at any time. Some market participants may assume that such remaining shares will become available to the market and choose to defer purchasing our shares on the market. This may, in turn have an effect of depressing the market price for our common stock. In addition, the future sale of substantial amounts of common stock by the holders of such registered shares may also depress the market price of our common stock.

Reputational Risks

Competition from other financial services providers could adversely impact our results of operations — The banking and financial services business is highly competitive. We face competition in making loans and leases, attracting deposits and providing insurance, investment, trust and wealth advisory, and other financial services. Increased competition in the banking and financial services businesses may reduce our market share, impair our growth or cause the prices we charge for our services to decline. Our results of operations may be adversely impacted in future periods depending upon the level and nature of competition we encounter in our various market areas.

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Managing reputational risk is important to attracting and maintaining customers, investors, and employees — Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. We have policies and procedures in place that seek to protect our reputation and promote ethical conduct. Nonetheless, negative publicity may arise regarding our business, employees, or customers, with or without merit, and could result in the loss of customers, investors, or employees, costly litigation, a decline in revenues, and increased government regulation.

Item 1B. Unresolved Staff Comments.

None

Item 2. Properties.

Our headquarters building is located in downtown South Bend, Indiana. The building is part of a larger complex, including a 300-room hotel and a 500-car parking garage. In December 2010, we entered into a new 10.5 year lease on our headquarters building which became effective January 1, 2011. As of December 31, 2018, 1st Source leases approximately 69% of the office space in this complex.

At December 31, 2018, we owned or leased property and/or buildings where 1st Source Bank’s 80 banking centers were located. Our facilities are located in Allen, Elkhart, Fulton, Huntington, Kosciusko, LaPorte, Marshall, Porter, Pulaski, St. Joseph, Starke, Tippecanoe, Wells, and Whitley Counties in the State of Indiana, Berrien, Cass, and Kalamazoo Counties in the State of Michigan, and Sarasota County in the state of Florida. Additionally, we utilize an operations center and our former headquarters building for business operations. The Bank leases additional property and/or buildings to and from third parties under lease agreements negotiated at arms-length.

Item 3. Legal Proceedings.

1st Source and our subsidiaries are involved in various other legal proceedings incidental to the conduct of our businesses. Our management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations.

Item 4. Mine Safety Disclosures.

None

Part II

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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the NASDAQ Global Select Market under the symbol “SRCE.” As of February 15, 2019, there were 1,567 holders of record of 1st Source common stock.

Comparison of Five Year Cumulative Total Return*

Among 1st Source, Morningstar Market Weighted NASDAQ Index** and Peer Group Index***

* Assumes $100 invested on December 31, 2013, in 1st Source Corporation common stock, NASDAQ market index, and peer group index.

** The Morningstar Weighted NASDAQ Index Return is calculated using all companies which trade as NASD Capital Markets, NASD Global Markets or NASD Global Select. It includes both domestic and foreign companies. The index is weighted by the then current shares outstanding and assumes dividends reinvested. The return is calculated on a monthly basis.

*** The peer group is a market-capitalization-weighted stock index of 38 banking companies in Illinois, Indiana, Michigan, Ohio, and Wisconsin. The following companies included in this peer group in last year’s annual report have not been included this year, all due to being acquired during 2018: First Federal of Northern Bancorp, Inc., MainSource Financial Group, Inc., and Northern States Financial Corp.

NOTE: Total return assumes reinvestment of dividends.

The following table shows our share repurchase activity during the three months ended December 31, 2018.

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs*	Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs
October 01 - 31, 2018	57,612	$	45.75	57,612	1,312,228
November 01 - 30, 2018	53,016	46.83		53,016	1,259,212
December 01 - 31, 2018	74,051	45.04		74,051	1,185,161

*1st Source maintains a stock repurchase plan that was authorized by the Board of Directors on July 24, 2014. Under the terms of the plan, 1st Source may repurchase up to 2,000,000 shares of its common stock from time to time to mitigate the potential dilutive effects of stock-based incentive plans and other potential uses of common stock for corporate purposes. Since the inception of the plan, 1st Source has repurchased a total of 814,839 shares.

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Federal laws and regulations contain restrictions on the ability of 1st Source and the Bank to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1, Business - Regulation and Supervision - Dividends and Part II, Item 8, Financial Statements and Supplementary Data - Note 20 of the Notes to Consolidated Financial Statements.

Item 6. Selected Financial Data.

The following table shows selected financial data and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes presented elsewhere herein.

(Dollars in thousands, except per share amounts)	2018			2017			2016			2015			2014
Interest income	$	257,316		$	212,385		$	191,760		$	184,684		$	178,554
Interest expense	43,410			26,754			22,101			18,163			18,225
Net interest income	213,906			185,631			169,659			166,521			160,329
Provision for loan and lease losses	19,462			8,980			5,833			2,160			3,733
Net interest income after provision for loan and lease losses	194,444			176,651			163,826			164,361			156,596
Noninterest income	97,050			98,706			88,945			83,316			77,887
Noninterest expense	186,467			173,997			163,645			159,114			150,040
Income before income taxes	105,027			101,360			89,126			88,563			84,443
Income taxes	22,613			33,309			31,340			31,077			26,374
Net income	82,414			68,051			57,786			57,486			58,069
Net income available to common shareholders	$	82,414		$	68,051		$	57,786		$	57,486		$	58,069
Assets at year-end	$	6,293,745		$	5,887,284		$	5,486,268		$	5,187,916		$	4,829,958
Long-term debt and mandatorily redeemable securities at year-end	71,123			70,060			74,308			57,379			56,232
Shareholders’ equity at year-end	762,082			718,537			672,650			644,053			614,473
Basic net income per common share	3.16			2.60			2.22			2.17			2.17
Diluted net income per common share	3.16			2.60			2.22			2.17			2.17
Cash dividends per common share	0.960			0.760			0.720			0.671			0.645
Dividend payout ratio	30.48		%	29.23		%	32.45		%	30.85		%	29.71		%
Return on average assets	1.34		%	1.21		%	1.08		%	1.15		%	1.21		%
Return on average common shareholders’ equity	11.09		%	9.69		%	8.71		%	9.05		%	9.65		%
Average common shareholders’ equity to average assets	12.08		%	12.46		%	12.38		%	12.72		%	12.52		%

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing our results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis you are encouraged to review the consolidated financial statements and statistical data presented in this document.

FORWARD-LOOKING STATEMENTS

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. Words such as “believe,” “contemplate,” “seek,” “estimate,” “plan,” “project,” “anticipate,” “possible,” “assume,” “expect,” “intend,” “targeted,” “continue,” “remain,” “will,” “should,” “indicate,” “would,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date.

All written or oral forward-looking statements that are made by or attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation, and do not undertake, to update, revise, or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made. We have expressed our expectations, beliefs, and projections in good faith and we believe they have a reasonable basis. However, we make no assurances that our expectations, beliefs, or projections will be achieved or accomplished. The results or outcomes indicated by our forward-looking statements may not be realized due to a variety of factors, including, without limitation, the following:

• Local, regional, national, and international economic conditions and the impact they may have on us and our clients and our assessment of that impact.

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• Changes in the level of nonperforming assets and charge-offs.

• Changes in estimates of future cash reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

• The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.

• Inflation, interest rate, securities market, and monetary fluctuations.

• Political instability.

• Acts of war or terrorism.

• Substantial changes in the cost of fuel.

• The timely development and acceptance of new products and services and perceived overall value of these products and services by others.

• Changes in consumer spending, borrowings, and savings habits.

• Changes in the financial performance and/or condition of our borrowers.

• Technological changes.

• Acquisitions and integration of acquired businesses.

• The ability to increase market share and control expenses.

• The ability to expand effectively into new markets that we target.

• 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 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.

• Changes in our organization, compensation, and benefit plans.

• The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquires and the results of regulatory examinations or reviews.

• Greater than expected costs or difficulties related to the integration of new products and lines of business.

• Our success at managing the risks described in Item 1A. Risk Factors.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) and follow general practices within the industries in which we operate. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates or judgments reflect management’s view of the most appropriate manner in which to record and report our overall financial performance. Because these estimates or judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. As such, changes in these estimates, judgments, and/or assumptions may have a significant impact on our financial statements. All accounting policies are important, and all policies described in Part II, Item 8, Financial Statements and Supplementary Data, Note 1 (Note 1), should be reviewed for a greater understanding of how our financial performance is recorded and reported.

We have identified the following three policies as being critical because they require management to make particularly difficult, subjective, and/or complex estimates or judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the determination of the reserve for loan and lease losses, fair value measurements, and the valuation of mortgage servicing rights. Management believes it has used the best information available to make the estimations or judgments necessary to value the related assets and liabilities. Actual performance that differs from estimates or judgments and future changes in the key variables could change future valuations and impact net income. Management has reviewed the application of these policies with the Audit Committee of the Board of Directors. Following is a discussion of the areas we view as our most critical accounting policies.

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Reserve for Loan and Lease Losses — The reserve for loan and lease losses represents management’s estimate of probable losses inherent in the loan and lease portfolio and the establishment of a reserve that is sufficient to absorb those losses. In determining an appropriate reserve, management makes numerous judgments, assumptions, and estimates based on continuous review of the loan and lease portfolio, estimates of client performance, collateral values, and disposition, as well as historical loss rates and expected cash flows. In assessing these factors, management benefits from a lengthy organizational history and experience with credit decisions and related outcomes. Nonetheless, if management’s underlying assumptions prove to be inaccurate, the reserve for loan and lease losses would have to be adjusted. Our accounting policy related to the reserve is disclosed in Note 1 under the heading “Reserve for Loan and Lease Losses.”

Fair Value Measurements — We use fair value measurements to record certain financial instruments and to determine fair value disclosures. Available-for-sale securities, trading account securities, mortgage loans held for sale, and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets. GAAP establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement. Fair value is discussed further in Note 1 under the heading “Fair Value Measurements” and in Note 21, “Fair Value Measurements.”

Mortgage Servicing Rights Valuation — We recognize as assets the rights to service mortgage loans for others, known as mortgage servicing rights (MSRs), whether the servicing rights are acquired through purchases or through originated loans. MSRs do not trade in an active open market with readily observable market prices. Although sales of MSRs do occur, the precise terms and conditions may not be readily available. As such, the value of MSRs is established and valued using discounted cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. The estimated rates of mortgage loan prepayments are the most significant factors driving the value of MSRs. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the fair value of the MSRs, mortgage interest rates (which are used to determine prepayment rates), and discount rates are held constant over the estimated life of the portfolio. Estimated mortgage loan prepayment rates are derived from a third-party. MSRs are carried at the lower of amortized cost or fair value. The values of these assets are sensitive to changes in the assumptions used and readily available market pricing does not exist. The valuation of MSRs is discussed further in Note 21, “Fair Value Measurements.”

EARNINGS SUMMARY

Net income in 2018 was $82.41 million, up from $68.05 million in 2017 and up from $57.79 million in 2016. Diluted net income per common share was $3.16 in 2018, $2.60 in 2017, and $2.22 in 2016. Return on average total assets was 1.34% in 2018 compared to 1.21% in 2017, and 1.08% in 2016. Return on average common shareholders’ equity was 11.09% in 2018 versus 9.69% in 2017, and 8.71% in 2016.

Net income in 2018, as compared to 2017, was positively impacted by a $28.28 million or 15.23% increase in net interest income and a $10.70 million or 32.11% decrease in income tax expense, which was offset by a $10.48 million or 116.73% increase in provision for loan and lease losses and a $12.47 million or 7.17% increase in noninterest expense. Net income in 2017 was positively impacted by a $15.97 million or 9.41% increase in net interest income and a $9.76 million or 10.97% increase in noninterest income, which was offset by a $3.15 million or 53.95% increase in provision for loan and lease losses and a $10.35 million or 6.33% increase in noninterest expense over 2016.

Dividends paid on common stock in 2018 amounted to $0.96 per share, compared to $0.76 per share in 2017, and $0.72 per share in 2016. The level of earnings reinvested and dividend payouts are determined by the Board of Directors based on management’s assessment of future growth opportunities and the level of capital necessary to support them.

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Net Interest Income — Our primary source of earnings is net interest income, the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities while deposits and borrowings represent the major portion of interest-bearing liabilities. For purposes of the following discussion, comparison of net interest income is done on a tax-equivalent basis, which provides a common basis for comparing yields on earning assets exempt from federal income taxes to those which are fully taxable.

Net interest margin (the ratio of net interest income to average earning assets) is significantly affected by movements in interest rates and changes in the mix of earning assets and the liabilities that fund those assets. Net interest margin on a fully taxable- equivalent basis was 3.73% in 2018, compared to 3.57% in 2017 and 3.43% in 2016. Net interest income was $213.91 million for 2018, compared to $185.63 million for 2017 and $169.66 million for 2016. Tax-equivalent net interest income totaled $214.71 million for 2018, up $27.28 million from the $187.43 million reported in 2017. Tax-equivalent net interest income for 2017 was up $15.94 million from the $171.48 million reported for 2016.

During 2018, average earning assets increased $510.67 million or 9.72% while average interest-bearing liabilities increased $399.45 million or 10.27% over the comparable period in 2017. The yield on average earning assets increased 40 basis points to 4.48% for 2018 from 4.08% for 2017 primarily due to higher rates on loans and leases and investment securities available-for-sale. Total cost of average interest-bearing liabilities increased 32 basis points to 1.01% during 2018 from 0.69% in 2017 as a result of the rising interest rate environment. The result to the net interest margin was an increase of 16 basis points.

The largest contributor to the increase in the yield on average earning assets in 2018 was the 43 basis point improvement in the loan and lease portfolio yield primarily due to market conditions as a result of Federal interest rate increases as well as the recognition of an unaccreted purchase loan discount and a prepayment penalty on two separate early loan payoffs of $1.03 million which had a positive 2 basis point effect. Average net loans and leases increased $421.88 million or 9.74% in 2018 from 2017 while the yield increased to 4.93%.

During 2018, the tax-equivalent yield on investment securities available-for-sale increased 23 basis points to 2.27% while the average balance grew $96.93 million. Average mortgages held for sale decreased $2.56 million during 2018 while the yield increased 55 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 decreased $5.58 million during 2018 while the yield increased 87 basis points. The increase in yield for mortgages held for sale and other investments was primarily a result of lower outstanding balances at higher rates.

Average interest-bearing deposits increased $383.80 million during 2018 while the effective rate paid on those deposits increased 34 basis points. The increase in the average cost of interest-bearing deposits was primarily the result of higher rates and a slight shift in the deposit mix. Average noninterest-bearing demand deposits increased $86.61 million during 2018.

Average short-term borrowings increased $19.81 million during 2018 while the effective rate paid increased 62 basis points. The increase in short-term borrowings was primarily the result of increased borrowings with the Federal Home Loan Bank. Average long-term debt decreased $4.16 million during 2018 as the effective rate increased 2 basis points.

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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. Yields/rates are computed on a tax-equivalent basis, using a 21% rate (35% for periods prior to 2018). Nonaccrual loans and leases are included in the average loan and lease balance outstanding.

	2018								2017								2016
(Dollars in thousands)	Average Balance			Interest Income/Expense			Yield/Rate		Average Balance			Interest Income/Expense			Yield/Rate		Average Balance			Interest Income/Expense			Yield/Rate
ASSETS
Investment securities available-for-sale:
Taxable	$	861,733		$	19,356		2.25	%	$	734,291		$	13,853		1.89	%	$	689,255		$	11,914		1.73	%
Tax-exempt(1)	90,079			2,293			2.55	%	120,588			3,587			2.97	%	123,246			3,844			3.12	%
Mortgages held for sale	8,190			372			4.54	%	10,754			429			3.99	%	12,396			467			3.77	%
Loans and leases, net of unearned discount(1)	4,755,256			234,450			4.93	%	4,333,375			194,918			4.50	%	4,113,508			176,116			4.28	%
Other investments	46,503			1,648			3.54	%	52,086			1,393			2.67	%	65,517			1,244			1.90	%
Total earning assets(1)	5,761,761			258,119			4.48	%	5,251,094			214,180			4.08	%	5,003,922			193,585			3.87	%
Cash and due from banks	64,853								62,137								60,753
Reserve for loan and lease losses	(99,258		)						(92,187		)						(90,206		)
Other assets	424,083								417,278								386,216
Total assets	$	6,151,439							$	5,638,322							$	5,360,685
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits	$	3,893,999		$	34,631		0.89	%	$	3,510,197		$	19,202		0.55	%	$	3,358,827		$	15,267		0.45	%
Short-term borrowings	265,041			2,838			1.07	%	245,235			1,115			0.45	%	210,876			525			0.25	%
Subordinated notes	58,764			3,625			6.17	%	58,764			4,002			6.81	%	58,764			4,220			7.18	%
Long-term debt and mandatorily redeemable securities	70,813			2,316			3.27	%	74,973			2,435			3.25	%	66,842			2,089			3.13	%
Total interest-bearing liabilities	4,288,617			43,410			1.01	%	3,889,169			26,754			0.69	%	3,695,309			22,101			0.60	%
Noninterest-bearing deposits	1,069,664								983,050								943,874
Other liabilities	49,791								63,684								57,799
Shareholders’ equity	743,173								702,419								663,703
Noncontrolling interests	194								—								—
Total liabilities and equity	$	6,151,439							$	5,638,322							$	5,360,685
Less: Fully tax-equivalent adjustments				(803		)						(1,795		)						(1,825		)
Net interest income/margin (GAAP-derived)(1)				$	213,906		3.71	%				$	185,631		3.54	%				$	169,659		3.39	%
Fully tax-equivalent adjustments				803								1,795								1,825
Net interest income/margin - FTE(1)				$	214,709		3.73	%				$	187,426		3.57	%				$	171,484		3.43	%

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

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Reconciliation of Non-GAAP Financial Measures— Our accounting and reporting policies conform to 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. These include taxable-equivalent net interest income (including its individual components) and net interest margin (including its individual components). 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.

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. The following table shows the reconciliation of non-GAAP financial measures for the most recent three years ended December 31.

(Dollars in thousands)		2018			2017			2016
Calculation of Net Interest Margin
(A)	Interest income (GAAP)	$	257,316		$	212,385		$	191,760
	Fully tax-equivalent adjustments:
(B)	- Loans and leases	367			621			584
(C)	- Tax-exempt investment securities	436			1,174			1,241
(D)	Interest income - FTE (A+B+C)	258,119			214,180			193,585
(E)	Interest expense (GAAP)	43,410			26,754			22,101
(F)	Net interest income (GAAP) (A-E)	213,906			185,631			169,659
(G)	Net interest income - FTE (D-E)	214,709			187,426			171,484
(H)	Total earning assets	$	5,761,761		$	5,251,094		$	5,003,922
	Net interest margin (GAAP-derived) (F/H)	3.71		%	3.54		%	3.39		%
	Net interest margin - FTE (G/H)	3.73		%	3.57		%	3.43		%

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The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The following table shows changes in tax-equivalent interest earned and interest paid, resulting from changes in volume and changes in rates.

	Increase (Decrease) due to
(Dollars in thousands)	Volume			Rate			Net
2018 compared to 2017
Interest earned on:
Investment securities available-for-sale:
Taxable	$	2,623		$	2,880		$	5,503
Tax-exempt	(824		)	(470		)	(1,294		)
Mortgages held for sale	(111		)	54			(57		)
Loans and leases, net of unearned discount	19,894			19,638			39,532
Other investments	(161		)	416			255
Total earning assets	$	21,421		$	22,518		$	43,939
Interest paid on:
Interest-bearing deposits	$	2,295		$	13,134		$	15,429
Short-term borrowings	97			1,626			1,723
Subordinated notes	—			(377		)	(377		)
Long-term debt and mandatorily redeemable securities	(136		)	17			(119		)
Total interest-bearing liabilities	$	2,256		$	14,400		$	16,656
Net interest income - FTE	$	19,165		$	8,118		$	27,283
2017 compared to 2016
Interest earned on:
Investment securities available-for-sale:
Taxable	$	808		$	1,131		$	1,939
Tax-exempt	(82		)	(175		)	(257		)
Mortgages held for sale	(64		)	26			(38		)
Loans and leases, net of unearned discount	9,658			9,144			18,802
Other investments	(290		)	439			149
Total earning assets	$	10,030		$	10,565		$	20,595
Interest paid on:
Interest-bearing deposits	$	713		$	3,222		$	3,935
Short-term borrowings	97			493			590
Subordinated notes	—			(218		)	(218		)
Long-term debt and mandatorily redeemable securities	262			84			346
Total interest-bearing liabilities	$	1,072		$	3,581		$	4,653
Net interest income - FTE	$	8,958		$	6,984		$	15,942

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Noninterest Income — Noninterest income decreased $1.66 million or 1.68% in 2018 from 2017 following a $9.76 million or 10.97% increase in 2017 over 2016. The following table shows noninterest income for the most recent three years ended December 31.

(Dollars in thousands)	2018			2017		2016
Noninterest income:
Trust and wealth advisory	$	21,071		$	20,980	$	19,256
Service charges on deposit accounts	10,454			10,589		10,012
Debit card	13,369			11,809		10,887
Mortgage banking	3,844			4,796		4,496
Insurance commissions	6,502			5,889		5,513
Equipment rental	31,793			30,381		25,863
(Losses) gains on investment securities available-for-sale	(345		)	4,340		1,796
Other	10,362			9,922		11,122
Total noninterest income	$	97,050		$	98,706	$	88,945

Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased slightly in 2018 from 2017 compared to an increase of $1.72 million or 8.95% in 2017 over 2016. 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, 2018 and 2017 was $3.94 billion and $4.63 billion, respectively. The decline in trust assets under management of 14.90% during 2018 was due to stock market corrections during the fourth quarter and the loss of a large employee benefit plan account. At December 31, 2018, these trust assets were comprised of $2.63 billion of personal and agency trusts and estate administration assets, $852.10 million of employee benefit plan assets, $364.09 million of individual retirement accounts, and $98.43 million of custody assets.

Service charges on deposit accounts declined by $0.14 million or 1.27% in 2018 from 2017 compared to an increase of $0.51 million or 5.64% in 2017 from 2016. The decrease in service charges on deposit accounts in 2018 primarily reflects a one-time adjustment to business account fees. The growth in service charges on deposit accounts in 2017 was primarily due to a higher volume of nonsufficient fund transactions and an increase in fees for deposit accounts that went into effect during the first quarter of 2017.

Debit card income improved $1.56 million or 13.21% in 2018 from 2017 compared to an increase of $0.92 million or 8.47% in 2017 from 2016. The increase in 2018 and 2017 was the result of an increased volume of debit card transactions.

Mortgage banking income decreased $0.95 million or 19.85% in 2018 over 2017, compared to a $0.30 million or 6.67% increase in 2017 over 2016. We had no MSR impairment in 2018, 2017 or 2016. During 2018, 2017 and 2016, we determined that no permanent write-down was necessary for previously recorded impairment on MSRs. During 2018, mortgage banking income decreased due to reduced gains on loan sales and a lower volume of loans originated for the secondary market. During 2017, mortgage banking income was positively impacted by higher loan servicing fees, offset by lower gains on loan sales due to reduced profit margins and lower secondary market production.

Insurance commissions grew $0.61 million or 10.41% in 2018 compared to 2017 and improved $0.38 million or 6.82% in 2017 compared to 2016. The increase in insurance commissions during 2018 and 2017 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 increased by $1.41 million or 4.65% during 2018 from 2017 compared to an increase of $4.52 million or 17.47% during 2017 from 2016. The average equipment rental portfolio increased 1.41% in 2018 over 2017 and 20.01% in 2017 over 2016 as the result of growth in specialty vehicles and solar financing during 2018 and growth in construction equipment and auto and light trucks during 2017. In 2018 and 2017, the increase in equipment rental income was offset by a similar increase in depreciation on equipment owned under operating leases.

Sales of investment securities available-for-sale resulted in losses of $0.35 million for the year ended 2018 compared to net gains of $4.34 million for the year ended 2017 and gains of $1.80 million for the year ended 2016. 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. During 2017, gains of $7.43 million were the result of sales of marketable equity securities. These gains were offset by losses of $2.90 million on sales of federal agencies and mortgage-backed securities from repositioning the investment portfolio and an other than temporary impairment charge of $0.19 million on a marketable equity security.

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Other income increased $0.44 million or 4.43% in 2018 from 2017 compared to a decline of $1.13 million or 9.39% in 2017 from 2016. The improvement in 2018 was mainly a result of increased net partnership investment gains, higher loan servicing fees, a rise in brokerage fees and commissions, and higher claim proceeds from bank owned life insurance offset by lower customer swap fees and reduced fees on standby letters of credit. The reduction in 2017 was mainly a result of gains on the liquidation of a partnership investment that occurred during 2016. Other items contributing to the decrease included lower monogram fund income and reduced brokerage fees and commissions. These decreases were offset by higher customer swap fees.

Noninterest Expense — Noninterest expense increased $12.47 million or 7.17% in 2018 over 2017 following a $10.35 million or 6.33% increase in 2017 from 2016. The following table shows noninterest expense for the most recent three years ended December 31.

(Dollars in thousands)	2018		2017		2016
Noninterest expense:
Salaries and employee benefits	$	93,857	$	86,912	$	86,837
Net occupancy	10,041		10,624		9,686
Furniture and equipment	23,433		20,769		19,500
Depreciation — leased equipment	26,248		25,215		21,678
Professional fees	7,680		6,810		5,161
Supplies and communications	6,320		5,355		5,244
FDIC and other insurance	2,923		2,537		3,147
Business development and marketing	6,112		7,477		4,936
Loan and lease collection and repossession	3,375		2,724		1,600
Other	6,478		5,574		5,856
Total noninterest expense	$	186,467	$	173,997	$	163,645

Total salaries and employee benefits increased $6.95 million or 7.99% in 2018 from 2017, following a slight increase in 2017 from 2016.

Employee salaries increased $6.30 million or 8.91% in 2018 from 2017 compared to an increase of $0.87 million of 1.25% in 2017 from 2016. The increase in 2018 was mainly a result of higher base salaries and executive incentives. Higher base salary expense was primarily due to normal performance raises and a slight increase in full-time equivalent employees. The increase in 2017 was mainly a result of higher base salaries and executive incentives. Higher base salary expense was primarily due to normal performance raises.

Employee benefits increased $0.65 million or 3.98% in 2018 from 2017, compared to a $0.80 million or 4.70% decrease in 2017 from 2016. During 2018, group insurance costs increased as a result of overall higher health insurance claims experience. In 2017, group insurance costs declined as a result of overall lower health insurance claims experience.

Occupancy expense decreased $0.58 million or 5.49% in 2018 from 2017, compared to an increase of $0.94 million or 9.68% in 2017 from 2016. The lower expense in 2018 was primarily attributed to a true-up of operating rent expense on a lease. The higher expense in 2017 was mainly attributed to higher depreciation resulting from the demolition and rebuild of a banking center, increased repair and maintenance costs, and increased rent expense.

Furniture and equipment expense, including depreciation, grew by $2.66 million or 12.83% in 2018 from 2017 compared to an increase of $1.27 million or 6.51% in 2017 from 2016. The higher expense in 2018 was primarily due to increased software maintenance costs and higher computer processing charges. The higher expense in 2017 was primarily due to increased software maintenance costs and software costs related to a customer relationship management project.

Depreciation on equipment owned under operating leases increased $1.03 million or 4.10% in 2018 from 2017, following a $3.54 million or 16.32% increase in 2017 from 2016. In 2018 and 2017, depreciation on equipment owned under operating leases correlates with the growth in equipment rental income.

Professional fees grew $0.87 million or 12.78% in 2018 from 2017, compared to a $1.65 million or 31.95% increase in 2017 from 2016. The higher expense in 2018 was primarily due to increased utilization of consulting services related to a customer relationship management project, information technology projects as well as a regulatory compliance project. The higher expense in 2017 was primarily due to increased utilization of consulting services related to a customer relationship management project and information technology projects offset by lower legal fees.

Supplies and communications expense increased $0.97 million or 18.02% in 2018 from 2017, and increased slightly in 2017 from 2016. The increase in 2018 resulted primarily from higher data communication line charges as bandwidth is improved and a one-time reduction in postage costs in 2017.

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FDIC and other insurance expense increased $0.39 million or 15.21% in 2018 from 2017 and decreased $0.61 million or 19.38% in 2017 from 2016. The increase in 2018 was mainly due to higher assessments for FDIC premiums in conjunction with overall asset growth and a rise in other insurance costs. The decline in 2017 was mainly due to lower assessments as a result of the Deposit Insurance Fund’s reserve ratio exceeding the FDIC’s established benchmark.

Business development and marketing expenses decreased $1.37 million or 18.26% in 2018 from 2017 and increased $2.54 million or 51.48% in 2017 from 2016. The lower expense in 2018 was mainly the result of reduced charitable contributions offset by additional business development efforts. The higher expense in 2017 was mainly the result of higher charitable contributions of $2.01 million and additional marketing promotions.

Loan and lease collection and repossession expenses increased $0.65 million or 23.90% in 2018 from 2017 compared to an increase of $1.12 million or 70.25% in 2017 from 2016. Loan and lease collection and repossession expense was higher in 2018 primarily due to increased valuation adjustments on repossessed assets offset by higher gains on the sale of repossessed assets. The increase in 2017 was mainly due to higher general collection and repossession expenses and increased valuation adjustments.

Other expenses were higher by $0.90 million or 16.22% in 2018 as compared to 2017 and decreased $0.28 million or 4.82% in 2017 as compared to 2016. The increase in 2018 was primarily the result of one-time trust losses and reduced gains on the sale of leased equipment offset by a decrease in the provision for unfunded loan commitments and lower intangible asset amortization as items fully amortize and impairment writedowns on branches in 2017 not present in 2018. The decrease in 2017 was mainly the result of higher gains on sale of operating leased equipment and fixed assets and reduced intangible asset amortization as items fully amortize offset by higher provision on unfunded loan commitments and increased training expenses.

Income Taxes — 1st Source recognized income tax expense in 2018 of $22.61 million, compared to $33.31 million in 2017, and $31.34 million in 2016. The effective tax rate in 2018 was 21.53% compared to 32.86% in 2017, and 35.16% in 2016. The change in effective tax rate was due primarily to the decrease in the federal tax rate from 35% in 2017 to 21% in 2018. 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.

(Dollars in thousands)	2018		2017		2016		2015		2014
Commercial and agricultural	$	1,073,205	$	929,997	$	812,264	$	744,749	$	710,758
Auto and light truck	559,987		496,816		411,764		425,236		397,902
Medium and heavy duty truck	283,544		296,935		294,790		278,254		247,153
Aircraft	803,111		844,657		802,414		778,012		727,665
Construction equipment	645,239		563,437		495,925		455,565		399,940
Commercial real estate	809,886		741,568		719,170		700,268		616,587
Residential real estate and home equity	523,855		526,122		521,931		490,468		476,504
Consumer	136,637		128,146		129,813		122,140		112,065
Total loans and leases	$	4,835,464	$	4,527,678	$	4,188,071	$	3,994,692	$	3,688,574

At December 31, 2018, 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, 2018, were $4.84 billion and were 76.83% of total assets, compared to $4.53 billion and 76.91% of total assets at December 31, 2017. Average loans and leases, net of unearned discount, increased $421.88 million or 9.74% and increased $219.87 million or 5.34% in 2018 and 2017, respectively.

Commercial and agricultural lending, excluding those loans secured by real estate, increased $143.21 million or 15.40% in 2018 over 2017. Commercial and agricultural lending outstandings were $1.07 billion and $930.00 million at December 31, 2018 and December 31, 2017, respectively. This increase was mainly attributed to market share gains as well as continued positive momentum in our markets and local economies, resulting in greater line of credit usage and financing opportunities for increased capital expenditures by our clients. During 2018, we also grew outstandings in our relatively new solar loan and lease portfolio by $19.52 million or 25.52% to $96.00 million as that business line also had positive momentum heading into 2019.

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Auto and light truck loans increased $63.17 million or 12.72% in 2018 over 2017. At December 31, 2018, auto and light truck loans had outstandings of $559.99 million and $496.82 million at December 31, 2017. This increase was primarily attributable to growth in the commercial lessor, auto rental and bus segments.

Medium and heavy duty truck loans and leases decreased $13.39 million or 4.51% in 2018. Medium and heavy duty truck financing at December 31, 2018 and 2017 had outstandings of $283.54 million and $296.94 million, respectively. Most of the decrease at December 31, 2018 from December 31, 2017 can be attributed to our pricing posture which slowed the pace of growth relative to payoffs.

Aircraft financing at year-end 2018 decreased $41.55 million or 4.92% from year-end 2017. Aircraft financing at December 31, 2018 and 2017 had outstandings of $803.11 million and $844.66 million, respectively. The reduction during 2018 was due to lower foreign outstandings of $25.05 million and reduced domestic outstandings of $16.50 million. The decrease in foreign outstandings was partially due to a large syndicated aircraft account (outside Latin America) which after being placed in nonaccrual during the second quarter had significant charge-offs recognized during the second half of 2018. We were a small participant in this syndicated account which was unique in both size and complexity within our portfolio. Foreign outstandings were also affected by our tightened credit posture. The domestic outstanding reduction was primarily due to a decrease in our dealer floor plan segment of the portfolio. Our foreign loan and lease outstandings, all denominated in U.S. dollars were $224.44 million and $233.37 million as of December 31, 2018 and 2017, respectively. Loan and lease outstandings to borrowers in Brazil and Mexico were $83.90 million and $127.16 million as of December 31, 2018, respectively, compared to $101.35 million and $121.02 million as of December 31, 2017, respectively. Outstanding balances to other borrowers in other countries were insignificant.

Construction equipment financing increased $81.80 million or 14.52% in 2018 compared to 2017. Construction equipment financing at December 31, 2018 had outstandings of $645.24 million, compared to outstandings of $563.44 million at December 31, 2017. The growth in this category was primarily due to new client relationships and continued replacement of aged equipment.

Commercial loans secured by real estate, of which approximately 60% is owner occupied, increased $68.32 million or 9.21% in 2018 over 2017. Commercial loans secured by real estate outstanding at December 31, 2018 were $809.89 million and $741.57 million at December 31, 2017. The increase in 2018 was driven by general improvements in the business economy within our markets related to our owner occupied financing. Our non-owner occupied real estate portfolio also experienced higher growth than in the prior year due to funding of several projects to existing clients that had been in our pipeline. We also experienced fewer payoffs on existing projects in the rising interest rate environment.

Residential real estate and home equity loans were $523.86 million at December 31, 2018 and $526.12 million at December 31, 2017. Residential real estate and home equity loans decreased $2.27 million in 2018 from 2017. Residential mortgage outstandings were lower in 2018 due to continued reductions in refinancings combined with purchase mortgage activity being hampered by limited existing housing inventory in our markets. New construction was affected by reduced labor in the trade groups as well as increased compliance and labor costs. Additionally, due to rising interest rates, we experienced fewer home equity lines of credit requests.

Consumer loans increased $8.49 million or 6.63% in 2018 over 2017. Consumer loans outstanding at December 31, 2018, were $136.64 million and $128.15 million at December 31, 2017. The increase during 2018 was primarily due to higher demand for auto loans.

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, 2018.

(Dollars in thousands)	0-1 Year		1-5 Years		Over 5 Years		Total
Commercial and agricultural	$	445,215	$	512,732	$	115,258	$	1,073,205
Auto and light truck	205,682		332,361		21,944		559,987
Medium and heavy duty truck	97,854		180,346		5,344		283,544
Aircraft	190,649		516,344		96,118		803,111
Construction equipment	187,196		434,229		23,814		645,239
Total	$	1,126,596	$	1,976,012	$	262,478	$	3,365,086

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	$	1,306,037	$	669,975	$	1,976,012
Over 5 Years	78,095		184,383		262,478
Total	$	1,384,132	$	854,358	$	2,238,490

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During 2018, approximately 50% of the Bank’s residential mortgage originations were sold into the secondary market. Mortgage loans held for sale were $11.29 million at December 31, 2018 and were $13.12 million at December 31, 2017. Although 1st Source Bank participated in the U.S. Treasury Making Home Affordable programs which expired December 30, 2016, we do not feel it had a material effect on our financial condition or results of operations.

1st Source Bank sells residential mortgage loans to Fannie Mae as well as FHA-insured and VA-guaranteed loans in Ginnie Mae mortgage-backed securities. Additionally, we have sold loans on a service released basis to various other financial institutions in the past. The agreements under which we sell these mortgage loans contain various representations and warranties regarding the acceptability of loans for purchase. On occasion, we may be asked to indemnify the loan purchaser for credit losses on loans that were later deemed ineligible for purchase or we may be asked to repurchase a loan. Both circumstances are collectively referred to as “repurchases.” Within the industry, repurchase demands have decreased during recent years. We believe the loans we have underwritten and sold to these entities have met or exceeded applicable transaction parameters. Our exposure risk for repurchases started to reduce in 2016 as a result of the enhancements made by FNMA in 2013 to the selling representations and warranties framework as warranties on loans sold prior to implementation of such changes lapse.

Our liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was $0.29 million and $0.39 million as of December 31, 2018 and 2017, respectively. Our (recovery) expense for repurchase losses, included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $(0.10) million in 2018 compared to $(0.03) million in 2017 and $(0.16) million in 2016. The mortgage repurchase liability represents our best estimate of the loss that we may incur. The estimate is based on specific loan repurchase requests and a historical loss ratio with respect to origination dollar volume. Because the level of mortgage loan repurchase losses is dependent on economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment.

CREDIT EXPERIENCE

Reserve for Loan and Lease Losses — Our reserve for loan and lease losses is provided for by direct charges to operations. Losses on loans and leases are charged against the reserve and likewise, recoveries during the period for prior losses are credited to the reserve. Our management evaluates the reserve quarterly, reviewing all loans and leases over a fixed-dollar amount ($100,000) where the internal credit quality grade is at or below a predetermined classification, actual and anticipated loss experience, current economic events in specific industries, and other pertinent factors including general economic conditions. Determination of the reserve is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows or fair value of collateral on collateral-dependent impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience, and consideration of environmental factors, principally economic risk and concentration risk, all of which may be susceptible to significant and unforeseen changes. We review the status of the loan and lease portfolio to identify borrowers that might develop financial problems in order to aid borrowers in the handling of their accounts and to mitigate losses. See Part II, Item 8, Financial Statements and Supplementary Data — Note 1 of the Notes to Consolidated Financial Statements for additional information on management’s evaluation of the reserve for loan and lease losses.

The reserve for loan and lease loss methodology has been consistently applied for several years, with enhancements instituted periodically. Reserve ratios are reviewed quarterly and revised periodically to reflect recent loss history and to incorporate current risks and trends which may not be recognized in historical data. As we update our historical charge-off analysis, we review the look-back periods for each business loan portfolio.

During 2018, the medium-term portion of the look-back period was ten years given that 2009 through 2018 losses were considerably impacted by the severe recession. Although the recession began in December 2007, its financial consequences were not recognized in the loan portfolios until 2009. We gave the greatest weight to this recent ten year period in our calculation. Furthermore, we perform a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency in order to review portfolio trends and other factors, including specific industry risks and economic conditions, which may have an impact on the reserves and reserve ratios applied to various portfolios. We adjust the calculated historical based ratio as a result of our analysis of environmental factors, principally economic risk, collateral risk and concentration risk. Key economic factors affecting our portfolios are growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation and global economic and political issues. The economy has been strong and is forecast to remain robust through at least the first half of 2019, but there is considerable downside risk. The government shutdown, which began on December 22, 2018, causes increased uncertainty. Collateral values are significant to our underwriting in our specialty finance portfolios and volatility or declining values pose a threat. Concentration risk is impacted primarily by geographic concentration in Northern Indiana and Southwestern Lower Michigan in our business banking and commercial real estate portfolios and by collateral concentration in our specialty finance portfolios.

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The world economy has strengthened but challenges persist. Current concerns include ongoing corruption scandals and political uncertainty in Latin American countries, the weak economic conditions in Brazil as the country emerges from a deep and prolonged recession, projected moderate growth in Mexico accompanied by somewhat strained U.S. trade relationships, the continued slowdown in China, the unrelenting geopolitical tensions with Russia, the unknown risk of various U.S. troop withdrawals, and the persistent threats of terrorist attacks. We include a factor in our loss ratios for global risk, as we are increasingly aware of the threat that global concerns may affect our customers. While we are unable to determine with any precision the impact of global economic and political issues on 1st Source Bank’s loan portfolios, we feel the risks are real and significant. 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 2018.

Another area of concern continues to be our aircraft portfolio, which was among the sectors affected most by the sluggish economy. In this portfolio we have collateral concentration and $224 million of foreign exposure, primarily in Mexico and Brazil. Mexico’s economic growth is expected to increase moderately but continues to be threatened by drug trafficking and related violence, the solution to which may entail additional public expenditures, further increasing already high and growing government debt. Brazil’s economic recovery has been slow and fiscal worries abound with pension reform presenting a significant challenge; however, positives include falling unemployment, positive wage growth, reduced interest rates and low inflation. We experienced our first charge-offs of foreign aircraft accounts in 2016. We have seen some evidence that depressed private jet markets have stabilized. The U.S. economic growth and a return to growth in emerging regions is expected to benefit the industry. New business jet markets have been relatively flat the last couple of years, but the industry is expected to experience growth in the short to medium term. We reassessed our ratios, which were established based on the high and volatile loss histories, and believe they remain appropriate particularly given our large aircraft loss in 2018, although this loss had unique characteristics as to size, complexity, collateral, and our ability to collect.

We experienced ongoing 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 no charge-offs until this year when we had a small charge-off. Our credit quality is strongest when industry conditions are favorable. Reasonably stable gas prices, low unemployment, and growth in GDP and the construction sector, which leads to higher demand for trucking bode well for the industry as does the strong growth in online sales which drive freight volumes. Industry concerns include a persistent driver shortage and achieving regulatory compliance. Nevertheless, the underlying industry fundamentals are expected to remain relatively stable and the industry is poised to have a good year again in 2019. We believe our reserve ratio for this portfolio remains appropriate without adjustment.

Our construction equipment portfolio is characterized by increasing outstanding loan balances and continued strong credit quality in 2018. The construction industry, which was hard hit during the recession, is benefiting from an improving economy, buoyed by growth in private residential and non-residential construction. 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. A solid U.S. market and potential infrastructure spending could have a positive impact for the used equipment markets. The industry’s greatest challenge is hiring and retaining qualified workers. The underlying risk has not changed significantly for this portfolio; our reserve factors are similar to last year.

The core businesses in our auto and light truck portfolio performed well in 2018. The losses in the portfolio were principally attributable to specialty vehicles which is a relatively new venture and where we had aggressive growth. We sustained a relatively large loss on one account principally due to the specialized nature and condition of certain collateral. We reviewed our processes, assessed our underwriting and have identified areas for improvement. We also reviewed the reserve ratio for this segment of the portfolio, increasing it by several basis points. 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. Further negatively impacting the portfolio is a projected decline in used car values as a result of an abundance of available vehicles following several years of strong production by the manufacturers. Last year, we considered these factors when establishing the reserve ratio and we believe the ratio remains appropriate.

There are several industries represented in the commercial and agricultural portfolio. The outlook for the business banking portfolio is guardedly optimistic, generally a continuation of 2018 trends. Consumer and small business confidence remains strong and unemployment is slightly lower than the national average in many of the markets we serve. Our recent foray into solar financing looks promising in terms of both loan growth opportunities and credit quality. An area of concern remains with our agricultural portfolio, which has exposure of approximately $155 million. Farm incomes declined sharply from 2015 through 2018 and no improvement is anticipated in 2019, as commodity prices, particularly corn and soybeans, remain low. Our customers have had favorable growing conditions which have resulted in strong crop yields. We will continue to have a few borrowers who will be unable to repay their lines of credit in full, resulting in carry-over debt. For the commercial and agricultural portfolio as a whole, we have experienced strong credit quality trends with low delinquencies and minimal charge-offs. We have reviewed the calculated loss ratios and assessed the environmental factors and concentration issues affecting these portfolios and we made a slight downward adjustment to the ratio primarily due to the strong economy and to a lessor extent, the performance metrics for our solar projects. We believe the adjustments to our reserve ratio are appropriate and the ratio is adequate.

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Similar to the commercial portfolio, our commercial real estate loans are concentrated in our local market with local customers, with approximately sixty percent 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, similar to other U.S. markets and we experienced losses in these categories from 2009 through 2011. From 2012 through 2017, we have experienced small recoveries in the portfolio and this year we had a small loss. We reviewed our reserve factors and believe the ratio remains appropriate and adequate this year-end.

The reserve for loan and lease losses at December 31, 2018, totaled $100.47 million and was 2.08% of loans and leases, compared to $94.88 million or 2.10% of loans and leases at December 31, 2017 and $88.54 million or 2.11% of loans and leases at December 31, 2016. It is our opinion that the reserve for loan and lease losses was appropriate to absorb probable losses inherent in the loan and lease portfolio as of December 31, 2018.

Charge-offs for loan and lease losses were $17.11 million for 2018, compared to $6.53 million for 2017 and $7.94 million for 2016. We had two large losses in 2018, one in the aircraft portfolio and one in the auto and light truck portfolio. The provision for loan and lease losses was $19.46 million for 2018, compared to $8.98 million for 2017 and $5.83 million for 2016 to accommodate net charge-offs and loan and lease growth.

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

(Dollars in thousands)	2018			2017			2016			2015			2014
Amounts of loans and leases outstanding at end of period	$	4,835,464		$	4,527,678		$	4,188,071		$	3,994,692		$	3,688,574
Average amount of net loans and leases outstanding during period	$	4,755,256		$	4,333,375		$	4,113,508		$	3,837,149		$	3,639,985
Balance of reserve for loan and lease losses at beginning of period	$	94,883		$	88,543		$	88,112		$	85,068		$	83,505
Charge-offs:
Commercial and agricultural	229			2,415			547			3,489			5,007
Auto and light truck	3,308			774			4			24			42
Medium and heavy duty truck	23			—			—			—			—
Aircraft	12,222			1,872			6,123			244			—
Construction equipment	288			164			128			—			4
Commercial real estate	70			344			32			—			99
Residential real estate and home equity	63			124			219			295			46
Consumer	909			836			888			658			833
Total charge-offs	17,112			6,529			7,941			4,710			6,031
Recoveries:
Commercial and agricultural	222			984			509			851			929
Auto and light truck	68			1,153			253			380			1,283
Medium and heavy duty truck	—			—			10			28			142
Aircraft	2,499			227			528			802			240
Construction equipment	100			298			461			434			525
Commercial real estate	53			851			469			2,807			347
Residential real estate and home equity	23			109			31			34			111
Consumer	271			267			278			258			284
Total recoveries	3,236			3,889			2,539			5,594			3,861
Net charge-offs (recoveries)	13,876			2,640			5,402			(884		)	2,170
Provision for loan and lease losses	19,462			8,980			5,833			2,160			3,733
Balance at end of period	$	100,469		$	94,883		$	88,543		$	88,112		$	85,068
Ratio of net charge-offs (recoveries) to average net loans and leases outstanding	0.29		%	0.06		%	0.13		%	(0.02		)%	0.06		%
Ratio of reserve for loan and lease losses to net loans and leases outstanding end of period	2.08		%	2.10		%	2.11		%	2.21		%	2.31		%
Coverage ratio of reserve for loan and lease losses to nonperforming loans and leases	355.96		%	477.66		%	435.68		%	686.23		%	239.07		%

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The following table shows net charge-offs (recoveries) as a percentage of average loans and leases by portfolio type:

	2018		2017		2016		2015		2014
Commercial and agricultural	—	%	0.16	%	—	%	0.36	%	0.58	%
Auto and light truck	0.60		(0.08	)	(0.06	)	(0.08	)	(0.30	)
Medium and heavy duty truck	0.01		—		—		(0.01	)	(0.06	)
Aircraft	1.15		0.21		0.69		(0.07	)	(0.03	)
Construction equipment	0.03		(0.03	)	(0.07	)	(0.10	)	(0.14	)
Commercial real estate	—		(0.07	)	(0.06	)	(0.44	)	(0.04	)
Residential real estate and home equity	0.01		—		0.04		0.05		(0.01	)
Consumer	0.48		0.44		0.49		0.33		0.56
Total net charge-offs (recoveries) to average portfolio loans and leases	0.29	%	0.06	%	0.13	%	(0.02	)%	0.06	%

The reserve for loan and lease losses has been allocated according to the amount deemed necessary to provide for the estimated probable losses that have been incurred within the categories of loans and leases set forth in the table below. The following table shows the amount of such components of the reserve at December 31 and the ratio of such loan and lease categories to total outstanding loan and lease balances.

	2018				2017				2016				2015				2014
(Dollars in thousands)	Reserve Amount		Percentage of Loans and Leases in Each Category to Total Loans and Leases		Reserve Amount		Percentage of Loans and Leases in Each Category to Total Loans and Leases		Reserve Amount		Percentage of Loans and Leases in Each Category to Total Loans and Leases		Reserve Amount		Percentage of Loans and Leases in Each Category to Total Loans and Leases		Reserve Amount		Percentage of Loans and Leases in Each Category to Total Loans and Leases
Commercial and agricultural	$	17,063	22.20	%	$	16,228	20.54	%	$	14,668	19.40	%	$	15,456	18.64	%	$	11,760	19.27	%
Auto and light truck	14,689		11.58		10,103		10.97		8,064		9.83		9,269		10.64		10,326		10.79
Medium and heavy duty truck	4,303		5.86		4,844		6.56		4,740		7.04		4,699		6.97		4,500		6.70
Aircraft	33,047		16.61		34,619		18.66		34,352		19.16		32,373		19.48		32,234		19.73
Construction equipment	10,922		13.34		9,343		12.44		8,207		11.84		7,592		11.40		7,008		10.84
Commercial real estate	15,705		16.75		14,792		16.38		13,677		17.17		13,762		17.53		13,270		16.72
Residential real estate and home equity	3,425		10.83		3,666		11.62		3,550		12.46		3,662		12.28		4,504		12.91
Consumer	1,315		2.83		1,288		2.83		1,285		3.10		1,299		3.06		1,466		3.04
Total	$	100,469	100.00	%	$	94,883	100.00	%	$	88,543	100.00	%	$	88,112	100.00	%	$	85,068	100.00	%

Nonperforming Assets — Nonperforming assets include loans past due over 90 days, nonaccrual loans and leases, other real estate, repossessions and other nonperforming assets we own. Our policy is to discontinue the accrual of interest on loans and leases where principal or interest is past due and remains unpaid for 90 days or more, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential real estate and home equity loans, which are placed on nonaccrual at the time the loan is placed in foreclosure and consumer loans that are both well secured and in the process of collection.

Nonperforming assets amounted to $35.32 million at December 31, 2018, compared to $31.30 million at December 31, 2017, and $30.43 million at December 31, 2016. During 2018, interest income on nonaccrual loans and leases would have increased by approximately $2.18 million compared to $1.14 million in 2017 if these loans and leases had earned interest at their full contractual rate.

Nonperforming assets at December 31, 2018 increased from December 31, 2017, mainly due to increases in nonaccrual loans and leases. Repossessions consisted mainly of aircraft largely represented by one helicopter with a carrying value of $5.50 million at December 31, 2018. Other real estate decreased due to sales of existing properties outpacing current foreclosures.

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Nonperforming assets at December 31 (Dollars in thousands)	2018			2017			2016			2015			2014
Loans past due over 90 days	$	366		$	459		$	416		$	122		$	981
Nonaccrual loans and leases:
Commercial and agricultural	2,653			2,603			3,981			4,283			14,284
Auto and light truck	11,374			8,041			166			46			38
Medium and heavy duty truck	106			371			—			—			56
Aircraft	7,561			1,957			6,110			4,388			12,473
Construction equipment	2,326			991			1,248			539			751
Commercial real estate	1,984			3,418			5,555			1,392			4,807
Residential real estate and home equity	1,714			1,890			2,641			1,961			2,094
Consumer	141			134			206			109			99
Total nonaccrual loans and leases	27,859			19,405			19,907			12,718			34,602
Total nonperforming loans and leases	28,225			19,864			20,323			12,840			35,583
Other real estate	299			1,312			704			736			1,109
Former bank premises held for sale	—			—			—			—			626
Repossessions:
Commercial and agricultural	—			—			—			—			—
Auto and light truck	440			165			32			10			25
Medium and heavy duty truck	15			—			—			—			—
Aircraft	6,209			9,335			9,335			6,916			5,123
Construction equipment	—			582			—			—			—
Consumer	2			32			6			1			8
Total repossessions	6,666			10,114			9,373			6,927			5,156
Operating leases	126			9			34			121			6
Total nonperforming assets	$	35,316		$	31,299		$	30,434		$	20,624		$	42,480
Nonperforming loans and leases to loans and leases, net of unearned discount	0.58		%	0.44		%	0.49		%	0.32		%	0.96		%
Nonperforming assets to loans and leases and operating leases, net of unearned discount	0.71		%	0.67		%	0.70		%	0.50		%	1.13		%

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, 2018 and 2017, we had $4.24 million and $5.45 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, 2018, potential problem loans consisted of three credit relationships, all of which in the auto and light truck portfolio. Weakness in these companies’ operating performance and payment patterns have caused us to heighten attention given to these credits.

INVESTMENT PORTFOLIO

The amortized cost of securities at year-end 2018 increased 10.43% from 2017, following a 7.20% increase from year-end 2016 to year-end 2017. The amortized cost of securities at December 31, 2018 was $1.00 billion or 15.96% of total assets, compared to $909.37 million or 15.45% of total assets at December 31, 2017.

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

(Dollars in thousands)	2018		2017		2016
U.S. Treasury and Federal agencies securities	$	537,913	$	471,508	$	424,495
U.S. States and political subdivisions securities	95,346		116,260		133,509
Mortgage-backed securities — Federal agencies	324,390		289,327		252,981
Corporate debt securities	45,843		31,573		35,266
Foreign government and other securities	700		700		800
Marketable equity securities	—		—		1,265
Total investment securities available-for-sale	$	1,004,192	$	909,368	$	848,316

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Yields on tax-exempt obligations are calculated on a fully tax-equivalent basis assuming a 21% tax rate. The following table shows the maturities of securities available-for-sale at December 31, 2018, at the amortized costs and weighted average yields of such securities.

(Dollars in thousands)	Amount		Yield
U.S. Treasury and Federal agencies securities
Under 1 year	$	87,468	1.84	%
1 – 5 years	450,445		2.10
5 – 10 years	—		—
Over 10 years	—		—
Total U.S. Treasury and Federal agencies securities	537,913		2.06
U.S. States and political subdivisions securities
Under 1 year	26,498		2.89
1 – 5 years	60,546		2.36
5 – 10 years	8,302		2.77
Over 10 years	—		—
Total U.S. States and political subdivisions securities	95,346		2.54
Corporate debt securities
Under 1 year	13,011		1.75
1 – 5 years	30,198		2.55
5 – 10 years	2,634		3.16
Over 10 years	—		—
Total Corporate debt securities	45,843		2.36
Foreign government and other securities
Under 1 year	500		2.22
1 – 5 years	200		3.47
5 – 10 years	—		—
Over 10 years	—		—
Total Foreign government and other securities	700		2.58
Mortgage-backed securities — Federal agencies	324,390		2.59
Total investment securities available-for-sale	$	1,004,192	2.29	%

At December 31, 2018, the residential mortgage-backed securities we held consisted of GNMA, FNMA and FHLMC pass-through certificates (Government Sponsored Enterprise, GSEs). The type of loans underlying the securities were all conforming loans at the time of issuance. The underlying GSEs backing these mortgage-backed securities are rated Aaa or AA+ from the rating agencies. At December 31, 2018, the vintage (years originated) of the underlying loans comprising our securities are: 53% in the years 2017 and 2018; 17% in the years 2015 and 2016; 9% in the years 2013 and 2014; and 21% in years 2012 and prior.

DEPOSITS

The following table shows the average daily amounts of deposits and rates paid on such deposits.

	2018				2017				2016
(Dollars in thousands)	Amount		Rate		Amount		Rate		Amount		Rate
Noninterest bearing demand	$	1,069,664	—	%	$	983,050	—	%	$	943,874	—	%
Interest bearing demand	1,610,022		0.62		1,517,859		0.31		1,395,195		0.17
Savings	839,652		0.14		828,993		0.09		786,983		0.08
Time	1,444,325		1.63		1,163,345		1.18		1,176,649		1.04
Total deposits	$	4,963,663			$	4,493,247			$	4,302,701

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

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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.

(Dollars in thousands)	Federal Funds Purchased and Securities Repurchase Agreements			Commercial Paper			Federal Home Loan Bank Advances			Other Short-Term Borrowings			Total Borrowings
2018
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		%
2017
Balance at December 31, 2017	$	205,834		$	6,115		$	—		$	2,646		$	214,595
Maximum amount outstanding at any month-end	205,834			6,542			160,000			2,402			374,778
Average amount outstanding	166,114			6,327			70,293			2,501			245,235
Weighted average interest rate during the year	0.21		%	0.27		%	1.06		%	—		%	0.45		%
Weighted average interest rate for outstanding amounts at December 31, 2017	0.59		%	0.27		%	—		%	—		%	0.57		%
2016
Balance at December 31, 2016	$	162,913		$	5,761		$	120,000		$	3,269		$	291,943
Maximum amount outstanding at any month-end	187,239			8,640			125,000			5,822			326,701
Average amount outstanding	171,316			6,929			28,989			3,642			210,876
Weighted average interest rate during the year	0.21		%	0.27		%	0.50		%	—		%	0.25		%
Weighted average interest rate for outstanding amounts at December 31, 2016	0.17		%	0.27		%	0.59		%	—		%	0.34		%

LIQUIDITY

Core Deposits — Our major source of investable funds is provided by stable core deposits consisting of all interest bearing and noninterest bearing deposits, excluding brokered certificates of deposit, listing services certificates of deposit and certain certificates of deposit over $250,000 based on established FDIC insured deposits. In 2018, average core deposits equaled 72.53% of average total assets, compared to 73.71% in 2017 and 74.12% in 2016. The effective rate of core deposits in 2018 was 0.56%, compared to 0.35% in 2017 and 0.28% in 2016.

Average noninterest bearing core deposits increased 8.81% in 2018 compared to an increase of 4.15% in 2017. These represented 23.97% of total core deposits in 2018, compared to 23.65% in 2017, and 23.76% in 2016.

Purchased Funds — We use purchased funds to supplement core deposits, which include certain certificates of deposit over $250,000, brokered certificates of deposit, listing services certificates of deposit, over-night borrowings, securities sold under agreements to repurchase, commercial paper, and other short-term borrowings. Purchased funds are raised from customers seeking short-term investments and are used to manage the Bank’s interest rate sensitivity. During 2018, our reliance on purchased funds increased to 12.47% of average total assets from 10.33% in 2017.

Shareholders’ Equity — Average shareholders’ equity equated to 12.08% of average total assets in 2018, compared to 12.46% in 2017. Shareholders’ equity was 12.11% of total assets at year-end 2018, compared to 12.20% at year-end 2017. We include unrealized (losses) gains on available-for-sale securities, net of income taxes, in accumulated other comprehensive (loss) income which is a component of shareholders’ equity. While regulatory capital adequacy ratios exclude unrealized losses, it does impact our equity as reported in the audited financial statements. The unrealized losses on available-for-sale securities, net of income taxes, were $10.68 million and $3.33 million at December 31, 2018 and 2017, 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. We have been informed that no collateral is required for our public fund deposits. However, the Board of Depositories could alter this requirement in the future and adversely impact our liquidity. Our potential liquidity exposure if we must pledge collateral is approximately $734 million.

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Liquidity Risk Management — The Bank’s liquidity is monitored and closely managed by the Asset/Liability Management Committee (ALCO), whose members are comprised of the Bank’s senior management. Asset and liability management includes the management of interest rate sensitivity and the maintenance of an adequate liquidity position. The purpose of interest rate sensitivity management is to stabilize net interest income during periods of changing interest rates.

Liquidity management is the process by which the Bank ensures that adequate liquid funds are available to meet financial commitments on a timely basis. Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities and provide a cushion against unforeseen needs.

Liquidity of the Bank is derived primarily from core deposits, principal payments received on loans, the sale and maturity of investment securities, net cash provided by operating activities, and access to other funding sources. The most stable source of liability-funded liquidity is deposit growth and retention of the core deposit base. The principal source of asset-funded liquidity is available-for-sale investment securities, cash and due from banks, overnight investments, securities purchased under agreements to resell, and loans and interest bearing deposits with other banks maturing within one year. Additionally, liquidity is provided by repurchase agreements, and the ability to borrow from the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB).

The Bank’s liquidity strategy is guided by internal policies and the Interagency Policy Statement on Funding and Liquidity Risk Management. Internal guidelines consist of:

(i) Available Liquidity (sum of short term borrowing capacity) greater than $500 million;

(ii) Liquidity Ratio (total of net cash, short term investments and unpledged marketable assets divided by the sum of net deposits and short term liabilities) greater than 15%;

(iii) Dependency Ratio (net potentially volatile liabilities minus short term investments divided by total earning assets minus short term investments) less than 15%; and

(iv) Loans to Deposits Ratio less than 100%

At December 31, 2018, we were in compliance with the foregoing internal policies and regulatory guidelines.

The Bank also maintains a contingency funding plan that assesses the liquidity needs under various scenarios of market conditions, asset growth and credit rating downgrades. The plan includes liquidity stress testing which measures various sources and uses of funds under the different scenarios. The contingency plan provides for ongoing monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity.

We have borrowing sources available to supplement deposits and meet our funding needs. 1st Source Bank has established relationships with several banks to provide short term borrowings in the form of federal funds purchased. At December 31, 2018, we borrowed $10.00 million in the federal funds market. We could borrow $255.00 million in additional funds for a short time from these banks on a collective basis. As of December 31, 2018, we had $126.44 million outstanding in FHLB advances and could borrow an additional $414.96 million contingent on the FHLB activity-based stock ownership requirement. We also had no outstandings with the FRB and could borrow $590.38 million as of December 31, 2018.

Interest Rate Risk Management — ALCO monitors and manages the relationship of earning assets to interest bearing liabilities and the responsiveness of asset yields, interest expense, and interest margins to changes in market interest rates. In the normal course of business, we face ongoing interest rate risks and uncertainties. We may utilize interest rate swaps to partially manage the primary market exposures associated with the interest rate risk related to underlying assets, liabilities, and anticipated transactions.

A hypothetical change in net interest income was modeled by calculating an immediate 200 basis point (2.00%) and 100 basis point (1.00%) increase and a 100 basis point (1.00%) decrease in interest rates across all maturities. The following table shows the aggregate hypothetical impact to pre-tax net interest income.

	Percentage Change in Net Interest Income
	December 31, 2018		December 31, 2017
Basis Point Interest Rate Change	12 Months	24 Months	12 Months	24 Months
Up 200	3.12%	6.92%	3.90%	7.83%
Up 100	1.58%	3.49%	1.93%	3.82%
Down 100	(4.33)%	(6.78)%	(6.45)%	(9.87)%

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The earnings simulation model excludes the earnings dynamics related to how fee income and noninterest expense may be affected by changes in interest rates. Actual results may differ materially from those projected. The use of this methodology to quantify the market risk of the balance sheet should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions.

At December 31, 2018 and 2017, the impact of these hypothetical fluctuations in interest rates on our derivative holdings was not significant, and, as such, separate disclosure is not presented. We manage the interest rate risk related to mortgage loan commitments by entering into contracts for future delivery of loans with outside parties. See Part II, Item 8, Financial Statements and Supplementary Data — Note 18 of the Notes to Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

In the ordinary course of operations, we enter into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises and equipment. The following table summarizes our significant fixed, determinable, and estimated contractual obligations, by payment date, at December 31, 2018, except for obligations associated with short-term borrowing arrangements. Payments for borrowings do not include interest. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

The following table shows contractual obligation payments by period.

(Dollars in thousands)	Note	0 – 1 Year		1 – 3 Years		3 – 5 Years		Over 5 Years		Indeterminate maturity		Total
Deposits without stated maturity	—	$	3,654,556	$	—	$	—	$	—	$	—	$	3,654,556
Certificates of deposit	10	755,605		614,849		89,657		7,655		—		1,467,766
Long-term debt	11	2,565		5,208		6,040		40,768		16,542		71,123
Subordinated notes	12	—		—		—		58,764		—		58,764
Operating leases	18	3,454		5,323		1,238		1,706		—		11,721
Purchase obligations	—	31,353		11,596		1,382		—		—		44,331
Total contractual obligations		$	4,447,533	$	636,976	$	98,317	$	108,893	$	16,542	$	5,308,261

We routinely enter into contracts for services. These contracts may require payment for services to be provided in the future and may also contain penalty clauses for early termination of the contract. We have made a diligent effort to estimate such payments and penalties, where applicable. Additionally, where necessary, we have made reasonable estimates as to certain purchase obligations as of December 31, 2018. Our management has used the best information available to make the estimates necessary to value the related purchase obligations. Our management is not aware of any additional commitments or contingent liabilities which may have a material adverse impact on our liquidity or capital resources at year-end 2018.

We also enter into derivative contracts under which we are required to either receive cash from, or pay cash to, counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of the contracts changes daily as market interest rates change. Because the derivative assets and liabilities recorded on the balance sheet at December 31, 2018 do not necessarily represent the amounts that may ultimately be paid under these contracts, these assets and liabilities are not included in the table of contractual obligations presented above.

Assets under management and assets under custody are held in fiduciary or custodial capacity for our clients. In accordance with U.S. generally accepted accounting principles, these assets are not included on our balance sheet.

We are also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit and standby letters of credit. 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.

36

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited consolidated selected quarterly statement of operations data for the years ended December 31, 2018 and 2017.

Three Months Ended (Dollars in thousands, except per share amounts)	March 31			June 30		September 30		December 31
2018
Interest income	$	59,238		$	63,865	$	65,696	$	68,517
Interest expense	8,706			10,696		11,334		12,674
Net interest income	50,532			53,169		54,362		55,843
Provision for loan and lease losses	3,786			4,817		6,157		4,702
(Losses) gains on investment securities available-for-sale	(345		)	—		—		—
Income before income taxes	24,996			27,498		24,923		27,610
Net income	19,116			21,964		19,888		21,446
Net income available to common shareholders	19,116			21,964		19,888		21,446
Diluted net income per common share	0.73			0.84		0.76		0.82
2017
Interest income	$	49,372		$	52,398	$	54,430	$	56,185
Interest expense	5,645			6,537		7,201		7,371
Net interest income	43,727			45,861		47,229		48,814
Provision for loan and lease losses	1,000			2,738		1,620		3,622
Gains (losses) on investment securities available-for-sale	1,285			465		1,007		1,583
Income before income taxes	24,915			26,154		26,741		23,550
Net income	16,206			16,669		17,182		17,994
Net income available to common shareholders	16,206			16,669		17,182		17,994
Diluted net income per common share	0.62			0.64		0.66		0.69

Net income available to common shareholders was $21.45 million for the fourth quarter of 2018, compared to the $17.99 million of net income available to common shareholders reported for the fourth quarter of 2017. Diluted net income per common share for the fourth quarter of 2018 amounted to $0.82, compared to $0.69 per common share reported in the fourth quarter of 2017.

Net interest margin was 3.77% for the fourth quarter of 2018 and 3.57% for the fourth quarter of 2017. Net interest income was $55.84 million for the fourth quarter of 2018 up 14.40% from 2017’s fourth quarter. Net interest margin on a fully taxable-equivalent basis was 3.78% for the fourth quarter of 2018 and 3.61% for the fourth quarter of 2017. Tax-equivalent net interest income was $56.03 million for the fourth quarter of 2018, up 13.78% from 2017’s fourth quarter.

Our provision for loan and lease losses was $4.70 million in the fourth quarter of 2018 compared to $3.62 million in the fourth quarter of 2017. Net charge-offs were $2.53 million for the fourth quarter 2018, compared to net charge-offs of $2.11 million a year ago.

Noninterest income for the fourth quarter of 2018 was $24.16 million, compared to $25.67 million for the fourth quarter of 2017. Noninterest expense for the fourth quarter of 2018 was $47.69 million and was $47.31 million in the fourth quarter 2017.

The provision for income taxes included a one-time benefit of $2.61 million for the fourth quarter of 2017 which resulted in a lower effective tax rate. This benefit was a result of the revaluation of net deferred tax liabilities due to the Tax Cuts and Jobs Act enacted in December 2017.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

For information regarding Quantitative and Qualitative Disclosures about Market Risk, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Interest Rate Risk Management.

37

Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors and Audit Committee

1st Source Corporation

South Bend, Indiana

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of 1st Source Corporation (Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2018 and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 22, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BKD, LLP

We have served as the Company’s auditor since 2015

Fort Wayne, Indiana

February 22, 2019

Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors and Audit Committee

1st Source Corporation

South Bend, Indiana

Opinion on the Internal Control over Financial Reporting

We have audited 1st Source Corporation’s (Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the consolidated financial statements of the Company and our report dated February 22, 2019, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definitions and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

/s/ BKD, LLP

Fort Wayne, Indiana

February 22, 2019

38

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31 (Dollars in thousands)	2018			2017
ASSETS
Cash and due from banks	$	94,907		$	73,635
Federal funds sold and interest bearing deposits with other banks	4,172			4,398
Investment securities available-for-sale	990,129			904,033
Other investments	28,404			25,953
Mortgages held for sale	11,290			13,123
Loans and leases, net of unearned discount:
Commercial and agricultural	1,073,205			929,997
Auto and light truck	559,987			496,816
Medium and heavy duty truck	283,544			296,935
Aircraft	803,111			844,657
Construction equipment	645,239			563,437
Commercial real estate	809,886			741,568
Residential real estate and home equity	523,855			526,122
Consumer	136,637			128,146
Total loans and leases	4,835,464			4,527,678
Reserve for loan and lease losses	(100,469		)	(94,883		)
Net loans and leases	4,734,995			4,432,795
Equipment owned under operating leases, net	134,440			139,581
Net premises and equipment	52,139			54,612
Goodwill and intangible assets	83,998			83,742
Accrued income and other assets	159,271			155,412
Total assets	$	6,293,745		$	5,887,284
LIABILITIES
Deposits:
Noninterest-bearing demand	$	1,217,120		$	1,064,271
Interest-bearing deposits:
Interest-bearing demand	1,614,959			1,554,898
Savings	822,477			863,588
Time	1,467,766			1,269,973
Total interest-bearing deposits	3,905,202			3,688,459
Total deposits	5,122,322			4,752,730
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase	113,627			205,834
Other short-term borrowings	85,717			8,761
Total short-term borrowings	199,344			214,595
Long-term debt and mandatorily redeemable securities	71,123			70,060
Subordinated notes	58,764			58,764
Accrued expenses and other liabilities	78,602			72,598
Total liabilities	5,530,155			5,168,747
SHAREHOLDERS’ EQUITY
Preferred stock; no par value Authorized 10,000,000 shares; none issued or outstanding	—			—
Common Stock; no par value Authorized 40,000,000 shares; issued 28,205,674 shares at December 31, 2018 and 2017	436,538			436,538
Retained earnings	398,980			339,959
Cost of common stock in treasury (2,421,946 shares at December 31, 2018 and 2,268,910 shares at December 31, 2017)	(62,760		)	(54,628		)
Accumulated other comprehensive loss	(10,676		)	(3,332		)
Total shareholders’ equity	762,082			718,537
Noncontrolling interests	1,508			—
Total equity	763,590			718,537
Total liabilities and equity	$	6,293,745		$	5,887,284

The accompanying notes are a part of the consolidated financial statements.

39

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31 (Dollars in thousands, except per share amounts)	2018			2017		2016
Interest income:
Loans and leases	$	234,455		$	194,726	$	175,999
Investment securities, taxable	19,356			13,853		11,914
Investment securities, tax-exempt	1,857			2,413		2,603
Other	1,648			1,393		1,244
Total interest income	257,316			212,385		191,760
Interest expense:
Deposits	34,631			19,202		15,267
Short-term borrowings	2,838			1,115		525
Subordinated notes	3,625			4,002		4,220
Long-term debt and mandatorily redeemable securities	2,316			2,435		2,089
Total interest expense	43,410			26,754		22,101
Net interest income	213,906			185,631		169,659
Provision for loan and lease losses	19,462			8,980		5,833
Net interest income after provision for loan and lease losses	194,444			176,651		163,826
Noninterest income:
Trust and wealth advisory	21,071			20,980		19,256
Service charges on deposit accounts	10,454			10,589		10,012
Debit card	13,369			11,809		10,887
Mortgage banking	3,844			4,796		4,496
Insurance commissions	6,502			5,889		5,513
Equipment rental	31,793			30,381		25,863
(Losses) gains on investment securities available-for-sale	(345		)	4,340		1,796
Other	10,362			9,922		11,122
Total noninterest income	97,050			98,706		88,945
Noninterest expense:
Salaries and employee benefits	93,857			86,912		86,837
Net occupancy	10,041			10,624		9,686
Furniture and equipment	23,433			20,769		19,500
Depreciation — leased equipment	26,248			25,215		21,678
Professional fees	7,680			6,810		5,161
Supplies and communication	6,320			5,355		5,244
FDIC and other insurance	2,923			2,537		3,147
Business development and marketing	6,112			7,477		4,936
Loan and lease collection and repossession	3,375			2,724		1,600
Other	6,478			5,574		5,856
Total noninterest expense	186,467			173,997		163,645
Income before income taxes	105,027			101,360		89,126
Income tax expense	22,613			33,309		31,340
Net income	82,414			68,051		57,786
Net (income) loss attributable to noncontrolling interests	—			—		—
Net income available to common shareholders	$	82,414		$	68,051	$	57,786
Basic net income per common share	$	3.16		$	2.60	$	2.22
Diluted net income per common share	$	3.16		$	2.60	$	2.22

The accompanying notes are a part of the consolidated financial statements.

40

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Net income	$	82,414		$	68,051		$	57,786
Other comprehensive loss:
Unrealized depreciation of investment securities available-for-sale	(9,073		)	(3,147		)	(6,547		)
Reclassification adjustment for realized losses (gains) included in net income	345			(4,340		)	(1,796		)
Income tax effect	2,102			2,811			3,132
Other comprehensive loss, net of tax	(6,626		)	(4,676		)	(5,211		)
Comprehensive income	75,788			63,375			52,575
Comprehensive (income) loss attributable to noncontrolling interests	—			—			—
Comprehensive income available to common shareholders	$	75,788		$	63,375		$	52,575

The accompanying notes are a part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	1st Source Corporation Shareholders
(Dollars in thousands, except per share amounts)	Preferred Stock		Common Stock		Retained Earnings			Cost of Common Stock in Treasury			Accumulated Other Comprehensive Income (Loss), Net			Total Shareholders’ Equity			Noncontrolling Interests		Total Equity
Balance at January 1, 2016	$	—	$	436,538	$	251,812		$	(50,852	)	$	6,555		$	644,053		$	—	$	644,053
Net income	—		—		57,786			—			—			57,786			—		57,786
Other comprehensive loss	—		—		—			—			(5,211		)	(5,211		)	—		(5,211		)
Issuance of 118,559 common shares per stock based compensation awards, including related tax effects	—		—		(18		)	2,826			—			2,808			—		2,808
Cost of 270,378 shares of common stock acquired for treasury	—		—		—			(8,030		)	—			(8,030		)	—		(8,030		)
Common stock dividend ($0.72 per share)	—		—		(18,756		)	—			—			(18,756		)	—		(18,756		)
Balance at December 31, 2016	$	—	$	436,538	$	290,824		$	(56,056	)	$	1,344		$	672,650		$	—	$	672,650
Cumulative-effect adjustment	—		—		(65		)	—			—			(65		)	—		(65		)
Balance at January 1, 2017, adjusted	—		436,538		290,759			(56,056		)	1,344			672,585			—		672,585
Net income	—		—		68,051			—			—			68,051			—		68,051
Other comprehensive loss	—		—		—			—			(4,676		)	(4,676		)	—		(4,676		)
Issuance of 61,899 common shares per stock based compensation awards	—		—		908			1,469			—			2,377			—		2,377
Cost of 900 shares of common stock acquired for treasury	—		—		—			(41		)	—			(41		)	—		(41		)
Common stock dividend ($0.76 per share)	—		—		(19,759		)	—			—			(19,759		)	—		(19,759		)
Balance at December 31, 2017	$	—	$	436,538	$	339,959		$	(54,628	)	$	(3,332	)	$	718,537		$	—	$	718,537
Cumulative-effect adjustment	—		—		718			—			(718		)	—			—		—
Balance at January 1, 2018, adjusted	—		436,538		340,677			(54,628		)	(4,050		)	718,537			—		718,537
Net income	—		—		82,414			—			—			82,414			—		82,414
Other comprehensive loss	—		—		—			—			(6,626		)	(6,626		)	—		(6,626		)
Issuance of 47,977 common shares per stock based compensation awards	—		—		841			1,139			—			1,980			—		1,980
Cost of 201,013 shares of common stock acquired for treasury	—		—		—			(9,271		)	—			(9,271		)	—		(9,271		)
Common stock dividend ($0.96 per share)	—		—		(24,952		)	—			—			(24,952		)	—		(24,952		)
Contributions from noncontrolling interests	—		—		—			—			—			—			1,508		1,508
Balance at December 31, 2018	$	—	$	436,538	$	398,980		$	(62,760	)	$	(10,676	)	$	762,082		$	1,508	$	763,590

The accompanying notes are a part of the consolidated financial statements.

41

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Operating activities:
Net income	$	82,414		$	68,051		$	57,786
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses	19,462			8,980			5,833
Depreciation of premises and equipment	5,620			5,658			5,245
Depreciation of equipment owned and leased to others	26,248			25,215			21,678
Stock-based compensation	3,553			2,963			2,884
Amortization of investment securities premiums and accretion of discounts, net	3,477			5,449			5,861
Amortization of mortgage servicing rights	956			1,092			1,478
Deferred income taxes	(550		)	2,767			2,856
Losses (gains) on investment securities available-for-sale	345			(4,340		)	(1,796		)
Originations of loans held for sale, net of principal collected	(78,450		)	(101,104		)	(119,134		)
Proceeds from the sales of loans held for sale	82,127			106,811			116,397
Net gains on sale of loans held for sale	(1,844		)	(2,981		)	(3,287		)
Net gains on sale of other real estate and repossessions	(561		)	(251		)	(228		)
Change in interest receivable	(1,747		)	(2,119		)	(1,326		)
Change in interest payable	2,997			1,222			570
Change in other assets	(8,076		)	(1,434		)	2,145
Change in other liabilities	7,375			(3,268		)	648
Other	1,028			4,550			450
Net change in operating activities	144,374			117,261			98,060
Investing activities:
Proceeds from sales of investment securities available-for-sale	11,392			228,715			23,784
Proceeds from maturities and paydowns of investment securities available-for-sale	145,167			177,466			217,613
Purchases of investment securities available-for-sale	(255,205		)	(469,385		)	(313,074		)
Proceeds from liquidation of partnership investments	1,868			128			2,903
Net change in other investments	(2,451		)	(3,495		)	(485		)
Loans sold or participated to others	22,835			32,004			5,926
Net change in loans and leases	(355,504		)	(382,386		)	(209,668		)
Net change in equipment owned under operating leases	(21,107		)	(46,003		)	(30,100		)
Purchases of premises and equipment	(3,058		)	(5,444		)	(8,935		)
Proceeds from sales of other real estate and repossessions	13,433			6,194			2,189
Net change in investing activities	(442,630		)	(462,206		)	(309,847		)
Financing activities:
Net change in demand deposits and savings accounts	171,799			205,649			278,666
Net change in time deposits	197,793			213,321			(84,092		)
Net change in short-term borrowings	(15,251		)	(77,348		)	58,714
Proceeds from issuance of long-term debt	—			19,999			20,837
Payments on long-term debt	(1,735		)	(26,628		)	(6,429		)
Stock issued under stock purchase plans	145			153			120
Acquisition of treasury stock	(9,271		)	(41		)	(8,030		)
Contributions from noncontrolling interests	1,508			—			—
Cash dividends paid on common stock	(25,686		)	(20,431		)	(19,416		)
Net change in financing activities	319,302			314,674			240,370
Net change in cash and cash equivalents	21,046			(30,271		)	28,583
Cash and cash equivalents, beginning of year	78,033			108,304			79,721
Cash and cash equivalents, end of year	$	99,079		$	78,033		$	108,304
Supplemental Information:
Non-cash transactions:
Loans transferred to other real estate and repossessions	$	11,007		$	8,135		$	4,961
Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan	583			1,426			800
Cash paid for:
Interest	$	40,413		$	25,531		$	21,531
Income taxes	8,272			10,567			19,866

The accompanying notes are a part of the consolidated financial statements.

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Accounting Policies

1st Source Corporation is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries (collectively referred to as “1st Source” or “the Company”), a broad array of financial products and services. 1st Source Bank (“Bank”), its banking subsidiary, offers commercial and consumer banking services, trust and wealth advisory services, and insurance to individual and business clients in Indiana and Michigan. The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements.

Basis of Presentation — The financial statements consolidate 1st Source, its subsidiaries (principally the Bank) and any variable interest entities (“VIEs”) for which the Company has concluded it has significant involvement in and the ability to direct the activities that impact the entity’s economic performance. All significant intercompany balances and transactions have been eliminated. For purposes of the parent company only financial information presented in Note 22, investments in subsidiaries are carried at equity in the underlying net assets.

Use of Estimates in the Preparation of Financial Statements — Financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Business Combinations — Business combinations are accounted for under the purchase method of accounting. Under the purchase method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition.

Cash Flows — For purposes of the consolidated and parent company only statements of cash flows, the Company considers cash and due from banks, federal funds sold and interest bearing deposits with other banks with original maturities of three months or less as cash and cash equivalents.

Securities — Securities that the Company has the ability and positive intent to hold to maturity are classified as investment securities held-to-maturity. Held-to-maturity investment securities, when present, are carried at amortized cost. As of December 31, 2018 and 2017, the Company held no securities classified as held-to-maturity. Securities that may be sold in response to, or in anticipation of, changes in interest rates and resulting prepayment risk, or for other factors, are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on debt securities are reported, net of applicable taxes, as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity. Unrealized gains and losses on equity securities are reflected, net of applicable taxes, in earnings.

The initial indication of potential other-than-temporary impairment (OTTI) for both debt and equity securities is a decline in fair value below amortized cost. Quarterly, any impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI. Declines in the fair value of available-for-sale debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. In estimating OTTI impairment losses, the Company considers among other things, (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether it is more likely than not that the Company will not have to sell any such securities before an anticipated recovery of cost.

Debt and equity securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading account securities and are carried at fair value with unrealized gains and losses reported in earnings. Realized gains and losses on the sales of all securities are reported in earnings and computed using the specific identification cost basis.

Other investments consist of shares of Federal Home Loan Bank of Indianapolis (FHLBI) and Federal Reserve Bank stock. As restricted member stocks, these investments are carried at cost. Both cash and stock dividends received on the stocks are reported as income. Quarterly, the Company reviews its investment in FHLBI for impairment. Factors considered in determining impairment are: history of dividend payments; determination of cause for any net loss; adequacy of capital; and review of the most recent financial statements. As of December 31, 2018 and 2017, it was determined that the Company’s investment in FHLBI stock is appropriately valued at cost, which equates to par value. In addition, other investments include interest bearing deposits with other banks with original maturities of greater than three months. These investments are in denominations, including accrued interest, that are fully insured by the FDIC.

Loans and Leases — Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. Interest income is accrued as earned based on unpaid principal balances. Origination fees and direct loan and lease origination costs are deferred, and the net amount amortized to interest income over the estimated life of the related loan or lease. Loan commitment fees are deferred and amortized into other income over the commitment period.

43

Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment.

The accrual of interest on loans and leases is discontinued when a loan or lease becomes contractually delinquent for 90 days, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential mortgage loans and consumer loans that are well secured and in the process of collection. Residential mortgage loans are placed on nonaccrual at the time the loan is placed in foreclosure. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the reserve for loan and lease losses. However, in some cases, the Company may elect to continue the accrual of interest when the net realizable value of collateral is sufficient to cover the principal and accrued interest. When a loan or lease is classified as nonaccrual and the future collectability of the recorded loan or lease balance is doubtful, collections on interest and principal are applied as a reduction to principal outstanding. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, which is typically evidenced by a sustained repayment performance of at least six months.

A loan or lease is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Interest on impaired loans and leases, which are not classified as nonaccrual, is recognized on the accrual basis. The Company evaluates loans and leases exceeding $100,000 where the internal credit quality grade is at or below a predetermined classification for impairment and establishes a specific reserve as a component of the reserve for loan and lease losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan or lease and the recorded investment in the loan or lease exceeds its fair value.

Loans and leases that have been modified and economic concessions have been granted to borrowers who have experienced financial difficulties are considered a troubled debt restructuring (TDR) and, by definition, are deemed an impaired loan. These concessions typically result from the Company’s loss mitigation activities and may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

When the Company modifies loans and leases in a TDR, it evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or uses the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a reserve for loan and lease losses estimate or a charge-off to the reserve for loan and lease losses. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the reserve for loan and lease losses.

The Company sells mortgage loans to the Government National Mortgage Association (GNMA) in the normal course of business and retains the servicing rights. The GNMA programs under which the loans are sold allow the Company to repurchase individual delinquent loans that meet certain criteria from the securitized loan pool. At its option, and without GNMA’s prior authorization, the Company may repurchase a delinquent loan for an amount equal to 100% of the remaining principal balance on the loan. Once the Company has the unconditional ability to repurchase a delinquent loan, the Company is deemed to have regained effective control over the loan and the Company is required to recognize the loan on its balance sheet and record an offsetting liability, regardless of its intent to repurchase the loan. At December 31, 2018 and 2017, residential real estate portfolio loans included $1.39 million and $2.65 million, respectively, of loans available for repurchase under the GNMA optional repurchase programs with the offsetting liability recorded within other short-term borrowings.

Mortgage Banking Activities — Loans held for sale are composed of performing one-to-four family residential mortgage loans originated for resale. Mortgage loans originated with the intent to sell are carried at fair value.

The Company recognizes the rights to service mortgage loans for others as separate assets, whether the servicing rights are acquired through a separate purchase or through the sale of originated loans with servicing rights retained. The Company allocates a portion of the total proceeds of a mortgage loan to servicing rights based on the relative fair value. These assets are amortized as reductions of mortgage servicing fee income over the estimated servicing period in proportion to the estimated servicing income to be received. Gains and losses on the sale of MSRs are recognized in Noninterest Income on the Statements of Income in the period in which such rights are sold.

44

MSRs are evaluated for impairment at each reporting date. For purposes of impairment measurement, MSRs are stratified based on the predominant risk characteristics of the underlying servicing, principally by loan type. If temporary impairment exists within a tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the fair value. If it is later determined all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced through a recovery of income.

MSRs are also reviewed for other-than-temporary impairment. Other-than-temporary impairment exists when recoverability of a recorded valuation allowance is determined to be remote considering historical and projected interest rates, prepayments, and loan pay-off activity. When this situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the MSRs. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the MSRs and the valuation allowance, precluding subsequent recoveries.

As part of mortgage banking operations, the Company enters into commitments to originate loans whereby the interest rate on these loans is determined prior to funding (“rate lock commitments”). Similar to loans held for sale, the fair value of rate lock commitments is subject to change primarily due to changes in interest rates. Under the Company’s risk management policy, these fair values are hedged primarily by selling forward contracts on agency securities. The rate lock commitments on mortgage loans intended to be sold and the related hedging instruments are recorded at fair value with changes in fair value recorded in current earnings.

Reserve for Loan and Lease Losses — The reserve for loan and lease losses is maintained at a level believed to be appropriate by the Company to absorb probable losses inherent in the loan and lease portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan and lease losses related to specifically identified impaired loans and leases as well as probable losses in the remainder of the various loan and lease portfolios. For purposes of determining the reserve, the Company has segmented loans and leases into classes based on the associated risk within these segments. The Company has determined that eight classes exist within the loan and lease portfolio. The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, formula reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not deemed impaired, and reserves for pooled homogenous loans and leases. The Company’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change.

Specific reserves are established for certain business and specialty finance credits based on a regular analysis of special attention loans and leases. This analysis is performed by the Credit Policy Committee (CPC), the Loan Review Department, Credit Administration, and the Loan Workout Departments. The specific reserves are based on an analysis of underlying collateral values, cash flow considerations and, if applicable, guarantor capacity. Sources for determining collateral values include appraisals, evaluations, auction values and industry guides. Generally, for loans secured by commercial real estate and dependent on cash flows from the underlying collateral to service the debt, a new appraisal is obtained at the time the credit is deemed to be impaired. For non-income producing commercial real estate, an appraisal or evaluation is ordered depending on an analysis of the underlying factors, including an assessment of the overall credit worthiness of the borrower, the value of non-real estate collateral supporting the transaction and the date of the most recent existing appraisal or evaluation. An evaluation may be performed in lieu of obtaining a new appraisal for less complex transactions secured by local market properties. Values based on evaluations are discounted more heavily than those determined by appraisals when calculating loan impairment. Appraisals, evaluations and industry guides are used to determine aircraft values. Appraisals, industry guides and auction values are used to determine construction equipment, truck and auto values.

The formula reserves determined for each business lending division portfolio are calculated quarterly by applying loss factors to outstanding loans and leases based upon a review of historical loss experience and qualitative factors, which include but are not limited to, economic trends, current market risk assessment by industry, recent loss experience in particular segments of the portfolios, movement in equipment values collateralizing specialized industry portfolios, concentrations of credit, delinquencies, trends in volume, experience and depth of relationship managers and division management, and the effects of changes in lending policies and practices, including changes in quality of the loan and lease origination, servicing and risk management processes. Special attention loans and leases without specific reserves receive a higher percentage allocation ratio than credits not considered special attention.

Pooled loans and leases are smaller credits and are homogenous in nature, such as consumer credits and residential mortgages. Pooled loan and lease loss reserves are based on historical net charge-offs, adjusted for delinquencies, the effects of lending practices and programs and current economic conditions, and current trends in the geographic markets which the Company serves.

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A comprehensive analysis of the reserve is performed on a quarterly basis by reviewing all loans and leases over a fixed dollar amount ($100,000) where the internal credit quality grade is at or below a predetermined classification. Although the Company determines the amount of each element of the reserve separately and relies on this process as an important credit management tool, the entire reserve is available for the entire loan and lease portfolio. The actual amount of losses incurred can vary significantly from the estimated amounts both positively and negatively. The Company’s methodology includes several factors intended to minimize the difference between estimated and actual losses. These factors allow the Company to adjust its estimate of losses based on the most recent information available.

Impaired loans are reviewed quarterly to assess the probability of being able to collect the portion considered impaired. When a review and analysis of the underlying credit and collateral indicates ultimate collection is improbable, the deficiency is charged-off and deducted from the reserve. Loans and leases, which are deemed uncollectible or have a low likelihood of collection, are charged-off and deducted from the reserve, while recoveries of amounts previously charged-off are credited to the reserve. A (recovery of) provision for loan and lease losses is credited or charged to operations based on the Company’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

Equipment Owned Under Operating Leases — The Company finances various types of construction equipment, medium and heavy duty trucks, automobiles and other equipment under leases classified as operating leases. The equipment underlying the operating leases is reported at cost, net of accumulated depreciation, in the Statements of Financial Condition. These operating lease arrangements require the lessee to make a fixed monthly rental payment over a specified lease term generally ranging from three to seven years. Revenue consists of the contractual lease payments and is recognized on a straight-line basis over the lease term and reported as noninterest income. Leased assets are being depreciated on a straight-line method over the lease term to the estimate of the equipment’s fair market value at lease termination, also referred to as “residual” value. The depreciation of these operating lease assets is reported as Noninterest Expense on the Statements of Income. For automobile leases, fair value is based upon published industry market guides. For other equipment leases, fair value may be based upon observable market prices, third-party valuations, or prices received on sales of similar assets at the end of the lease term. These residual values are reviewed annually to ensure the recorded amount does not exceed the fair market value at the lease termination. At the end of the lease, the operating lease asset is either purchased by the lessee or returned to the Company.

Other Real Estate — Other real estate acquired through partial or total satisfaction of nonperforming loans is included in Other Assets and recorded at fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property less cost to sell, and the carrying value of the loan charged to the reserve for loan and lease losses or other income, if a positive adjustment. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs, property maintenance costs, and gains or losses recognized upon the sale of other real estate are recognized in Noninterest Expense on the Statements of Income. Gains or losses resulting from the sale of other real estate are recognized on the date of sale. As of December 31, 2018 and 2017, other real estate had carrying values of $0.30 million and $1.31 million, respectively, and is included in Other Assets in the Statements of Financial Condition.

Repossessed Assets — Repossessed assets may include fixtures and equipment, inventory and receivables, aircraft, construction equipment, and vehicles acquired from business banking and specialty finance activities. Repossessed assets are included in Other Assets at fair value of the equipment or vehicle less estimated selling costs. At the time of repossession, the recorded amount of the loan or lease is written down to the fair value of the equipment or vehicle by a charge to the reserve for loan and lease losses or other income, if a positive adjustment. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs, equipment maintenance costs, and gains or losses recognized upon the sale of repossessions are recognized in Noninterest Expense on the Statements of Income. Gains or losses resulting from the sale of repossessed assets are recognized on the date of sale. Repossessed assets totaled $6.66 million and $10.11 million, as of December 31, 2018 and 2017, respectively, and are included in Other Assets in the Statements of Financial Condition.

Premises and Equipment — Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed by the straight-line method, primarily with useful lives ranging from three to 31.5 years. Maintenance and repairs are charged to expense as incurred, while improvements, which extend the useful life, are capitalized and depreciated over the estimated remaining life.

Goodwill and Intangibles — Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Goodwill is reviewed for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the carrying amount. Goodwill is allocated into two reporting units. Fair value for each reporting unit is estimated using stock price multiples or earnings before interest, tax, depreciation and amortization (EBITDA) multiples. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to impairment testing. All of the Company’s other intangible assets have finite lives and are amortized on a straight-line basis over varying periods not exceeding twenty-five years. The Company performed the required annual impairment test of goodwill during the fourth quarter of 2018 and determined that no impairment exists.

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Partnership Investments — The partnerships in which the Company has investments account for their investments at fair value. As a result, the Company’s investments in these partnerships reflect the underlying fair value of the partnerships’ investments. The Company accounts for its investments in partnerships for which it owns three percent or more of the partnership on the equity method. The Company accounts for its investments in partnerships of which it owns less than three percent at fair value less impairment. The Company has elected to use the practical expedient to estimate fair value of an investment in an investment company using the net asset value of its partnership interest. The Company uses the hypothetical liquidation book value (HLBV) method for equity investments when the liquidation rights and priorities as defined by an equity investment agreement differ from what is reflected by the underlying percentage ownership interests. The HLBV method is commonly applied to equity investments in the renewable energy industry, where cash percentages vary at different points in time and are not directly linked to an investor’s ownership percentage. A calculation is prepared at each balance sheet date to determine the amount that the Company would receive if an equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is 1st Source’s share of the earnings or losses from the equity investment for the period. Investments in partnerships are included in Other Assets in the Statements of Financial Condition. The balances as of December 31, 2018 and 2017 were $23.46 million and $23.76 million, respectively.

Short-Term Borrowings — Short-term borrowings consist of Federal funds purchased, securities sold under agreements to repurchase, commercial paper, Federal Home Loan Bank notes, and borrowings from non-affiliated banks. Federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings mature within one to 365 days of the transaction date. Commercial paper matures within seven to 270 days. Other short-term borrowings in the Statements of Financial Condition include the Company’s liability related to mortgage loans available for repurchase under GNMA optional repurchase programs.

Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third-party is continually monitored and additional collateral obtained or requested to be returned to the Company as deemed appropriate.

Revenue Recognition — The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial services offered primarily through 1st Source Bank and its subsidiaries.

Interest Income — The largest source of revenue for the Company is interest income which is primarily recognized on an accrual basis according to nondiscretionary formulas in written contracts, such as loan and lease agreements or investment securities contracts.

Noninterest Income — The Company earns noninterest income through a variety of financial and transaction services provided to corporate and consumer clients such as trust and wealth advisory, deposit account, debit card, mortgage banking, insurance, and equipment rental services. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.

Trust and Wealth AdvisoryFees — Trust and wealth advisory fees are recognized on the accrual basis.

Income Taxes — 1st Source and its subsidiaries file a consolidated Federal income tax return. The provision for incomes taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, the Company believes it is more likely than not that all of the deferred tax assets will be realized.

The Company uses the deferral method of accounting on investments that generate investment tax credits. Under this method, the investment tax credits are recognized as a reduction to the related asset. The expense on certain qualified affordable housing investments is included in Tax Expense in the Statements of Income.

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Positions taken in the tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within Income Tax Expense in the Statements of Income.

Net Income Per Common Share — Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding, plus the dilutive effect of outstanding stock options, stock warrants and nonvested stock-based compensation awards.

Stock-Based Employee Compensation — The Company recognizes stock-based compensation as compensation cost in the Statements of Income based on their fair values on the measurement date, which, for its purposes, is the date of grant. The Company recognizes forfeitures as they occur.

Segment Information — 1st Source has one principal business segment, commercial banking. While our chief decision makers monitor the revenue streams of various products and services, the identifiable segments’ operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company’s financial service operations are considered to be aggregated in one reportable operating segment.

Derivative Financial Instruments — The Company occasionally enters into derivative financial instruments as part of its interest rate risk management strategies. These derivative financial instruments consist primarily of interest rate swaps. All derivative instruments are recorded on the Statements of Financial Condition, as either an asset or liability, at their fair value. The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the derivative. For a derivative used to hedge changes in fair value of a recognized asset or liability, or an unrecognized firm commitment, the gain or loss on the derivative will be recognized in earnings together with the offsetting loss or gain on the hedged item. This results in an earnings impact only to the extent that the hedge is ineffective in achieving offsetting changes in fair value. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in earnings. For a derivative used to hedge changes in cash flows associated with forecasted transactions, the gain or loss on the effective portion of the derivative will be deferred, and reported as accumulated other comprehensive income, a component of shareholders’ equity, until such time the hedged transaction affects earnings. For derivative instruments not accounted for as hedges, changes in fair value are recognized in noninterest income/expense. Deferred gains and losses from derivatives that are terminated and were in a cash flow hedge are amortized over the shorter of the original remaining term of the derivative or the remaining life of the underlying asset or liability.

Fair Value Measurements — The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale, mortgage loans held for sale, and derivative instruments are carried at fair value on a recurring basis. Fair value measurements are also utilized to determine the initial value of certain assets and liabilities, to perform impairment assessments, and for disclosure purposes. The Company uses quoted market prices and observable inputs to the maximum extent possible when measuring fair value. In the absence of quoted market prices, various valuation techniques are utilized to measure fair value. When possible, observable market data for identical or similar financial instruments are used in the valuation. When market data is not available, fair value is determined using valuation models that incorporate management’s estimates of the assumptions a market participant would use in pricing the asset or liability.

Fair value measurements are classified within one of three levels based on the observability of the inputs used to determine fair value, as follows:

Level 1 — The valuation is based on quoted prices in active markets for identical instruments.

Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 — The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.

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Reclassifications — Certain amounts in the prior periods consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on total assets, shareholders’ equity or net income as previously reported.

Note 2 — Recent Accounting Pronouncements

Intangibles - Internal-Use Software: In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contact with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The guidance is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is assessing ASU 2018-15 and the impact on its accounting and disclosures.

Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” These amendments modify the disclosure requirements in Topic 820 as follows:

Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.

Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is assessing ASU 2018-13 and the impact on its disclosures.

Share Based Payment Accounting: In June 2018, the FASB issued ASU No. 2018-07 “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company adopted ASU 2018-07 on January 1, 2019 and it did not have an impact on its accounting and disclosures.

Income Taxes: In March 2018, the FASB issued ASU 2018-05 “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118.” These amendments add SEC guidance to the FASB Accounting Standards Codification regarding the Tax Cuts and Jobs Act pursuant to the issuance of SAB 118. The amendments are effective upon addition to the FASB Codification. Disclosures related to the effect of the Tax Cuts and Jobs Act and the Company’s utilization of SAB 118 appear in Note 17 - Income Taxes.

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Accumulated Other Comprehensive Income (Loss): In February 2018, the FASB issued ASU No. 2018-02 “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” These amendments provide financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The guidance is effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The amendments should be applied either in the period adopted or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company early adopted ASU 2018-02 on January 1, 2018 through a $0.72 million cumulative-effect adjustment from AOCI to increase retained earnings related to unrealized gains and losses on available-for-sale securities. No other income tax effects related to the application of the Tax Cuts and Jobs Act were reclassified from AOCI to retained earnings.

Premium Amortization: In March 2017, the FASB issued ASU No. 2017-08 “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted ASU 2017-08 on January 1, 2019 and recognized a cumulative-effect adjustment to retained earnings of $0.30 million.

Simplifying the Test for Goodwill Impairment: In January 2017, the FASB issued ASU No. 2017-04 “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company has assessed ASU 2017-04 and does not expect it to have a material impact on its accounting and disclosures.

Measurement of Credit Losses on Financial Instruments: In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the financial assets.

For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense.

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.

ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has a cross-functional team working through an implementation plan which includes assessment and documentation of processes, internal controls and data as well as model development. The Company is also in the process of implementing a third-party software solution to assist in the application of the new standard. The impact of adopting ASU 2016-13 cannot be reasonably estimated at this point.

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Leases: In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early adoption is permitted.

In July 2018, the FASB issued amendments (ASU No. 2018-11) which provide entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The amendments in ASU 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met. For entities that have not adopted Topic 842 before the issuance of ASU No. 2018-11, the effective date and transition requirements for the amendments related to separating components of a contract are the same as the effective date and transition requirements in ASU No. 2016-02. In December 2018, the FASB issued amendments (ASU No. 2018-20) which addresses issues facing lessors when applying the leases standard. The amendments in ASU 2018-20 provide for certain accounting policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Entities that have not yet adopted Topic 842 before the issuance of ASU 2018-20 should apply ASU 2018-20 to all new and existing leases when the entity first applies Topic 842 and should apply the same transition method elected for Topic 842.

The Company adopted ASU 2016-02, 2018-11, and ASU 2018-20 on January 1, 2019. Upon adoption, the Company recognized discounted right of use assets and lease liabilities of $9.97 million and $10.75 million, respectively. The Company chose not to adopt the hindsight practical expedient and instead chose to utilize the transition method of adoption whereby comparative periods shown in the period of adoption will continue to be in accordance with Topic 840. The Company elected to apply the practical expedients where an entity may choose to not reassess: whether expired or existing contracts contain leases under the new definition of a lease; lease classification for expired or existing leases; and whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. Additionally, the Company will make an accounting policy election not to apply the recognition guidance in ASU 2016-02 to any short-term leases. The Company also elected the practical expedient, as an accounting policy election by class of underlying asset, to account for lease and nonlease components together as a single lease component. The Company made an accounting policy election as a lessor to exclude sales taxes and other similar taxes from being reported as lease revenue with an associated expense.

Note 3 — Investment Securities Available-For-Sale

The following table shows investment securities available-for-sale.

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2018
U.S. Treasury and Federal agencies securities	$	537,913	$	196	$	(6,886	)	$	531,223
U.S. States and political subdivisions securities	95,346		172		(936		)	94,582
Mortgage-backed securities - Federal agencies	324,390		718		(6,875		)	318,233
Corporate debt securities	45,843		—		(451		)	45,392
Foreign government and other securities	700		—		(1		)	699
Total investment securities available-for-sale	$	1,004,192	$	1,086	$	(15,149	)	$	990,129
December 31, 2017
U.S. Treasury and Federal agencies securities	$	471,508	$	57	$	(3,446	)	$	468,119
U.S. States and political subdivisions securities	116,260		648		(908		)	116,000
Mortgage-backed securities - Federal agencies	289,327		1,456		(2,873		)	287,910
Corporate debt securities	31,573		5		(284		)	31,294
Foreign government and other securities	700		10		—			710
Total investment securities available-for-sale	$	909,368	$	2,176	$	(7,511	)	$	904,033

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At December 31, 2018, the residential mortgage-backed securities held by the Company consisted primarily of GNMA, FNMA and FHLMC pass-through certificates which are guaranteed by those respective agencies of the United States government (Government Sponsored Enterprise, GSEs).

The Company did not hold any marketable equity securities at December 31, 2018 and 2017.

The following table shows the contractual maturities of investments in debt securities available-for-sale at December 31, 2018. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	127,476	$	126,664
Due after one year through five years	541,389		534,377
Due after five years through ten years	10,937		10,855
Due after ten years	—		—
Mortgage-backed securities	324,390		318,233
Total debt securities available-for-sale	$	1,004,192	$	990,129

The following table summarizes gross unrealized losses and fair value by investment category and age. At December 31, 2018, the Company’s available-for-sale securities portfolio consisted of 639 securities, 437 of which were in an unrealized loss position.

	Less than 12 Months					12 months or Longer					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2018
U.S. Treasury and Federal agencies securities	$	55,491	$	(177	)	$	424,269	$	(6,709	)	$	479,760	$	(6,886	)
U.S. States and political subdivisions securities	21,059		(61		)	45,365		(875		)	66,424		(936		)
Mortgage-backed securities - Federal agencies	65,554		(511		)	198,221		(6,364		)	263,775		(6,875		)
Corporate debt securities	21,496		(143		)	23,896		(308		)	45,392		(451		)
Foreign government and other securities	699		(1		)	—		—			699		(1		)
Total temporarily impaired available-for-sale securities	$	164,299	$	(893	)	$	691,751	$	(14,256	)	$	856,050	$	(15,149	)
December 31, 2017
U.S. Treasury and Federal agencies securities	$	311,865	$	(1,161	)	$	89,617	$	(2,285	)	$	401,482	$	(3,446	)
U.S. States and political subdivisions securities	34,971		(287		)	24,909		(621		)	59,880		(908		)
Mortgage-backed securities - Federal agencies	137,169		(1,336		)	60,162		(1,537		)	197,331		(2,873		)
Corporate debt securities	13,747		(57		)	10,048		(227		)	23,795		(284		)
Foreign government and other securities	—		—			—		—			—		—
Total temporarily impaired available-for-sale securities	$	497,752	$	(2,841	)	$	184,736	$	(4,670	)	$	682,488	$	(7,511	)

At December 31, 2018, the Company does not have the intent to sell any of the available-for-sale securities in the table above and believes that it is more likely than not that it will not have to sell any such securities before an anticipated recovery of cost. The unrealized losses on debt securities are due to market volatility. The fair value is expected to recover on all debt securities as they approach their maturity date or repricing date or if market yields for such investments decline. The Company does not believe any of the securities are impaired due to reasons of credit quality.

The following table shows the gross realized gains and losses from the securities available-for-sale portfolio, including marketable equity securities.

(Dollars in thousands)	2018			2017			2016
Gross realized gains	$	2		$	7,425		$	2,090
Gross realized losses	(347		)	(2,895		)	—
OTTI losses	—			(190		)	(294		)
Net realized (losses) gains	$	(345	)	$	4,340		$	1,796

At December 31, 2018 and 2017, investment securities with carrying values of $242.31 million and $289.05 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.

52

Note 4 — Loan and Lease Financings

Total loans and leases outstanding were recorded net of unearned income and deferred loan fees and costs at December 31, 2018 and 2017, and totaled $4.84 billion and $4.53 billion, respectively. At December 31, 2018 and 2017, net deferred loan and lease costs were $4.54 million and $3.85 million, respectively.

The loan and lease portfolio includes direct financing leases, which are included in commercial and agricultural, auto and light truck, medium and heavy duty truck, aircraft, and construction equipment on the Consolidated Statements of Financial Condition.

The following table shows the summary of the gross investment in lease financing and the components of the investment in lease financing at December 31, 2018 and 2017.

(Dollars in thousands)	2018			2017
Direct finance leases:
Rentals receivable	$	219,301		$	208,295
Estimated residual value of leased assets	38,138			29,638
Gross investment in lease financing	257,439			237,933
Unearned income	(46,709		)	(37,851		)
Net investment in lease financing	$	210,730		$	200,082

At December 31, 2018, the direct financing minimum future lease payments receivable for each of the years 2019 through 2023 were $53.04 million, $46.58 million, $38.69 million, $36.32 million, and $30.79 million, respectively.

In the ordinary course of business, the Company has extended loans to certain directors, executive officers, and principal shareholders of equity securities of 1st Source and to their affiliates. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Company and did not involve more than the normal risk of collectability, or present other unfavorable features. The loans are consistent with sound banking practices and within applicable regulatory and lending limitations. The aggregate dollar amounts of these loans were $11.38 million and $14.61 million at December 31, 2018 and 2017, respectively. During 2018, $8.73 million of new loans and other additions were made and repayments and other reductions totaled $11.96 million.

The Company evaluates loans and leases for credit quality at least annually but more frequently if certain circumstances occur (such as material new information which becomes available and indicates a potential change in credit risk). The Company uses two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.

All loans and leases, except residential real estate and home equity loans and consumer loans, are assigned credit quality grades on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on our safety and soundness. Loans or leases graded 7 or weaker are considered “special attention” credits and, as such, relationships in excess of $100,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the reserve for loan and lease losses. Grade 7 credits are defined as “watch” and contain greater than average credit risk and are monitored to limit our exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered ‘‘classified’’ and are graded 9 through 12 corresponding to the regulatory definitions of “substandard” (grades 9 and 10) and the more severe ‘‘doubtful’’ (grade 11) and ‘‘loss’’ (grade 12).

53

The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.

	Credit Quality Grades
(Dollars in thousands)	1-6		7-12		Total
December 31, 2018
Commercial and agricultural	$	1,043,019	$	30,186	$	1,073,205
Auto and light truck	528,174		31,813		559,987
Medium and heavy duty truck	281,834		1,710		283,544
Aircraft	768,442		34,669		803,111
Construction equipment	625,579		19,660		645,239
Commercial real estate	787,376		22,510		809,886
Total	$	4,034,424	$	140,548	$	4,174,972
December 31, 2017
Commercial and agricultural	$	906,074	$	23,923	$	929,997
Auto and light truck	482,455		14,361		496,816
Medium and heavy duty truck	293,318		3,617		296,935
Aircraft	815,956		28,701		844,657
Construction equipment	552,684		10,753		563,437
Commercial real estate	726,134		15,434		741,568
Total	$	3,776,621	$	96,789	$	3,873,410

For residential real estate and home equity and consumer loans, credit quality is based on the aging status of the loan and by payment activity. The following table shows the recorded investment in residential real estate and home equity and consumer loans by performing or nonperforming status. Nonperforming loans are those loans which are on nonaccrual status or are 90 days or more past due.

(Dollars in thousands)	Performing		Nonperforming		Total
December 31, 2018
Residential real estate and home equity	$	521,846	$	2,009	$	523,855
Consumer	136,423		214		136,637
Total	$	658,269	$	2,223	$	660,492
December 31, 2017
Residential real estate and home equity	$	523,803	$	2,319	$	526,122
Consumer	127,982		164		128,146
Total	$	651,785	$	2,483	$	654,268

54

The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.

(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Total Accruing Loans		Nonaccrual		Total Financing Receivables
December 31, 2018
Commercial and agricultural	$	1,070,530	$	22	$	—	$	—	$	1,070,552	$	2,653	$	1,073,205
Auto and light truck	544,022		3,154		1,437		—		548,613		11,374		559,987
Medium and heavy duty truck	283,284		154		—		—		283,438		106		283,544
Aircraft	790,233		4,149		1,168		—		795,550		7,561		803,111
Construction equipment	641,270		1,643		—		—		642,913		2,326		645,239
Commercial real estate	807,793		109		—		—		807,902		1,984		809,886
Residential real estate and home equity	520,124		1,267		455		295		522,141		1,714		523,855
Consumer	135,591		682		150		73		136,496		141		136,637
Total	$	4,792,847	$	11,180	$	3,210	$	368	$	4,807,605	$	27,859	$	4,835,464
December 31, 2017
Commercial and agricultural	$	927,113	$	281	$	—	$	—	$	927,394	$	2,603	$	929,997
Auto and light truck	485,885		2,869		21		—		488,775		8,041		496,816
Medium and heavy duty truck	296,564		—		—		—		296,564		371		296,935
Aircraft	823,638		14,570		4,492		—		842,700		1,957		844,657
Construction equipment	561,665		333		448		—		562,446		991		563,437
Commercial real estate	738,006		23		121		—		738,150		3,418		741,568
Residential real estate and home equity	521,943		1,508		352		429		524,232		1,890		526,122
Consumer	127,107		776		99		30		128,012		134		128,146
Total	$	4,481,921	$	20,360	$	5,533	$	459	$	4,508,273	$	19,405	$	4,527,678

Interest income for the years ended December 31, 2018, 2017, and 2016, would have increased by approximately $2.18 million, $1.14 million, and $1.11 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.

55

The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Reserve
December 31, 2018
With no related reserve recorded:
Commercial and agricultural	$	2,471	$	2,471	$	—
Auto and light truck	7,504		7,504		—
Medium and heavy duty truck	106		106		—
Aircraft	556		556		—
Construction equipment	905		905		—
Commercial real estate	1,131		1,131		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	12,673		12,673		—
With a reserve recorded:
Commercial and agricultural	—		—		—
Auto and light truck	3,840		3,840		372
Medium and heavy duty truck	—		—		—
Aircraft	7,004		7,004		1,255
Construction equipment	1,340		1,340		279
Commercial real estate	759		759		51
Residential real estate and home equity	344		346		126
Consumer	—		—		—
Total with a reserve recorded	13,287		13,289		2,083
Total impaired loans	$	25,960	$	25,962	$	2,083
December 31, 2017
With no related reserve recorded:
Commercial and agricultural	$	2,439	$	2,439	$	—
Auto and light truck	—		—		—
Medium and heavy duty truck	371		371		—
Aircraft	1,901		1,901		—
Construction equipment	584		584		—
Commercial real estate	2,375		2,375		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	7,670		7,670		—
With a reserve recorded:
Commercial and agricultural	—		—		—
Auto and light truck	7,780		7,780		243
Medium and heavy duty truck	—		—		—
Aircraft	—		—		—
Construction equipment	344		344		108
Commercial real estate	971		971		181
Residential real estate and home equity	352		354		134
Consumer	—		—		—
Total with a reserve recorded	9,447		9,449		666
Total impaired loans	$	17,117	$	17,119	$	666

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The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class, for years ending December 31, 2018, 2017 and 2016.

	2018				2017				2016
(Dollars in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Commercial and agricultural	$	2,812	$	—	$	4,526	$	1	$	3,484	$	6
Auto and light truck	9,352		—		766		—		10		—
Medium and heavy duty truck	247		—		658		—		—		—
Aircraft	9,987		20		4,873		5		6,291		2
Construction equipment	1,663		—		1,011		—		766		—
Commercial real estate	2,303		—		3,220		2		5,417		123
Residential real estate and home equity	347		15		355		15		415		15
Consumer loans	—		—		—		—		—		—
Total	$	26,711	$	35	$	15,409	$	23	$	16,383	$	146

The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during 2018, 2017 and 2016, segregated by class, as well as the recorded investment as of December 31. The classification between nonperforming and performing is shown at the time of modification. Modification programs focused on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. The modifications did not result in the contractual forgiveness of principal or interest. There were no modifications during 2018, one modification during 2017, and one modification during 2016 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modifications was immaterial.

	2018			2017			2016
(Dollars in thousands)	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Performing TDRs:
Commercial and agricultural	—	$	—	—	$	—	—	$	—
Auto and light truck	—	—		—	—		—	—
Medium and heavy duty truck	—	—		—	—		—	—
Aircraft	—	—		—	—		—	—
Construction equipment	—	—		—	—		—	—
Commercial real estate	—	—		—	—		—	—
Residential real estate and home equity	—	—		—	—		—	—
Consumer	—	—		—	—		—	—
Total performing TDR modifications	—	—		—	—		—	—
Nonperforming TDRs:
Commercial and agricultural	—	—		1	—		—	—
Auto and light truck	1	285		—	—		—	—
Medium and heavy duty truck	—	—		—	—		—	—
Aircraft	—	—		—	—		—	—
Construction equipment	—	—		—	—		1	562
Commercial real estate	—	—		—	—		—	—
Residential real estate and home equity	—	—		—	—		1	314
Consumer	—	—		—	—		—	—
Total nonperforming TDR modifications	1	285		1	—		2	876
Total TDR modifications	1	$	285	1	$	—	2	$	876

There were no TDRs which had a payment default within the twelve months following modification during the year ended December 31, 2018, one nonperforming construction equipment TDR with a recorded investment of $0.41 million which had a payment default within the twelve months following modification for the year ended December 31, 2017 and no TDRs which had payment defaults within the twelve months following modification during the year ended December 31, 2016.

The classification between nonperforming and performing is shown at the time of modification. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

57

The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of December 31.

Year Ended December 31 (Dollars in thousands)	2018		2017
Performing TDRs	$	344	$	352
Nonperforming TDRs	316		537
Total TDRs	$	660	$	889

Note 5 — Reserve for Loan and Lease Losses

The following table shows the changes in the reserve for loan and lease losses, segregated by class, for each of the three years ended December 31.

(Dollars in thousands)	Commercial and agricultural			Auto and light truck			Medium and heavy duty truck			Aircraft		Construction equipment			Commercial real estate			Residential real estate and home equity			Consumer		Total
2018
Balance, beginning of year	$	16,228		$	10,103		$	4,844		$	34,619	$	9,343		$	14,792		$	3,666		$	1,288	$	94,883
Charge-offs	229			3,308			23			12,222		288			70			63			909		17,112
Recoveries	222			68			—			2,499		100			53			23			271		3,236
Net charge-offs	7			3,240			23			9,723		188			17			40			638		13,876
Provision (recovery of provision)	842			7,826			(518		)	8,151		1,767			930			(201		)	665		19,462
Balance, end of year	$	17,063		$	14,689		$	4,303		$	33,047	$	10,922		$	15,705		$	3,425		$	1,315	$	100,469
2017
Balance, beginning of year	$	14,668		$	8,064		$	4,740		$	34,352	$	8,207		$	13,677		$	3,550		$	1,285	$	88,543
Charge-offs	2,415			774			—			1,872		164			344			124			836		6,529
Recoveries	984			1,153			—			227		298			851			109			267		3,889
Net charge-offs (recoveries)	1,431			(379		)	—			1,645		(134		)	(507		)	15			569		2,640
Provision (recovery of provision)	2,991			1,660			104			1,912		1,002			608			131			572		8,980
Balance, end of year	$	16,228		$	10,103		$	4,844		$	34,619	$	9,343		$	14,792		$	3,666		$	1,288	$	94,883
2016
Balance, beginning of year	$	15,456		$	9,269		$	4,699		$	32,373	$	7,592		$	13,762		$	3,662		$	1,299	$	88,112
Charge-offs	547			4			—			6,123		128			32			219			888		7,941
Recoveries	509			253			10			528		461			469			31			278		2,539
Net charge-offs (recoveries)	38			(249		)	(10		)	5,595		(333		)	(437		)	188			610		5,402
Provision (recovery of provision)	(750		)	(1,454		)	31			7,574		282			(522		)	76			596		5,833
Balance, end of year	$	14,668		$	8,064		$	4,740		$	34,352	$	8,207		$	13,677		$	3,550		$	1,285	$	88,543

The following table shows the reserve for loan and lease losses and recorded investment in loans and leases, segregated by class, separated by individually and collectively evaluated for impairment as of December 31, 2018 and 2017.

(Dollars in thousands)	Commercial and agricultural		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer		Total
December 31, 2018
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	$	—	$	372	$	—	$	1,255	$	279	$	51	$	126	$	—	$	2,083
Ending balance, collectively evaluated for impairment	17,063		14,317		4,303		31,792		10,643		15,654		3,299		1,315		98,386
Total reserve for loan and lease losses	$	17,063	$	14,689	$	4,303	$	33,047	$	10,922	$	15,705	$	3,425	$	1,315	$	100,469
Recorded investment in loans
Ending balance, individually evaluated for impairment	$	2,471	$	11,344	$	106	$	7,560	$	2,245	$	1,890	$	344	$	—	$	25,960
Ending balance, collectively evaluated for impairment	1,070,734		548,643		283,438		795,551		642,994		807,996		523,511		136,637		4,809,504
Total recorded investment in loans	$	1,073,205	$	559,987	$	283,544	$	803,111	$	645,239	$	809,886	$	523,855	$	136,637	$	4,835,464
December 31, 2017
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	$	—	$	243	$	—	$	—	$	108	$	181	$	134	$	—	$	666
Ending balance, collectively evaluated for impairment	16,228		9,860		4,844		34,619		9,235		14,611		3,532		1,288		94,217
Total reserve for loan and lease losses	$	16,228	$	10,103	$	4,844	$	34,619	$	9,343	$	14,792	$	3,666	$	1,288	$	94,883
Recorded investment in loans
Ending balance, individually evaluated for impairment	$	2,439	$	7,780	$	371	$	1,901	$	928	$	3,346	$	352	$	—	$	17,117
Ending balance, collectively evaluated for impairment	927,558		489,036		296,564		842,756		562,509		738,222		525,770		128,146		4,510,561
Total recorded investment in loans	$	929,997	$	496,816	$	296,935	$	844,657	$	563,437	$	741,568	$	526,122	$	128,146	$	4,527,678

Note 6 — Operating Leases

Operating lease equipment at December 31, 2018 and 2017 was $134.44 million and $139.58 million, respectively, net of accumulated depreciation of $65.51 million and $49.74 million, respectively.

The minimum future lease rental payments due from clients on operating lease equipment at December 31, 2018, totaled $99.89 million, of which $30.54 million is due in 2019, $32.83 million in 2020, $18.68 million in 2021, $10.76 million in 2022, $5.29 million in 2023, and $1.79 million thereafter. Depreciation expense related to operating lease equipment for the years ended December 31, 2018, 2017 and 2016 was $26.25 million, $25.22 million and $21.68 million, respectively.

Note 7 — Premises and Equipment

The following table shows premises and equipment as of December 31.

(Dollars in thousands)	2018			2017
Land	$	15,223		$	15,413
Buildings and improvements	59,691			58,981
Furniture and equipment	40,789			39,978
Total premises and equipment	115,703			114,372
Accumulated depreciation and amortization	(63,564		)	(59,760		)
Net premises and equipment	$	52,139		$	54,612

Depreciation and amortization of properties and equipment totaled $5.62 million in 2018, $5.66 million in 2017, and $5.25 million in 2016.

During 2018, 2017 and 2016, the Company recorded long-lived asset impairment charges totaling $100,000, $410,000 and $0, respectively. The impairment charges were recorded as a result of appraisals on buildings and were recognized in Other Expense on the Statements of Income.

Note 8 — Mortgage Servicing Rights

The unpaid principal balance of residential mortgage loans serviced for third parties was $734.30 million at December 31, 2018, compared to $752.99 million at December 31, 2017, and $761.85 million at December 31, 2016.

58

Amortization expense on MSRs is expected to total $0.60 million, $0.53 million, $0.46 million, $0.40 million, and $0.35 million in 2019, 2020, 2021, 2022 and 2023, respectively. Projected amortization excludes the impact of future asset additions or disposals.

The following table shows changes in the carrying value of MSRs and the associated valuation allowance.

(Dollars in thousands)	2018			2017
Mortgage servicing rights:
Balance at beginning of year	$	4,349		$	4,297
Additions	890			1,144
Amortization	(956		)	(1,092		)
Sales	—			—
Carrying value before valuation allowance at end of year	4,283			4,349
Valuation allowance:
Balance at beginning of year	—			—
Impairment recoveries	—			—
Balance at end of year	$	—		$	—
Net carrying value of mortgage servicing rights at end of year	$	4,283		$	4,349
Fair value of mortgage servicing rights at end of year	$	7,238		$	7,187

At December 31, 2018, the fair value of MSRs exceeded the carrying value reported in the Statements of Financial Condition by $2.96 million. This difference represents increases in the fair value of certain MSRs that could not be recorded above cost basis.

Funds held in trust at 1st Source for the payment of principal, interest, taxes and insurance premiums applicable to mortgage loans being serviced for others, were approximately $10.28 million and $10.42 million at December 31, 2018 and December 31, 2017, respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were $2.61 million, $2.70 million, and $2.69 million for 2018, 2017, and 2016, respectively. Mortgage loan contractual servicing fees are included in Mortgage Banking Income on the Consolidated Statements of Income.

Note 9 — Intangible Assets and Goodwill

At December 31, 2018, intangible assets consisted of goodwill of $83.87 million and other intangible assets of $0.13 million, which was net of accumulated amortization of $0.07 million. At December 31, 2017, intangible assets consisted of goodwill of $83.68 million and other intangible assets of $0.06 million, which was net of accumulated amortization of $9.48 million. Intangible asset amortization was $0.08 million, $0.36 million, and $0.58 million for 2018, 2017, and 2016, respectively. Amortization on other intangible assets is expected to total $0.03 million, $0.02 million, $0.02 million, $0.02 million, and $0.02 million in 2019, 2020, 2021, 2022, and 2023, respectively.

The following table shows a summary of core deposit intangible and other intangible assets as of December 31.

(Dollars in thousands)	2018			2017
Core deposit intangibles:
Gross carrying amount	$	—		$	8,689
Less: accumulated amortization	—			(8,657		)
Net carrying amount	$	—		$	32
Other intangibles:
Gross carrying amount	$	204		$	857
Less: accumulated amortization	(71		)	(827		)
Net carrying amount	$	133		$	30

Note 10 — Deposits

The aggregate amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more outstanding at December 31, 2018 and 2017 was $666.89 million and $553.80 million, respectively.

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The following table shows the amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more outstanding at December 31, 2018, by time remaining until maturity.

(Dollars in thousands)
Under 3 months	$	135,940
4 – 6 months	87,102
7 – 12 months	144,960
Over 12 months	298,890
Total	$	666,892

The following table shows scheduled maturities of time deposits, including both private and public funds, at December 31, 2018.

(Dollars in thousands)
2019	$	755,605
2020	489,445
2021	125,404
2022	52,512
2023	37,145
Thereafter	7,655
Total	$	1,467,766

Note 11 — Borrowed Funds and Mandatorily Redeemable Securities

The following table shows the details of long-term debt and mandatorily redeemable securities as of December 31, 2018 and 2017.

(Dollars in thousands)	2018		2017
Federal Home Loan Bank borrowings (1.04% – 5.04%)	$	46,444	$	47,114
Mandatorily redeemable securities	16,542		18,948
Other long-term debt	8,137		3,998
Total long-term debt and mandatorily redeemable securities	$	71,123	$	70,060

Annual maturities of long-term debt outstanding at December 31, 2018, for the next five years and thereafter beginning in 2019, are as follows (in thousands): $2,565; $2,460; $2,748; $4,410; $1,630; and $57,310.

At December 31, 2018, the Federal Home Loan Bank borrowings represented a source of funding for community economic development activities, agricultural loans and general funding for the bank and consisted of 17 fixed rate notes with maturities ranging from 2021 to 2027. These notes were collateralized by $58.04 million of certain real estate loans.

Mandatorily redeemable securities as of December 31, 2018 and 2017, of $16.54 million and $18.95 million, respectively reflected the “book value” shares under the 1st Source Executive Incentive Plan. See Note 16 - Stock Based Compensation (Stock Award Plans) for additional information. Dividends paid on these shares and changes in book value per share are recorded as other interest expense. Total interest expense recorded for 2018, 2017, and 2016 was $1.61 million, $1.68 million, and $1.45 million, respectively.

The following table shows the details of short-term borrowings as of December 31, 2018 and 2017.

	2018				2017
(Dollars in thousands)	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Federal funds purchased	$	10,000	2.70	%	$	56,000	1.63	%
Security repurchase agreements	103,627		0.25		149,834		0.20
Commercial paper	4,325		0.29		6,115		0.27
Federal Home Loan Bank advances	80,000		2.57		—		—
Other short-term borrowings	1,392		—		2,646		—
Total short-term borrowings	$	199,344	1.30	%	$	214,595	0.57	%

Note 12 — Variable Interest Entities

A variable interest entity (VIE) is a partnership, limited liability company, trust or other legal entity that meets any one of the following criteria:

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• The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.

• The entity’s investors lack the power to direct the activities that most significantly affect the entity’s economic performance.

• The entity’s at-risk holders do not have the obligation to absorb the losses or the right to receive residual returns.

• The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entity’s activities involve, or are conducted on behalf of, investors with disproportionately few voting rights.

The Company is involved in various entities that are considered to be VIEs. The Company’s investments in VIEs are primarily related to investments promoting affordable housing, community development and renewable energy sources. Some of these tax-advantaged investments support the Company’s regulatory compliance with the Community Reinvestment Act. The Company’s investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits are recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related investment asset. The Company recognized federal income tax credits related to its affordable housing and community development tax-advantaged investments in tax expense of $1.29 million, $1.15 million and $1.03 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Company also recognized $10.45 million, $18.16 million and $2.91 million of investment tax credits for the years ended December 31, 2018, 2017 and 2016, respectively.

The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. As a limited partner in these operating partnerships, we are allocated credits and deductions associated with the underlying properties. The Company has determined that it is not the primary beneficiary of these investments because the general partners have the power to direct activities that most significantly influence the economic performance of their respective partnerships.

The Company’s investments in these unconsolidated VIEs are carried in Other Assets on the Consolidated Statements of Financial Condition. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are generally carried in Other Liabilities on the Consolidated Statements of Financial Condition. The Company’s maximum exposure to loss from these unconsolidated VIEs include the investment recorded on the Company’s Consolidated Statements of Financial Condition, net of unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business, housing projects and renewable energy projects completely fail and do not meet certain taxing authority compliance requirements resulting in recapture of the related tax credits.

The following table provides a summary of investments in affordable housing, community development and renewable energy VIEs that the Company has not consolidated as of December 31, 2018 and 2017.

(Dollars in thousands)	2018		2017
Investment carrying amount	$	15,083	$	23,759
Unfunded capital and other commitments	6,449		15,712
Maximum exposure to loss	40,705		29,926

The Company is required to consolidate VIEs in which it has concluded it has significant involvement in and the ability to direct the activities that impact the entity’s economic performance. The Company is the managing general partner of an entity to which it shares interest in tax-advantaged investments with a third party. At December 31, 2018, approximately $8.38 million of the Company’s assets and $6.70 million of its liabilities included on the Consolidated Statements of Financial Condition were related to the tax-advantaged investment VIE which the Company has consolidated. No amounts were outstanding as of December 31, 2017. The assets of the consolidated VIE are reported in Other Assets, the liabilities are reported in Other Liabilities and the non-controlling interest is reported in Equity on the Consolidated Statements of Financial Condition. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIE do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIE is generally limited to the carrying value of its variable interest plus any related tax credits previously recognized.

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Additionally, the Company sponsors one trust, 1st Source Master Trust (Capital Trust) of which 100% of the common equity is owned by the Company. The Capital Trust was formed in 2007 for the purpose of issuing corporation-obligated mandatorily redeemable capital securities (the capital securities) to third-party investors and investing the proceeds from the sale of the capital securities solely in junior subordinated debenture securities of the Company (the subordinated notes). The subordinated notes held by the Capital Trust are the sole assets of the Capital Trust. The Capital Trust qualifies as a variable interest entity for which the Company is not the primary beneficiary and therefore reported in the financial statements as an unconsolidated subsidiary. The junior subordinated debentures are reflected as subordinated notes in the Statements of Financial Condition with the corresponding interest distributions reflected as Interest Expense in the Statements of Income. The common shares issued by the Capital Trust are included in Other Assets in the Statements of Financial Condition.

Distributions on the capital securities issued by the Capital Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Capital Trust on the subordinated notes held by the Capital Trust. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated notes. The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The capital securities held by the Capital Trust qualify as Tier 1 capital under Federal Reserve Board guidelines.

The following table shows subordinated notes at December 31, 2018.

(Dollars in thousands)	Amount of Subordinated Notes		Interest Rate		Maturity Date
June 2007 issuance (1)	$	41,238	7.22	%	6/15/2037
August 2007 issuance (2)	17,526		4.27	%	9/15/2037
Total	$	58,764

(1) Fixed rate through life of debt.

(2) 3-Month LIBOR +1.48% through remaining life of debt.

Note 13 — Earnings Per Share

Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards. Non-vested restricted stock awards are considered participating securities to the extent the holders of these securities receive non-forfeitable dividends at the same rate as holders of common stock. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

Stock options, where the exercise price was greater than the average market price of the common shares, were excluded from the computation of diluted earnings per common share because the result would have been antidilutive. No stock options were considered antidilutive as of December 31, 2018, 2017 and 2016.

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share for the three years ending December 31.

(Dollars in thousands - except per share amounts)	2018		2017		2016
Distributed earnings allocated to common stock	$	24,894	$	19,701	$	18,707
Undistributed earnings allocated to common stock	56,975		47,830		38,670
Net earnings allocated to common stock	81,869		67,531		57,377
Net earnings allocated to participating securities	545		520		409
Net income allocated to common stock and participating securities	$	82,414	$	68,051	$	57,786
Weighted average shares outstanding for basic earnings per common share	25,937,599		25,925,820		25,879,397
Dilutive effect of stock compensation	—		—		—
Weighted average shares outstanding for diluted earnings per common share	25,937,599		25,925,820		25,879,397
Basic earnings per common share	$	3.16	$	2.60	$	2.22
Diluted earnings per common share	$	3.16	$	2.60	$	2.22

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Note 14 — Accumulated Other Comprehensive Income

The following table presents reclassifications out of accumulated other comprehensive income related to unrealized gains and losses on available-for-sale securities for the two years ending December 31.

(Dollars in thousands)	2018			2017			Affected Line Item in the Statements of Income
Realized (losses) gains included in net income	$	(345	)	$	4,340		(Losses) gains on investment securities available-for-sale
	(345		)	4,340			Income before income taxes
Tax effect	83			(1,629		)	Income tax expense
Net of tax	$	(262	)	$	2,711		Net income

Note 15 — Employee Benefit Plans

The 1st Source Corporation Employee Stock Ownership and Profit Sharing Plan (as amended, the “Plan”) includes an employee stock ownership component, which is designed to invest in and hold 1st Source common stock, and a 401(k) plan component, which holds all Plan assets not invested in 1st Source common stock. The Plan encourages diversification of investments with opportunities to change investment elections and contribution levels.

Employees are eligible to participate in the Plan the first of the month following 90 days of employment. The Company matches dollar for dollar on the first 4% of deferred compensation, plus 50 cents on the dollar of the next 2% deferrals. The Company will also contribute to the Plan an amount designated as a fixed 2% employer contribution. The amount of fixed contribution is equal to two percent of the participant’s eligible compensation. Additionally, each year the Company may, in its sole discretion, make a discretionary profit sharing contribution. As of December 31, 2018 and 2017, there were 1,007,611 and 1,126,939 shares, respectively, of 1st Source Corporation common stock held in relation to employee benefit plans.

The Company contributions are allocated among the participants on the basis of compensation. Each participant’s account is credited with cash and/or shares of 1st Source common stock based on that participant’s compensation earned during the year. After completing 5 years of service in which they worked at least 1,000 hours per year, a participant will be completely vested in the Company’s contribution. An employee is always 100% vested in their deferral. Plan participants are entitled to receive distributions from their Plan accounts upon termination of service, retirement, or death.

Contribution expense for the years ended December 31, 2018, 2017, and 2016, amounted to $4.87 million, $4.88 million, and $4.71 million, respectively.

In addition to the 1st Source Corporation Employee Stock Ownership and Profit Sharing Plan, the Company provides a limited health care and life insurance benefit for some of its retired employees. Effective March 31, 2009, the Company amended the plan so that no new retirees would be covered by the plan. The amendment will have no effect on the coverage for retirees covered at the time of the amendment. Prior to amendment, all full-time employees became eligible for these retiree benefits upon reaching age 55 with 20 years of credited service. The retiree medical plan pays a stated percentage of eligible medical expenses reduced by any deductibles and payments made by government programs and other group coverage. The lifetime maximum benefit payable under the medical plan is $15,000 and for life insurance is $3,000.

The Company’s net periodic post retirement benefit (recovery) cost recognized in Salaries and Employee Benefits in the Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016, amounted to $(0.01) million, $(0.01) million, and $(0.01) million, respectively. The accrued post retirement benefit cost was not material at December 31, 2018, 2017, and 2016.

Note 16 — Stock Based Compensation

As of December 31, 2018, the Company had four active stock-based employee compensation plans. These plans include three executive stock award plans, the Executive Incentive Plan (EIP), the Restricted Stock Award Plan (RSAP), the Strategic Deployment Incentive Plan (SDP); and the Employee Stock Purchase Plan (ESPP). The 2011 Stock Option Plan was approved by the shareholders on April 21, 2011 but the Company had not made any grants through December 31, 2018. These stock-based employee compensation plans were established to help retain and motivate key employees. All of the plans have been approved by the shareholders of 1st Source Corporation. The Executive Compensation and Human Resources Committee (the “Committee”) of the 1st Source Corporation Board of Directors has sole authority to select the employees, establish the awards to be issued, and approve the terms and conditions of each award under the stock-based compensation plans.

Stock-based compensation to employees is recognized as compensation cost in the Statements of Income based on their fair values on the measurement date, which, for 1st Source, is the date of grant. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. The total fair value of share awards vested was $3.53 million during 2018, $2.37 million in 2017, and $4.53 million in 2016.

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The following table shows the combined summary of activity regarding active stock option and stock award plans.

			Non-Vested Stock Awards Outstanding
	Shares Available for Grant		Number of Shares		Weighted-Average Grant-Date Fair Value
Balance, January 1, 2016	2,450,799		358,861		$	21.93
Shares authorized - 2016 EIP	59,342		—		—
Shares authorized - Restricted Stock Award Plan(1)	229,439		—		—
Granted	(79,118	)	79,118		26.19
Stock awards vested	—		(155,981	)	20.47
Forfeited	3,543		(5,383	)	23.39
Canceled	(1,950,000	)	—		—
Balance, December 31, 2016	714,005		276,615		23.94
Shares authorized - 2017 EIP	59,064		—		—
Granted	(98,625	)	98,625		33.54
Stock awards vested	—		(76,858	)	22.71
Forfeited	2,000		(2,456	)	29.93
Balance, December 31, 2017	676,444		295,926		27.41
Shares authorized - 2018 EIP	70,461		—		—
Granted	(74,981	)	74,981		29.11
Stock awards vested	—		(106,513	)	25.79
Forfeited	3,135		(10,575	)	27.51
Balance, December 31, 2018	675,059		253,819		$	28.59

(1) Shares issuable under the Plan, after taking into account previously granted and forfeited shares, were adjusted to 250,000 shares effective November 9, 2016.

Stock Option Plans — Incentive stock option plans include the 2011 Stock Option Plan (the “2011 Plan”). Shares available for issuance under the 2011 Plan were reduced from 2,200,000 shares to 250,000 shares effective November 9, 2016.

Each award from the plan is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Committee determines. The option price is equal to the fair market value of a share of 1st Source Corporation’s common stock on the date of grant. Options granted expire at such time as the Committee determines at the date of grant and in no event does the exercise period exceed a maximum of ten years. Upon merger, consolidation, or other corporate consolidation in which 1st Source Corporation is not the surviving corporation, as defined in the plans, all outstanding options immediately vest.

There were zero stock options exercised during 2018, 2017 or 2016. All shares issued in connection with stock option exercises and non-vested stock awards are issued from available treasury stock.

No stock-based compensation expense related to stock options was recognized in 2018, 2017 or 2016.

The fair value of each option on the date of grant is estimated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility estimated over a period equal to the expected life of the options. In estimating the fair value of stock options under the Black-Scholes valuation model, separate groups of employees that have similar historical exercise behavior are considered separately. The expected life of the options granted is derived based on past experience and represents the period of time that options granted are expected to be outstanding.

Stock Award Plans — Incentive stock award plans include the EIP, the SDP and the RSAP. The EIP is administered by the Committee. Awards under the EIP and SDP include “book value” shares and “market value” shares of common stock. These shares are awarded annually based on weighted performance criteria and generally vest over a period of five years. The EIP book value shares may only be sold to 1st Source and such sale is mandatory in the event of death, retirement, disability, or termination of employment. The RSAP is designed for key employees. Awards under the RSAP are made to employees recommended by the Chief Executive Officer and approved by the Committee. Shares granted under the RSAP vest over two to ten years and vesting is based upon meeting certain various criteria, including continued employment with 1st Source. Shares issuable under the RSAP, after taking into account previously granted and forfeited shares, were adjusted to 250,000 shares effective November 9, 2016.

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Stock-based compensation expense relating to the EIP, SDP and RSAP totaled $3.55 million in 2018, $2.96 million in 2017, and $2.88 million in 2016. The total income tax benefit recognized in the accompanying Statements of Income related to stock-based compensation was $0.86 million in 2018, $1.11 million in 2017, and $1.07 million in 2016. Unrecognized stock-based compensation expense related to non-vested stock awards (EIP/SDP/RSAP) was $5.13 million at December 31, 2018. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 3.00 years.

The fair value of non-vested stock awards for the purposes of recognizing stock-based compensation expense is market price of the stock on the measurement date, which, for the Company’s purposes is the date of the award.

Employee Stock Purchase Plan — The Company offers an ESPP for substantially all employees with at least two years of service on the effective date of an offering under the plan. Eligible employees may elect to purchase any dollar amount of stock, so long as such amount does not exceed 25% of their base rate of pay and the aggregate stock accrual rate for all offerings does not exceed $25,000 in any calendar year. The purchase price for shares offered is the lower of the closing market bid price for the offering date or the average market bid price for the five business days preceding the offering date. The purchase price and premium/(discount) to the actual market closing price on the offering date for the 2018, 2017, and 2016 offerings were $53.84 (-0.09%), $46.18 (-1.32%), and $33.87 (-0.29%), respectively. Payment for the stock is made through payroll deductions over the offering period, and employees may discontinue the deductions at any time and exercise the option or take the funds out of the program. The most recent offering began June 1, 2018 and runs through June 1, 2020, with $206,402 in stock value to be purchased at $53.84 per share.

Note 17 — Income Taxes

The following table shows the composition of income tax expense.

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Current:
Federal	$	20,167		$	26,012		$	25,479
State	2,996			4,530			3,005
Total current	23,163			30,542			28,484
Deferred:
Federal	(875		)	5,869			2,530
State	1,200			(488		)	326
Deferred tax liability remeasurement	(875		)	(2,614		)	—
Total deferred	(550		)	2,767			2,856
Total provision	$	22,613		$	33,309		$	31,340

The following table shows the reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate (21% for 2018 and 35% for 2017 and 2016) to income before income taxes.

	2018					2017					2016
Year Ended December 31 (Dollars in thousands)	Amount			Percent of Pretax Income		Amount			Percent of Pretax Income		Amount			Percent of Pretax Income
Statutory federal income tax	$	22,056		21.0	%	$	35,476		35.0	%	$	31,194		35.0	%
(Decrease) increase in income taxes resulting from:
Tax-exempt interest income	(650		)	(0.6	)	(1,197		)	(1.2	)	(1,235		)	(1.4	)
State taxes, net of federal income tax benefit	3,315			3.2		2,627			2.6		2,165			2.4
Deferred tax liability remeasurement	(875		)	(0.8	)	(2,614		)	(2.6	)	—			—
Other	(1,233		)	(1.3	)	(983		)	(0.9	)	(784		)	(0.8	)
Total	$	22,613		21.5	%	$	33,309		32.9	%	$	31,340		35.2	%

The tax expense related to (losses) gains on investment securities available-for-sale for the years 2018, 2017, and 2016 was approximately $(83,000), $1,629,000, and $674,000, respectively.

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The following table shows the composition of deferred tax assets and liabilities as of December 31, 2018 and 2017.

(Dollars in thousands)	2018			2017
Deferred tax assets:
Reserve for loan and lease losses	$	25,386		$	23,791
Accruals for employee benefits	2,974			2,369
Net unrealized losses on securities available-for-sale	3,386			1,285
Other	127			622
Total deferred tax assets	31,873			28,067
Deferred tax liabilities:
Differing depreciable bases in premises and leased equipment	21,184			22,641
Differing bases in assets related to acquisitions	4,021			3,954
Tax advantaged partnerships	4,354			1,921
Mortgage servicing	586			745
Capitalized loan costs	1,110			867
Prepaid expenses	273			387
Other	364			222
Total deferred tax liabilities	31,892			30,737
Net deferred tax liability	$	(19	)	$	(2,670	)

No valuation allowance for deferred tax assets was recorded at December 31, 2018 and 2017 as the Company believes it is more likely than not that all of the deferred tax assets will be realized.

The following table shows a reconciliation of the beginning and ending amounts of unrecognized tax benefits.

(Dollars in thousands)	2018			2017		2016
Balance, beginning of year	$	1,112		$	762	$	380
Additions based on tax positions related to the current year	—			350		382
Additions for tax positions of prior years	—			—		—
Reductions for tax positions of prior years	—			—		—
Reductions due to lapse in statute of limitations	—			—		—
Settlements	(1,112		)	—		—
Balance, end of year	$	—		$	1,112	$	762

The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was $0.00 million at December 31, 2018, $0.72 million at December 31, 2017, and $0.50 million at December 31, 2016. Interest and penalties are recognized through the income tax provision. For the years 2018, 2017 and 2016, the Company recognized approximately $(0.09) million, $0.05 million and $0.04 million in interest, net of tax effect, and penalties, respectively. There was $0.00 million, $0.09 million and $0.04 million accrued interest and penalties at December 31, 2018, 2017 and 2016, respectively.

Tax years that remain open and subject to audit include the federal 2015-2018 years and the Indiana 2015-2018 years. Additionally, in 2018 the Company reached a state tax settlement for the 2015-2017 years and as a result, recorded a reduction of unrecognized tax benefits in the amount of $1.11 million. The Company does not anticipate a significant change in the amount of uncertain tax positions within the next 12 months.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%. At December 31, 2017, the Company had not fully completed its accounting for the tax effects of enactment of the Act and recorded a provisional benefit of $2.61 million which is included as a component of Income Tax Expense in the Consolidated Statements of Income related to the remeasurement of its deferred tax balance. During the third quarter of 2018, the Company completed its accounting for the provisional amounts recognized at December 31, 2017 and recorded an additional $0.88 million benefit as provided by the SEC’s Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

Note 18 — Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk

Contingent Liabilities —1st Source and its subsidiaries are defendants in various legal proceedings arising in the normal course of business. In the opinion of management, based upon present information including the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Company’s consolidated financial position or results of operations.

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1st Source Bank sells residential mortgage loans to Fannie Mae as well as FHA-insured, USDA-insured and VA-guaranteed loans in Ginnie Mae mortgage-backed securities. Additionally, the Bank has sold loans on a service released basis to various other financial institutions in the past. The agreements under which the Bank sells these mortgage loans contain various representations and warranties regarding the acceptability of loans for purchase. On occasion, the Bank may be required to indemnify the loan purchaser for credit losses on loans that were later deemed ineligible for purchase or may be required to repurchase a loan. Both circumstances are collectively referred to as “repurchases.”

The Company’s liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was $0.29 million and $0.39 million as of December 31, 2018 and 2017, respectively. The mortgage repurchase liability represents the Company’s best estimate of the loss that it may incur. The estimate is based on specific loan repurchase requests and a historical loss ratio with respect to origination dollar volume. Because the level of mortgage loan repurchase losses are dependent on economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment.

Commitments — 1st Source and its subsidiaries are obligated under operating leases for certain office premises and equipment. The Company also leases certain owned premises and receives rental income from such lease agreements. Future minimum rental commitments for all noncancellable operating leases total approximately, $3.45 million in 2019, $3.26 million in 2020, $2.07 million in 2021, $0.81 million in 2022, $0.42 million in 2023, and $1.71 million, thereafter.

The following table shows rental expense of office premises and equipment and rental income from owned premises.

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Gross rental expense	$	3,727		$	4,183		$	3,995
Gross rental income	(873		)	(856		)	(921		)
Net rental expense	$	2,854		$	3,327		$	3,074

Financial Instruments with Off-Balance-Sheet Risk — To meet the financing needs of our clients, 1st Source and its subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business. These off-balance-sheet financial instruments include commitments to originate and sell loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.

Financial instruments, whose contract amounts represent credit risk as of December 31, were as follows:

(Dollars in thousands)	2018		2017
Amounts of commitments:
Loan commitments to extend credit	$	1,095,053	$	1,030,334
Standby letters of credit	$	31,133	$	29,961
Commercial and similar letters of credit	$	2,500	$	1,837

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments and standby letters of credit is represented by the dollar amount of those instruments. The Company uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company grants mortgage loan commitments to borrowers subject to normal loan underwriting standards. The interest rate risk associated with these loan commitments is managed by entering into contracts for future deliveries of loans.

Standby letters of credit are conditional commitments issued to guarantee the performance of a client to a third party. The credit risk involved in and collateral obtained when issuing standby letters of credit are essentially the same as those involved in extending loan commitments to clients. Standby letters of credit generally have terms ranging from six months to one year.

Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. Commercial letters of credit generally have terms ranging from three months to six months.

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Note 19 — Derivative Financial Instruments

Commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments. See Note 18 for further information.

The Company has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Statements of Financial Condition and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s results of operations.

The following table shows the amounts of non-hedging derivative financial instruments at December 31, 2018 and 2017.

			Asset derivatives			Liability derivatives
(Dollars in thousands)	Notional or contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification	Fair value
Interest rate swap contracts	$	855,848	Other assets	$	7,124	Other liabilities	$	7,250
Loan commitments	5,871		Mortgages held for sale	112		N/A	—
Forward contracts - mortgage loan	14,087		N/A	—		Mortgages held for sale	135
Total - December 31, 2018	$	875,806		$	7,236		$	7,385
Interest rate swap contracts	$	756,550	Other assets	$	5,167	Other liabilities	$	5,262
Loan commitments	8,504		Mortgages held for sale	66		N/A	—
Forward contracts - mortgage loan	19,390		N/A	—		Mortgages held for sale	10
Total - December 31, 2017	$	784,444		$	5,233		$	5,272

The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments at December 31, 2018, 2017 and 2016.

		Gain (loss)
(Dollars in thousands)	Statement of Income classification	2018			2017			2016
Interest rate swap contracts	Other expense	$	(30	)	$	26		$	64
Interest rate swap contracts	Other income	1,028			1,585			730
Loan commitments	Mortgage banking	46			23			(4		)
Forward contracts - mortgage loan	Mortgage banking	(125		)	(232		)	209
Total		$	919		$	1,402		$	999

The following table shows the offsetting of financial assets and derivative assets at December 31, 2018 and 2017.

							Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
December 31, 2018
Interest rate swaps	$	7,128	$	4	$	7,124	$	177	$	610	$	6,337
December 31, 2017
Interest rate swaps	$	5,194	$	27	$	5,167	$	—	$	—	$	5,167

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The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2018 and 2017.

							Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount
December 31, 2018
Interest rate swaps	$	7,254	$	4	$	7,250	$	1,700	$	—	$	5,550
Repurchase agreements	103,627		—		103,627		103,627		—		—
Total	$	110,881	$	4	$	110,877	$	105,327	$	—	$	5,550
December 31, 2017
Interest rate swaps	$	5,289	$	27	$	5,262	$	—	$	2,705	$	2,557
Repurchase agreements	149,835		—		149,835		149,835		—		—
Total	$	155,124	$	27	$	155,097	$	149,835	$	2,705	$	2,557

If a default in performance of any obligation of a repurchase or derivative agreement occurs, each party will set-off property held, or loan indebtedness owing, in respect of transactions against obligations owing in respect of any other transactions. At December 31, 2018 and December 31, 2017, repurchase agreements had a remaining contractual maturity of $102.34 million and $148.22 million in overnight, $1.29 million and $1.32 million in up to 30 days and $0.00 million and $0.30 million in greater than 90 days, respectively and were collateralized by U.S. Treasury and Federal agencies securities.

Note 20 — Regulatory Matters

The Company is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total capital, Tier 1 capital, and common equity Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. The Company believes that it meets all capital adequacy requirements to which it is subject.

The most recent notification from the Federal bank regulators categorized 1st Source Bank, the largest of its subsidiaries, as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that the Company believes will have changed the institution’s category.

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As discussed in Note 12, the capital securities held by the Capital Trusts qualify as Tier 1 capital under Federal Reserve Board guidelines. The following table shows the actual and required capital amounts and ratios for 1st Source Corporation and 1st Source Bank as of December 31, 2018 and 2017.

	Actual				Minimum Capital Adequacy				Minimum Capital Adequacy with Capital Buffer(1)				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
2018
Total Capital (to Risk-Weighted Assets):
1st Source Corporation	$	821,975	14.68	%	$	447,909	8.00	%	$	552,888	9.875	%	$	559,887	10.00	%
1st Source Bank	744,326		13.29		448,152		8.00		553,188		9.875		560,190		10.00
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	751,575		13.42		335,932		6.00		440,911		7.875		447,909		8.00
1st Source Bank	673,888		12.03		336,114		6.00		441,150		7.875		448,152		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	693,067		12.38		251,949		4.50		356,928		6.375		363,926		6.50
1st Source Bank	672,380		12.00		252,086		4.50		357,121		6.375		364,124		6.50
Tier 1 Capital (to Average Assets):
1st Source Corporation	751,575		12.06		249,185		4.00		N/A		N/A		311,481		5.00
1st Source Bank	673,888		10.82		249,052		4.00		N/A		N/A		311,315		5.00
2017
Total Capital (to Risk-Weighted Assets):
1st Source Corporation	$	764,853	14.70	%	$	416,174	8.00	%	$	481,201	9.250	%	$	520,218	10.00	%
1st Source Bank	696,248		13.36		416,902		8.00		482,043		9.250		521,127		10.00
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	699,420		13.44		312,131		6.00		377,158		7.250		416,174		8.00
1st Source Bank	630,702		12.10		312,676		6.00		377,817		7.250		416,902		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	642,420		12.35		234,098		4.50		299,125		5.750		338,142		6.50
1st Source Bank	630,702		12.10		234,507		4.50		299,648		5.750		338,733		6.50
Tier 1 Capital (to Average Assets):
1st Source Corporation	699,420		12.17		229,890		4.00		N/A		N/A		287,362		5.00
1st Source Bank	630,702		10.98		229,789		4.00		N/A		N/A		287,236		5.00

(1) The capital conservation buffer requirement will be phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis.

The Bank was not required to maintain noninterest bearing cash balances with the Federal Reserve Bank as of December 31, 2018 and 2017.

Dividends that may be paid by a subsidiary bank to the parent company are subject to certain legal and regulatory limitations and also may be affected by capital needs, as well as other factors.

Due to the Company’s mortgage activities, 1st Source Bank is required to maintain minimum net worth capital requirements established by various governmental agencies. 1st Source Bank’s net worth requirements are governed by the Department of Housing and Urban Development and GNMA. As of December 31, 2018, 1st Source Bank met its minimum net worth capital requirements.

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Note 21 — Fair Value Measurements

The Company determines the fair values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. The Company elected fair value accounting for mortgages held for sale. The Company believes the election for mortgages held for sale (which are economically hedged with free-standing derivatives) will reduce certain timing differences and better match changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. At December 31, 2018 and 2017, all mortgages held for sale are carried at fair value.

The following table shows the differences between fair value carrying amount of mortgages held for sale measured at fair value and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity on December 31, 2018 and 2017.

(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Excess of fair value carrying amount over (under) unpaid principal
December 31, 2018
Mortgages held for sale reported at fair value:
Total Loans	$	11,290	$	11,076	$	214	(1)
December 31, 2017
Mortgages held for sale reported at fair value:
Total Loans	$	13,123	$	12,967	$	156	(1)

(1) The excess of fair value carrying amount over (under) unpaid principal is included in mortgage banking income and includes changes in fair value at and subsequent to funding and gains and losses on the related loan commitment prior to funding.

Financial Instruments on Recurring Basis:

The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis:

Investment securities available-for-sale are valued primarily by a third-party pricing agent. Prices supplied by the independent pricing agent, as well as their pricing methodologies and assumptions, are reviewed by the Company for reasonableness and to ensure such prices are aligned with market levels. In general, the Company’s investment securities do not possess a complex structure that could introduce greater valuation risk. The portfolio mainly consists of traditional investments including U.S. Treasury and Federal agencies securities, federal agency mortgage pass-through securities, and general obligation and revenue municipal bonds. Pricing for such instruments is fairly generic and is easily obtained. On a quarterly basis, prices supplied by the pricing agent are validated by comparison to prices obtained from other third party sources for a material portion of the portfolio.

The valuation policy and procedures for Level 3 fair value measurements of available-for-sale debt securities are decided through collaboration between management of the Corporate Accounting and Funds Management departments. The changes in fair value measurement for Level 3 securities are analyzed on a periodic basis under a collaborative framework with the aforementioned departments. The methodology and variables used for input are derived from the combination of observable and unobservable inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external factors, such as market movement and credit rating adjustments.

Both the market and income valuation approaches are implemented using the following types of inputs:

• U.S. treasuries are priced using the market approach and utilizing live data feeds from active market exchanges for identical securities.

• Government-sponsored agency debt securities and corporate bonds are primarily priced using available market information through processes such as benchmark curves, market valuations of like securities, sector groupings and matrix pricing.

• Other government-sponsored agency securities, mortgage-backed securities and some of the actively traded REMICs and CMOs, are primarily priced using available market information including benchmark yields, prepayment speeds, spreads and volatility of similar securities.

• Inactively traded government-sponsored agency securities are primarily priced using consensus pricing and dealer quotes.

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• State and political subdivisions are largely grouped by characteristics, i.e., geographical data and source of revenue in trade dissemination systems. Since some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities. Local direct placement municipal securities, with very little market activity, are priced using an appropriate market yield curve which incorporates a credit spread assumption.

Mortgages held for sale and the related loan commitments and forward contracts (hedges) are valued using a market value approach and utilizing an appropriate current market yield and a loan commitment closing rate based on historical analysis.

Interest rate swap positions, both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their basis readily observable market parameters. This valuation process considers various factors including interest rate yield curves, time value and volatility factors. Validation of third-party agent valuations is accomplished by comparing those values to the Company’s swap counterparty valuations. Management believes an adjustment is required to “mid-market” valuations for derivatives tied to its performing loan portfolio to recognize the imprecision and related exposure inherent in the process of estimating expected credit losses as well as velocity of deterioration evident with systemic risks embedded in these portfolios. Any change in the mid-market derivative valuation adjustment will be recognized immediately through the Consolidated Statements of Income.

The following table shows the balance of assets and liabilities measured at fair value on a recurring basis.

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2018
Assets:
Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities	$	33,746	$	497,477	$	—	$	531,223
U.S. States and political subdivisions securities	—		93,557		1,025		94,582
Mortgage-backed securities - Federal agencies	—		318,233		—		318,233
Corporate debt securities	—		45,392		—		45,392
Foreign government and other securities	—		699		—		699
Total debt securities available-for-sale	33,746		955,358		1,025		990,129
Mortgages held for sale	—		11,290		—		11,290
Accrued income and other assets (interest rate swap agreements)	—		7,124		—		7,124
Total	$	33,746	$	973,772	$	1,025	$	1,008,543
Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	$	—	$	7,250	$	—	$	7,250
Total	$	—	$	7,250	$	—	$	7,250
December 31, 2017
Assets:
Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities	$	27,971	$	440,148	$	—	$	468,119
U.S. States and political subdivisions securities	—		113,845		2,155		116,000
Mortgage-backed securities - Federal agencies	—		287,910		—		287,910
Corporate debt securities	—		31,294		—		31,294
Foreign government and other securities	—		—		710		710
Total debt securities available-for-sale	27,971		873,197		2,865		904,033
Mortgages held for sale	—		13,123		—		13,123
Accrued income and other assets (interest rate swap agreements)	—		5,167		—		5,167
Total	$	27,971	$	891,487	$	2,865	$	922,323
Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	$	—	$	5,262	$	—	$	5,262
Total	$	—	$	5,262	$	—	$	5,262

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The following table shows the changes in Level 3 assets and liabilities measured at fair value on a recurring basis.

(Dollars in thousands)	U.S. States and political subdivisions securities			Foreign government and other securities			Investment securities available-for-sale
Beginning balance January 1, 2018	$	2,155		$	710		$	2,865
Total gains or losses (realized/unrealized):
Included in earnings	—			—			—
Included in other comprehensive income	6			(11		)	(5		)
Purchases	—			200			200
Issuances	—			—			—
Sales	—			—			—
Settlements	—			—			—
Maturities	(1,136		)	(200		)	(1,336		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			(699		)	(699		)
Ending balance December 31, 2018	$	1,025		$	—		$	1,025
Beginning balance January 1, 2017	$	2,699		$	807		$	3,506
Total gains or losses (realized/unrealized):
Included in earnings	—			—			—
Included in other comprehensive income	31			3			34
Purchases	1,437			500			1,937
Issuances	—			—			—
Sales	—			—			—
Settlements	—			—			—
Maturities	(2,012		)	(600		)	(2,612		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Ending balance December 31, 2017	$	2,155		$	710		$	2,865

There were no gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at December 31, 2018 or 2017. A foreign government debt security was transferred from Level 3 to Level 2 during 2018 due to the Company’s periodic review of valuation methodologies and inputs. The Company determined that the observable inputs used in determining fair value warranted a transfer to Level 2 as the unobservable inputs were deemed to be insignificant to the overall fair value measurement. No transfers between levels occurred during 2017.

The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a recurring basis.

(Dollars in thousands)	Fair value		Valuation Methodology	Unobservable Inputs	Range of Inputs
December 31, 2018
Debt securities available-for-sale
Direct placement municipal securities	$	1,025	Discounted cash flows	Credit spread assumption	0.17% - 3.02%
December 31, 2017
Debt securities available-for-sale
Direct placement municipal securities	$	2,155	Discounted cash flows	Credit spread assumption	2.21% - 2.93%
Foreign government	$	710	Discounted cash flows	Market yield assumption	0.35% - 1.23%

The sensitivity to changes in the unobservable inputs and their impact on the fair value measurement can be significant. The significant unobservable input for direct placement municipal securities are the credit spread assumptions used to determine the fair value measure. An increase (decrease) in the estimated spread assumption of the market will decrease (increase) the fair value measure of the securities. The significant unobservable input for foreign government securities are the market yield assumptions. The market yield assumption is negatively correlated to the fair value measure. An increase (decrease) in the determined market yield assumption will decrease (increase) the fair value measurement.

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Financial Instruments on Non-recurring Basis:

The Company may be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or market accounting or impairment charges of individual assets.

The Credit Policy Committee (CPC), a management committee, is responsible for overseeing the valuation processes and procedures for Level 3 measurements of impaired loans, other real estate and repossessions. The CPC reviews these assets on a quarterly basis to determine the accuracy of the observable inputs, generally third-party appraisals, auction values, values derived from trade publications and data submitted by the borrower, and the appropriateness of the unobservable inputs, generally discounts due to current market conditions and collection issues. The CPC establishes discounts based on asset type and valuation source; deviations from the standard are documented. The discounts are reviewed periodically, annually at a minimum, to determine they remain appropriate. Consideration is given to current trends in market values for the asset categories and gain and losses on sales of similar assets. The Loan and Funds Management Committee of the Board of Directors is responsible for overseeing the CPC.

Discounts vary depending on the nature of the assets and the source of value. Aircraft are generally valued using quarterly trade publications adjusted for engine time, condition, maintenance programs, discounted by 10%. Likewise, autos are valued using current auction values, discounted by 10%; medium and heavy duty trucks are valued using trade publications and auction values, discounted by 15%. Construction equipment is generally valued using trade publications and auction values, discounted by 20%. Real estate is valued based on appraisals or evaluations, discounted by 20% at a minimum with higher discounts for property in poor condition or property with characteristics which may make it more difficult to market. Commercial loans subject to borrowing base certificates are generally discounted by 20% for receivables and 40% - 75% for inventory with higher discounts when monthly borrowing base certificates are not required or received.

Impaired loans and related write-downs are based on the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are reviewed quarterly and estimated using customized discounting criteria, appraisals and dealer and trade magazine quotes which are used in a market valuation approach. In accordance with fair value measurements, only impaired loans for which a reserve for loan loss has been established based on the fair value of collateral require classification in the fair value hierarchy. As a result, only a portion of the Company’s impaired loans are classified in the fair value hierarchy.

During 2017, partnership investments and the adjustments to fair value primarily resulted from application of lower of cost or fair value accounting. The partnership investments were priced using financial statements provided by the partnerships. Quantitative unobservable inputs were not reasonably available for reporting purposes.

The Company has established MSRs valuation policies and procedures based on industry standards and to ensure valuation methodologies are consistent and verifiable. MSRs and related adjustments to fair value result from application of lower of cost or fair value accounting. For purposes of impairment, MSRs are stratified based on the predominant risk characteristics of the underlying servicing, principally by loan type. The fair value of each tranche of the servicing portfolio is estimated by calculating the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. Prepayment rates and discount rates are derived through a third-party pricing agent. Changes in the most significant inputs, including prepayment rates and discount rates, are compared to the changes in the fair value measurements and appropriate resolution is made. A fair value analysis is also obtained from an independent third-party agent and compared to the internal valuation for reasonableness. MSRs do not trade in an active, open market with readily observable prices and though sales of MSRs do occur, precise terms and conditions typically are not readily available and the characteristics of the Company’s servicing portfolio may differ from those of any servicing portfolios that do trade.

Other real estate is based on the fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and reflect a market value approach. Fair values are reviewed quarterly and new appraisals are obtained annually. Repossessions are similarly valued.

For assets measured at fair value on a nonrecurring basis the following represents impairment charges (recoveries) recognized on these assets during the year ended December 31, 2018 and 2017, respectively: impaired loans - $12.46 million and $0.50 million; partnership investments - $0.00 million and $0.00 million; MSRs - $0.00 million and $0.00 million; repossessions - $1.92 million and $0.79 million, and other real estate - $0.00 million and $0.05 million.

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The following table shows the carrying value of assets measured at fair value on a non-recurring basis.

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2018
Impaired loans - collateral based	$	—	$	—	$	7,306	$	7,306
Accrued income and other assets (mortgage servicing rights)	—		—		4,283		4,283
Accrued income and other assets (repossessions)	—		—		6,666		6,666
Accrued income and other assets (other real estate)	—		—		299		299
Total	$	—	$	—	$	18,554	$	18,554
December 31, 2017
Impaired loans - collateral based	$	—	$	—	$	7,994	$	7,994
Accrued income and other assets (partnership investments)	—		—		1,000		1,000
Accrued income and other assets (mortgage servicing rights)	—		—		4,349		4,349
Accrued income and other assets (repossessions)	—		—		10,114		10,114
Accrued income and other assets (other real estate)	—		—		1,312		1,312
Total	$	—	$	—	$	24,769	$	24,769

The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a non-recurring basis.

(Dollars in thousands)	Carrying Value		Fair value		Valuation Methodology	Unobservable Inputs	Range of Inputs
December 31, 2018
Impaired loans	$	7,306	$	7,306	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	20% - 35%
Mortgage servicing rights	4,283		7,238		Discounted cash flows	Constant prepayment rate (CPR)	7.2% - 24.8%
						Discount rate	10.3% - 13.1%
Repossessions	6,666		6,991		Appraisals, trade publications and auction values	Discount for lack of marketability	4% - 6%
Other real estate	299		305		Appraisals	Discount for lack of marketability	0% - 10%
December 31, 2017
Impaired loans	$	7,994	$	7,994	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	3% - 20%
Mortgage servicing rights	4,349		7,187		Discounted cash flows	Constant prepayment rate (CPR)	8.6% - 20.7%
						Discount rate	9.6% - 12.5%
Repossessions	10,114		10,493		Appraisals, trade publications and auction values	Discount for lack of marketability	3% - 10%
Other real estate	1,312		1,441		Appraisals	Discount for lack of marketability	7% - 9%

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.

75

The following table shows the fair values of the Company’s financial instruments.

(Dollars in thousands)	Carrying or Contract Value		Fair Value		Level 1		Level 2		Level 3
December 31, 2018
Assets:
Cash and due from banks	$	94,907	$	94,907	$	94,907	$	—	$	—
Federal funds sold and interest bearing deposits with other banks	4,172		4,172		4,172		—		—
Investment securities, available-for-sale	990,129		990,129		33,746		955,358		1,025
Other investments	28,404		28,404		28,404		—		—
Mortgages held for sale	11,290		11,290		—		11,290		—
Loans and leases, net of reserve for loan and lease losses	4,734,995		4,689,267		—		—		4,689,267
Mortgage servicing rights	4,283		7,238		—		—		7,238
Interest rate swaps	7,124		7,124		—		7,124		—
Liabilities:
Deposits	$	5,122,322	$	5,111,711	$	3,654,556	$	1,457,155	$	—
Short-term borrowings	199,344		199,344		113,734		85,610		—
Long-term debt and mandatorily redeemable securities	71,123		68,751		—		68,751		—
Subordinated notes	58,764		45,874		—		45,874		—
Interest rate swaps	7,250		7,250		—		7,250		—
Off-balance-sheet instruments *	—		259		—		259		—
December 31, 2017
Assets:
Cash and due from banks	$	73,635	$	73,635	$	73,635	$	—	$	—
Federal funds sold and interest bearing deposits with other banks	4,398		4,398		4,398		—		—
Investment securities, available-for-sale	904,033		904,033		27,971		873,197		2,865
Other investments	25,953		25,953		25,953		—		—
Mortgages held for sale	13,123		13,123		—		13,123		—
Loans and leases, net of reserve for loan and lease losses	4,432,795		4,428,848		—		—		4,428,848
Mortgage servicing rights	4,349		7,187		—		—		7,187
Interest rate swaps	5,167		5,167		—		5,167		—
Liabilities:
Deposits	$	4,752,730	$	4,745,111	$	3,482,757	$	1,262,354	$	—
Short-term borrowings	214,595		214,595		206,862		7,733		—
Long-term debt and mandatorily redeemable securities	70,060		67,857		—		67,857		—
Subordinated notes	58,764		57,103		—		57,103		—
Interest rate swaps	5,262		5,262		—		5,262		—
Off-balance-sheet instruments *	—		286		—		286		—

* Represents estimated cash outflows required to currently settle the obligations at current market rates.

These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. These estimates are subjective in nature and require considerable judgment to interpret market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange, nor are they intended to represent the fair value of the Company as a whole. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of the respective balance sheet date. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Other significant assets, such as premises and equipment, other assets, and liabilities not defined as financial instruments, are not included in the above disclosures. Also, the fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

76

Note 22 — 1st Source Corporation (Parent Company Only) Financial Information

STATEMENTS OF FINANCIAL CONDITION

December 31(Dollars in thousands)	2018		2017
ASSETS
Cash and cash equivalents	$	106,647	$	100,155
Short-term investments with bank subsidiary	500		500
Investments in:
Bank subsidiaries	740,697		706,119
Non-bank subsidiaries	1		1
Other assets	4,191		2,696
Total assets	$	852,036	$	809,471
LIABILITIES AND SHAREHOLDERS’ EQUITY
Commercial paper	$	4,325	$	6,115
Long-term debt and mandatorily redeemable securities	24,676		22,942
Subordinated notes	58,764		58,764
Other liabilities	2,189		3,113
Total liabilities	89,954		90,934
Total shareholders’ equity	762,082		718,537
Total liabilities and shareholders’ equity	$	852,036	$	809,471

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Year Ended December 31 (Dollars in thousands)	2018			2017		2016
Income:
Dividends from bank subsidiary	$	45,080		$	38,317	$	36,064
Dividends from non-bank subsidiary	—			958		—
Rental income from subsidiaries	2,613			2,354		2,363
Other	367			422		444
Investment securities and other investment (losses) gains	(180		)	6,431		3,901
Total income	47,880			48,482		42,772
Expenses:
Interest on subordinated notes	3,625			4,002		4,220
Interest on long-term debt and mandatorily redeemable securities	1,624			1,685		1,454
Interest on commercial paper and other short-term borrowings	14			17		20
Rent	1,774			2,070		1,739
Other	642			1,733		1,179
Total expenses	7,679			9,507		8,612
Income before income tax benefit and equity in undistributed income of subsidiaries	40,201			38,975		34,160
Income tax benefit	1,009			204		741
Income before equity in undistributed income of subsidiaries	41,210			39,179		34,901
Equity in undistributed income of subsidiaries:
Bank subsidiaries	41,204			28,872		22,569
Non-bank subsidiaries	—			—		316
Net income	$	82,414		$	68,051	$	57,786
Comprehensive income	$	75,788		$	63,375	$	52,575

77

STATEMENTS OF CASH FLOWS

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Operating activities:
Net income	$	82,414		$	68,051		$	57,786
Adjustments to reconcile net income to net cash provided by operating activities:
Equity (undistributed) distributed in excess of income of subsidiaries	(41,204		)	(28,872		)	(22,885		)
Depreciation of premises and equipment	2			2			4
Stock-based compensation	71			48			52
Realized/unrealized investment securities and other investment losses (gains)	180			(6,431		)	(3,901		)
Other	45			4,122			3,132
Net change in operating activities	41,508			36,920			34,188
Investing activities:
Proceeds from sales and maturities of investment securities	—			6,327			1,795
Net change in partnership investments	(980		)	(62		)	2,903
Return of capital from subsidiaries	—			854			—
Net change in investing activities	(980		)	7,119			4,698
Financing activities:
Net change in commercial paper	(1,790		)	354			(2,281		)
Proceeds from issuance of long-term debt and mandatorily redeemable securities	1,867			1,248			1,607
Payments on long-term debt and mandatorily redeemable securities	(1,064		)	(667		)	(627		)
Stock issued under stock purchase plans	145			153			120
Net proceeds from issuance of treasury stock	1,763			2,176			2,636
Acquisition of treasury stock	(9,271		)	(41		)	(8,030		)
Cash dividends paid on common stock	(25,686		)	(20,431		)	(19,416		)
Net change in financing activities	(34,036		)	(17,208		)	(25,991		)
Net change in cash and cash equivalents	6,492			26,831			12,895
Cash and cash equivalents, beginning of year	100,155			73,324			60,429
Cash and cash equivalents, end of year	$	106,647		$	100,155		$	73,324

78

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None

Item 9A. Controls and Procedures.

1st Source carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, at December 31, 2018, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by 1st Source in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

In addition, there were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the fourth fiscal quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of 1st Source Corporation (“1st Source”) is responsible for establishing and maintaining adequate internal control over financial reporting. 1st Source’s internal control over financial reporting includes policies and procedures pertaining to 1st Source’s ability to record, process, and report reliable information. Actions are taken to correct any deficiencies as they are identified through internal and external audits, regular examinations by bank regulatory agencies, 1st Source’s formal risk management process, and other means. 1st Source’s internal control system is designed to provide reasonable assurance to 1st Source’s management and Board of Directors regarding the preparation and fair presentation of 1st Source’s published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

1st Source’s management assessed the effectiveness of internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013 framework). Based on management’s assessment, 1st Source believes that, as of December 31, 2018, 1st Source’s internal control over financial reporting is effective based on those criteria.

BKD LLP, independent registered public accounting firm, has issued an attestation report on management’s assessment of 1st Source’s internal control over financial reporting. This report appears on page 38.

By	/s/ CHRISTOPHER J. MURPHY III
	Christopher J. Murphy III, Chief Executive Officer
By	/s/ ANDREA G. SHORT
	Andrea G. Short, Treasurer and Chief Financial Officer

South Bend, Indiana

Item 9B. Other Information.

None

79

Part III

Item 10. Directors, Executive Officers and Corporate Governance.

The information under the caption “Proposal Number 1: Election of Directors,” “Board Committees and Other Corporate Governance Matters,” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the 2019 Proxy Statement is incorporated herein by reference.

Item 11. Executive Compensation.

The information under the caption “Compensation Discussion & Analysis” of the 2019 Proxy Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information under the caption “Voting Securities and Principal Holders Thereof” and “Proposal Number 1: Election of Directors” of the 2019 Proxy Statement is incorporated herein by reference.

The following table shows Equity Compensation Plan Information as of December 31, 2018.

	(A) Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights	Weighted-average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans [excluding securities reflected in column (A)]
Equity compensation plans approved by shareholders
2011 Stock Option Plan	—	$	—	250,000
1997 Employee Stock Purchase Plan	6,640	50.60		120,449
1982 Executive Incentive Plan	—	—		96,876	(1)(2)
1982 Restricted Stock Award Plan	—	—		229,538	(1)
Strategic Deployment Incentive Plan	—	—		98,645	(1)(2)
Total plans approved by shareholders	6,640	$	50.60	795,508
Equity compensation plans not approved by shareholders
Director Retainer Stock Plan	—	—		47,418
Total equity compensation plans	6,640	$	50.60	842,926

(1) Amount is to be awarded by grants administered by the Executive Compensation and Human Resources Committee of the 1st Source Corporation Board of Directors.

(2) Amount includes market value stock only. Book value shares used for annual awards may only be sold to 1st Source.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information under the caption “Proposal Number 1: Election of Directors”, “Board Committees and Other Corporate Governance Matters, “ and “Transactions with Related Persons” of the 2019 Proxy Statement is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

The information under the caption “Relationship with Independent Registered Public Accounting Firm” of the 2019 Proxy Statement is incorporated herein by reference.

80

Part IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Financial Statements and Schedules:

The following Financial Statements and Supplementary Data are filed as part of this annual report:

Financial statement schedules required by Article 9 of Regulation S-X are not required under the related instructions, or are inapplicable and, therefore, have been omitted.

(b) Exhibits (numbered in accordance with Item 601 of Regulation S-K):

3(a)	Articles of Incorporation of Registrant, amended April 30, 1996, filed as exhibit to Form 10-K, dated December 31, 2017, and incorporated herein by reference.
3(b)	By-Laws of Registrant, as amended October 22, 2015, filed as an exhibit to Form 10-K, dated December 31, 2015, and incorporated herein by reference.
3(c)	Certificate of Designations for Series A Preferred Stock, dated January 23, 2009, filed as exhibit to Form 8-K, dated January 23, 2009, and incorporated herein by reference.
4(a)	Form of Common Stock Certificates of Registrant, filed as exhibit to Registration Statement 2-40481 and incorporated herein by reference.
4(b)	1st Source agrees to furnish to the Commission, upon request, a copy of each instrument defining the rights of holders of Senior and Subordinated debt of 1st Source.
10(a)(1)	Employment Agreement of Christopher J. Murphy III, dated January 1, 2008, filed as exhibit to Form 8-K, dated March 17, 2008, amended February 6, 2014, filed as exhibit to Form 8-K, dated March 12, 2014, and incorporated herein by reference.
10(a)(2)	Employment Agreement of Andrea G. Short dated January 1, 2013, filed as exhibit to Form 10-K, dated December 31, 2012, amended February 6, 2014, filed as exhibit to Form 8-K, dated March 12, 2014, and incorporated herein by reference.
10(a)(3)	Employment Agreement of John B. Griffith, dated January 1, 2008, filed as exhibit to Form 8-K, dated March 17, 2008, amended February 6, 2014, filed as exhibit to Form 8-K, dated March 12, 2014, and incorporated herein by reference.
10(a)(4)	Employment Agreement of James R. Seitz, dated May 23, 2017, filed as an exhibit to Form 8-K, dated May 23, 2017, and incorporated herein by reference.
10(a)(5)	Employment Agreement of Jeffrey L. Buhr, dated May 23, 2017, filed as an exhibit to Form 8-K, dated May 23, 2017, and incorporated herein by reference.
10(b)	1st Source Corporation Employee Stock Purchase Plan dated April 17, 1997, filed as exhibit to Form 10-K, dated December 31, 2017, and incorporated herein by reference.
10(c)	1st Source Corporation 1982 Executive Incentive Plan, amended November 9, 2016, filed as an exhibit to Form 10-K, dated December 31, 2016, and incorporated herein by reference.
10(d)	1st Source Corporation 1982 Restricted Stock Award Plan, amended November 9, 2016, filed as Exhibit 4.3 to Registration Statement on Form S-8 No. 333-215910, filed February 6, 2017, and incorporated herein by reference.
10(e)	1st Source Corporation Strategic Deployment Incentive Plan, amended February 26, 2016, filed as exhibit to registrant’s 2016 definitive proxy statement, filed March 15, 2016, and incorporated herein by reference.
10(f)	1st Source Corporation 2011 Stock Option Plan, amended November 9, 2016, filed as exhibit to Form 10-K, dated December 31, 2016, and incorporated herein by reference.
10(g)	1st Source Corporation Director Retainer Stock Plan, amended August 3, 2018, filed as exhibit to Form 10-Q, dated September 30, 2018, and incorporated herein by reference.

81

21 Subsidiaries of Registrant (unless otherwise indicated, each subsidiary does business under its own name):

Name	Jurisdiction
1st Source Bank	Indiana
SFG Aircraft, Inc. * (formerly known as SFG Equipment Leasing, Inc.)	Indiana
1st Source Insurance, Inc. *	Indiana
1st Source Specialty Finance, Inc. *	Indiana
1st Source Capital Corporation *	Indiana
Trustcorp Mortgage Company (Inactive)	Indiana
1st Source Master Trust	Delaware
Michigan Transportation Finance Corporation *	Michigan
1st Source Intermediate Holding, LLC	Delaware
1st Source Funding, LLC (Inactive)	Delaware
1st Source Corporation Investment Advisors, Inc. *	Indiana
SFG Commercial Aircraft Leasing, Inc. *	Indiana
SFG Equipment Leasing Corporation I*	Indiana
Washington and Michigan Insurance, Inc.*	Arizona
1st Source Solar 1, LLC*	Delaware
1st Source Solar 2, LLC	Delaware

*Wholly-owned subsidiaries of 1st Source Bank

23	Consent of BKD, LLP, Independent Registered Public Accounting Firm.
31.1	Certification of Christopher J. Murphy III, Chief Executive Officer (Rule 13a-14(a)).
31.2	Certification of Andrea G. Short, Chief Financial Officer (Rule 13a-14(a)).
32.1	Certification of Christopher J. Murphy III, Chief Executive Officer.
32.2	Certification of Andrea G. Short, Chief Financial Officer.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

(c) Financial Statement Schedules — None.

82

Item 16. Form 10-K Summary.

Not provided.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

1st SOURCE CORPORATION

By	/s/ CHRISTOPHER J. MURPHY III
Christopher J. Murphy III, Chairman of the Board
and Chief Executive Officer

Date: February 22, 2019

83

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ CHRISTOPHER J. MURPHY III	Chairman of the Board	February 22, 2019
Christopher J. Murphy III	and Chief Executive Officer
/s/ JAMES R. SEITZ	President	February 22, 2019
James R. Seitz
/s/ ANDREA G. SHORT	Treasurer, Chief Financial Officer	February 22, 2019
Andrea G. Short	and Principal Accounting Officer
/s/ JOHN B. GRIFFITH	Secretary	February 22, 2019
John B. Griffith	and General Counsel
/s/ MELODY BIRMINGHAM-BYRD	Director	February 22, 2019
Melody Birmingham-Byrd
/s/ DANIEL B. FITZPATRICK	Director	February 22, 2019
Daniel B. Fitzpatrick
/s/ LISA W. HERSHMAN	Director	February 22, 2019
Lisa W. Hershman
/s/ NAJEEB A. KHAN	Director	February 22, 2019
Najeeb A. Khan
/s/ VINOD M. KHILNANI	Director	February 22, 2019
Vinod M. Khilnani
/s/ REX MARTIN	Director	February 22, 2019
Rex Martin
/s/ CHRISTOPHER J. MURPHY IV	Director	February 22, 2019
Christopher J. Murphy IV
/s/ TIMOTHY K. OZARK	Director	February 22, 2019
Timothy K. Ozark
/s/ JOHN T. PHAIR	Director	February 22, 2019
John T. Phair
/s/ MARK D. SCHWABERO	Director	February 22, 2019
Mark D. Schwabero

84

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

Registration Statement No. 333-215910 on Form S-8 dated February 6, 2017

Registration Statement No. 333-207926 on Form S-3/A dated November 25, 2015

Registration Statement No. 333-207926 on Form S-3 dated November 10, 2015

Registration Statement No. 333-188266 on Form S-8 dated May 1, 2013

Registration Statement No. 333-173717 on Form S-8 dated April 25, 2011

Registration Statement No. 333-173715 on Form S-8 dated April 25, 2011

Registration Statement No. 333-173714 on Form S-8 dated April 25, 2011

Registration Statement No. 333-173713 on Form S-8 dated April 25, 2011

Registration Statement No. 333-101710 on Form S-8 dated December 6, 2002

Registration Statement No. 333-64314 on Form S-8 dated July 2, 2001

Registration Statement No. 333-26243 on Form S-8 dated April 30, 1997

Registration Statement No. 33-8840 on Form S-2 dated September 16, 1986

of our report dated February 22, 2019, on our audits of the consolidated financial statements of 1st Source Corporation and the effectiveness of internal control over financial reporting of 1st Source Corporation included in this Annual Report (Form 10-K) of 1st Source Corporation as of December 31, 2018 and 2017, and for each of the three years ended December 31, 2018.

/s/ BKD, LLP

Fort Wayne, Indiana

February 22, 2019

EX-31.1

EXHIBIT 31.1

Certifications

I, Christopher J. Murphy III, Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of 1st Source Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 22, 2019

By	/s/ CHRISTOPHER J. MURPHY III
	Christopher J. Murphy III, Chief Executive Officer

1

EX-31.2

EXHIBIT 31.2

Certifications

I, Andrea G. Short, Chief Financial Officer, certify that:

1. I have reviewed this annual report on Form 10-K of 1st Source Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 22, 2019

By	/s/ ANDREA G. SHORT
	Andrea G. Short, Chief Financial Officer

1

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of 1st Source Corporation (1st Source) on Form 10-K for the fiscal year ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher J. Murphy III, Chief Executive Officer of 1st Source, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of 1st Source.

Date: February 22, 2019

By	/s/ CHRISTOPHER J. MURPHY III
	Christopher J. Murphy III, Chief Executive Officer

1

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of 1st Source Corporation (1st Source) on Form 10-K for the fiscal year ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrea G. Short, Chief Financial Officer of 1st Source, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of 1st Source.

Date: February 22, 2019

By	/s/ ANDREA G. SHORT
	Andrea G. Short, Chief Financial Officer

1

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Document and Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2018	Feb. 15, 2019	Jun. 30, 2018
Document and Entity Information
Entity Registrant Name	1ST SOURCE CORP
Trading Symbol	SRCE
Entity Central Index Key	0000034782
Document Type	10-K
Entity Emerging Growth Company	false
Entity Small Business	false
Entity Shell Company	false
Document Period End Date	Dec. 31, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Public Float			$ 1,055,910,322
Entity Common Stock, Shares Outstanding		25,804,596
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	FY

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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
ASSETS
Cash and due from banks	$ 94,907	$ 73,635
Federal funds sold and interest bearing deposits with other banks	4,172	4,398
Investment securities available-for-sale	990,129	904,033
Other investments	28,404	25,953
Mortgages held for sale	11,290	13,123
Loans and leases, net of unearned discount:
Total loans and leases	4,835,464	4,527,678
Reserve for loan and lease losses	(100,469)	(94,883)
Net loans and leases	4,734,995	4,432,795
Equipment owned under operating leases, net	134,440	139,581
Net premises and equipment	52,139	54,612
Goodwill and intangible assets	83,998	83,742
Accrued income and other assets	159,271	155,412
Total assets	6,293,745	5,887,284
Deposits:
Noninterest-bearing demand	1,217,120	1,064,271
Interest-bearing demand	1,614,959	1,554,898
Savings	822,477	863,588
Time	1,467,766	1,269,973
Total interest-bearing deposits	3,905,202	3,688,459
Total deposits	5,122,322	4,752,730
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase	113,627	205,834
Other short-term borrowings	85,717	8,761
Total short-term borrowings	199,344	214,595
Long-term debt and mandatorily redeemable securities	71,123	70,060
Subordinated notes	58,764	58,764
Accrued expenses and other liabilities	78,602	72,598
Total liabilities	5,530,155	5,168,747
SHAREHOLDERS’ EQUITY
Preferred stock; no par value Authorized 10,000,000 shares; none issued or outstanding	0	0
Common Stock; no par value Authorized 40,000,000 shares; issued 28,205,674 shares at December 31, 2018 and 2017	436,538	436,538
Retained earnings	398,980	339,959
Cost of common stock in treasury (2,421,946 shares at December 31, 2018 and 2,268,910 shares at December 31, 2017)	(62,760)	(54,628)
Accumulated other comprehensive loss	(10,676)	(3,332)
Total shareholders’ equity	762,082	718,537
Noncontrolling interests	1,508	0
Total equity	763,590	718,537
Total liabilities and equity	6,293,745	5,887,284
Commercial and agricultural
Loans and leases, net of unearned discount:
Total loans and leases	1,073,205	929,997
Reserve for loan and lease losses	(17,063)	(16,228)
Auto and light truck
Loans and leases, net of unearned discount:
Total loans and leases	559,987	496,816
Reserve for loan and lease losses	(14,689)	(10,103)
Medium and heavy duty truck
Loans and leases, net of unearned discount:
Total loans and leases	283,544	296,935
Reserve for loan and lease losses	(4,303)	(4,844)
Aircraft
Loans and leases, net of unearned discount:
Total loans and leases	803,111	844,657
Reserve for loan and lease losses	(33,047)	(34,619)
Construction equipment
Loans and leases, net of unearned discount:
Total loans and leases	645,239	563,437
Reserve for loan and lease losses	(10,922)	(9,343)
Commercial real estate
Loans and leases, net of unearned discount:
Total loans and leases	809,886	741,568
Reserve for loan and lease losses	(15,705)	(14,792)
Residential real estate and home equity
Loans and leases, net of unearned discount:
Total loans and leases	523,855	526,122
Reserve for loan and lease losses	(3,425)	(3,666)
Consumer
Loans and leases, net of unearned discount:
Total loans and leases	136,637	128,146
Reserve for loan and lease losses	$ (1,315)	$ (1,288)

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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Parenthetical) - $ / shares	Dec. 31, 2018	Dec. 31, 2017
Statement of Financial Position [Abstract]
Preferred Stock, Par or Stated Value Per Share	$ 0	$ 0
Preferred stock, Authorized shares	10,000,000	10,000,000
Preferred stock, issued shares	0	0
Preferred stock, outstanding shares	0	0
Common Stock, Par or Stated Value Per Share	$ 0	$ 0
Common stock, Authorized shares	40,000,000	40,000,000
Common stock, issued shares	28,205,674	28,205,674
Cost of common stock in treasury, shares	2,421,946	2,268,910

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CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Interest income:
Loans and leases	$ 234,455	$ 194,726	$ 175,999
Investment securities, taxable	19,356	13,853	11,914
Investment securities, tax-exempt	1,857	2,413	2,603
Other	1,648	1,393	1,244
Total interest income	257,316	212,385	191,760
Interest expense:
Deposits	34,631	19,202	15,267
Short-term borrowings	2,838	1,115	525
Subordinated notes	3,625	4,002	4,220
Long-term debt and mandatorily redeemable securities	2,316	2,435	2,089
Total interest expense	43,410	26,754	22,101
Net interest income	213,906	185,631	169,659
Provision for loan and lease losses	19,462	8,980	5,833
Net interest income after provision for loan and lease losses	194,444	176,651	163,826
Noninterest income:
Mortgage banking	3,844	4,796	4,496
Insurance commissions	6,502	5,889	5,513
Equipment rental	31,793	30,381	25,863
(Losses) gains on investment securities available-for-sale	(345)
(Losses) gains on investment securities available-for-sale (including equity securities)		4,340	1,796
Other	10,362	9,922	11,122
Total noninterest income	97,050	98,706	88,945
Noninterest expense:
Salaries and employee benefits	93,857	86,912	86,837
Net occupancy	10,041	10,624	9,686
Furniture and equipment	23,433	20,769	19,500
Depreciation — leased equipment	26,248	25,215	21,678
Professional fees	7,680	6,810	5,161
Supplies and communication	6,320	5,355	5,244
FDIC and other insurance	2,923	2,537	3,147
Business development and marketing	6,112	7,477	4,936
Loan and lease collection and repossession	3,375	2,724	1,600
Other	6,478	5,574	5,856
Total noninterest expense	186,467	173,997	163,645
Income before income taxes	105,027	101,360	89,126
Income tax expense	22,613	33,309	31,340
Net income	82,414	68,051	57,786
Net (income) loss attributable to noncontrolling interests	0	0	0
Net income available to common shareholders	$ 82,414	$ 68,051	$ 57,786
Basic net income per common share, in dollars per share	$ 3.16	$ 2.60	$ 2.22
Diluted net income per common share, in dollars per share	$ 3.16	$ 2.60	$ 2.22
Trust and wealth advisory
Noninterest income:
Trust and wealth advisory, service charges on deposit accounts, and debit card income	$ 21,071	$ 20,980	$ 19,256
Service charges on deposit accounts
Noninterest income:
Trust and wealth advisory, service charges on deposit accounts, and debit card income	10,454	10,589	10,012
Debit card
Noninterest income:
Trust and wealth advisory, service charges on deposit accounts, and debit card income	$ 13,369	$ 11,809	$ 10,887

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Statement of Comprehensive Income [Abstract]
Net income	$ 82,414	$ 68,051	$ 57,786
Other comprehensive loss:
Unrealized depreciation of investment securities available-for-sale	(9,073)	(3,147)	(6,547)
Reclassification adjustment for realized losses (gains) included in net income	345	(4,340)	(1,796)
Income tax effect	2,102	2,811	3,132
Other comprehensive loss, net of tax	(6,626)	(4,676)	(5,211)
Comprehensive income	75,788	63,375	52,575
Comprehensive (income) loss attributable to noncontrolling interests	0	0	0
Comprehensive income available to common shareholders	$ 75,788	$ 63,375	$ 52,575

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($) $ in Thousands	Total	Preferred Stock	Common Stock	Retained Earnings	Cost of Common Stock in Treasury	Accumulated Other Comprehensive Income (Loss), Net	Total Shareholders' Equity	Noncontrolling Interests
Balance at Dec. 31, 2015	$ 644,053	$ 0	$ 436,538	$ 251,812	$ (50,852)	$ 6,555	$ 644,053	$ 0
Increase (Decrease) in Stockholders' Equity
Net income	57,786	0	0	57,786	0	0	57,786	0
Other comprehensive loss	(5,211)	0	0	0	0	(5,211)	(5,211)	0
Issuance of 47,977, 61,899, and 118,559 common shares under stock based compensation awards for 2018, 2017 and 2016, respectively	2,808	0	0	(18)	2,826	0	2,808	0
Cost of 201,013, 900, and 270,378 shares of common stock acquired for treasury for 2018, 2017 and 2016, respectively	(8,030)	0	0	0	(8,030)	0	(8,030)	0
Common stock dividend ($0.96, $0.76, and $0.72 per share for 2018, 2017 and 2016, respectively)	(18,756)	0	0	(18,756)	0	0	(18,756)	0
Balance at Dec. 31, 2016	672,650	0	436,538	290,824	(56,056)	1,344	672,650	0
Increase (Decrease) in Stockholders' Equity
Cumulative-effect adjustment	(65)	0	0	(65)	0	0	(65)	0
Balance, adjusted	672,585	0	436,538	290,759	(56,056)	1,344	672,585	0
Net income	68,051	0	0	68,051	0	0	68,051	0
Other comprehensive loss	(4,676)	0	0	0	0	(4,676)	(4,676)	0
Issuance of 47,977, 61,899, and 118,559 common shares under stock based compensation awards for 2018, 2017 and 2016, respectively	2,377	0	0	908	1,469	0	2,377	0
Cost of 201,013, 900, and 270,378 shares of common stock acquired for treasury for 2018, 2017 and 2016, respectively	(41)	0	0	0	(41)	0	(41)	0
Common stock dividend ($0.96, $0.76, and $0.72 per share for 2018, 2017 and 2016, respectively)	(19,759)	0	0	(19,759)	0	0	(19,759)	0
Balance at Dec. 31, 2017	718,537	0	436,538	339,959	(54,628)	(3,332)	718,537	0
Increase (Decrease) in Stockholders' Equity
Cumulative-effect adjustment	0	0	0	718	0	(718)	0	0
Balance, adjusted	718,537	0	436,538	340,677	(54,628)	(4,050)	718,537	0
Net income	82,414	0	0	82,414	0	0	82,414	0
Other comprehensive loss	(6,626)	0	0	0	0	(6,626)	(6,626)	0
Issuance of 47,977, 61,899, and 118,559 common shares under stock based compensation awards for 2018, 2017 and 2016, respectively	1,980	0	0	841	1,139	0	1,980	0
Cost of 201,013, 900, and 270,378 shares of common stock acquired for treasury for 2018, 2017 and 2016, respectively	(9,271)	0	0	0	(9,271)	0	(9,271)	0
Common stock dividend ($0.96, $0.76, and $0.72 per share for 2018, 2017 and 2016, respectively)	(24,952)	0	0	(24,952)	0	0	(24,952)	0
Issuance of noncontrolling interests	1,508	0	0	0	0	0	0	1,508
Balance at Dec. 31, 2018	$ 763,590	$ 0	$ 436,538	$ 398,980	$ (62,760)	$ (10,676)	$ 762,082	$ 1,508

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Parenthetical) - $ / shares	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Statement of Stockholders' Equity [Abstract]
Issuance of common shares per stock based compensation awards, including related tax effects, shares	47,977	61,899	118,559
Common stock acquired for treasury, shares	201,013	900	270,378
Common stock dividend (in dollars per share)	$ 0.96	$ 0.76	$ 0.72

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CONSOLIDATED STATEMENTS OF CASH FLOW - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Statement of Cash Flows [Abstract]
Net income	$ 82,414	$ 68,051	$ 57,786
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses	19,462	8,980	5,833
Depreciation of premises and equipment	5,620	5,658	5,245
Depreciation of equipment owned and leased to others	26,248	25,215	21,678
Stock-based compensation	3,553	2,963	2,884
Amortization of investment securities premiums and accretion of discounts, net	3,477	5,449	5,861
Amortization of mortgage servicing rights	956	1,092	1,478
Deferred income taxes	(550)	2,767	2,856
Losses (gains) on investment securities available-for-sale	345
Losses (gains) on investment securities available-for-sale (including equity securities)		(4,340)	(1,796)
Originations of loans held for sale, net of principal collected	(78,450)	(101,104)	(119,134)
Proceeds from the sales of loans held for sale	82,127	106,811	116,397
Net gains on sale of loans held for sale	(1,844)	(2,981)	(3,287)
Net gain on sale of other real estate and repossessions	(561)	(251)	(228)
Change in interest receivable	(1,747)	(2,119)	(1,326)
Change in interest payable	2,997	1,222	570
Change in other assets	(8,076)	(1,434)	2,145
Change in other liabilities	7,375	(3,268)	648
Other	1,028	4,550	450
Net change in operating activities	144,374	117,261	98,060
Investing activities:
Proceeds from sales of investment securities available-for-sale	11,392
Proceeds from sales of investment securities available-for-sale (including equity securities)		228,715	23,784
Proceeds from maturities and paydowns of investment securities available-for-sale	145,167	177,466	217,613
Purchases of investment securities available-for-sale	(255,205)
Purchases of investment securities available-for-sale (including equity securities)		(469,385)	(313,074)
Proceeds from liquidation of partnership investment	1,868	128	2,903
Net change in other investments	(2,451)	(3,495)	(485)
Loans sold or participated to others	22,835	32,004	5,926
Net change in loans and leases	(355,504)	(382,386)	(209,668)
Net change in equipment owned under operating leases	(21,107)	(46,003)	(30,100)
Purchases of premises and equipment	(3,058)	(5,444)	(8,935)
Proceeds from sales of other real estate and repossessions	13,433	6,194	2,189
Net change in investing activities	(442,630)	(462,206)	(309,847)
Financing activities:
Net change in demand deposits and savings accounts	171,799	205,649	278,666
Net change in time deposits	197,793	213,321	(84,092)
Net change in short-term borrowings	(15,251)	(77,348)	58,714
Proceeds from issuance of long-term debt	0	19,999	20,837
Payments on long-term debt	(1,735)	(26,628)	(6,429)
Stock issued under stock purchase plans	145	153	120
Acquisition of treasury stock	(9,271)	(41)	(8,030)
Contributions from noncontrolling interests	1,508	0	0
Cash dividends paid on common stock	(25,686)	(20,431)	(19,416)
Net change in financing activities	319,302	314,674	240,370
Net change in cash and cash equivalents	21,046	(30,271)	28,583
Cash and cash equivalents, beginning of year	78,033	108,304	79,721
Cash and cash equivalents, end of year	99,079	78,033	108,304
Non-cash transactions:
Loans transferred to other real estate and repossessions	11,007	8,135	4,961
Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan	583	1,426	800
Cash paid for:
Interest	40,413	25,531	21,531
Income taxes	$ 8,272	$ 10,567	$ 19,866

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Accounting Policies

12 Months Ended

Dec. 31, 2018

Accounting Policies [Abstract]

Accounting Policies

Accounting Policies

1st Source Corporation is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries (collectively referred to as “1st Source” or “the Company”), a broad array of financial products and services. 1st Source Bank (“Bank”), its banking subsidiary, offers commercial and consumer banking services, trust and wealth advisory services, and insurance to individual and business clients in Indiana and Michigan. The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements.

Basis of Presentation — The financial statements consolidate 1st Source, its subsidiaries (principally the Bank) and any variable interest entities (“VIEs”) for which the Company has concluded it has significant involvement in and the ability to direct the activities that impact the entity’s economic performance. All significant intercompany balances and transactions have been eliminated. For purposes of the parent company only financial information presented in Note 22, investments in subsidiaries are carried at equity in the underlying net assets.

Use of Estimates in the Preparation of Financial Statements — Financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Business Combinations — Business combinations are accounted for under the purchase method of accounting. Under the purchase method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition.

Cash Flows — For purposes of the consolidated and parent company only statements of cash flows, the Company considers cash and due from banks, federal funds sold and interest bearing deposits with other banks with original maturities of three months or less as cash and cash equivalents.

Securities — Securities that the Company has the ability and positive intent to hold to maturity are classified as investment securities held-to-maturity. Held-to-maturity investment securities, when present, are carried at amortized cost. As of December 31, 2018 and 2017, the Company held no securities classified as held-to-maturity. Securities that may be sold in response to, or in anticipation of, changes in interest rates and resulting prepayment risk, or for other factors, are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on debt securities are reported, net of applicable taxes, as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity. Unrealized gains and losses on equity securities are reflected, net of applicable taxes, in earnings.

The initial indication of potential other-than-temporary impairment (OTTI) for both debt and equity securities is a decline in fair value below amortized cost. Quarterly, any impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI. Declines in the fair value of available-for-sale debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. In estimating OTTI impairment losses, the Company considers among other things, (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether it is more likely than not that the Company will not have to sell any such securities before an anticipated recovery of cost.

Debt and equity securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading account securities and are carried at fair value with unrealized gains and losses reported in earnings. Realized gains and losses on the sales of all securities are reported in earnings and computed using the specific identification cost basis.

Other investments consist of shares of Federal Home Loan Bank of Indianapolis (FHLBI) and Federal Reserve Bank stock. As restricted member stocks, these investments are carried at cost. Both cash and stock dividends received on the stocks are reported as income. Quarterly, the Company reviews its investment in FHLBI for impairment. Factors considered in determining impairment are: history of dividend payments; determination of cause for any net loss; adequacy of capital; and review of the most recent financial statements. As of December 31, 2018 and 2017, it was determined that the Company’s investment in FHLBI stock is appropriately valued at cost, which equates to par value. In addition, other investments include interest bearing deposits with other banks with original maturities of greater than three months. These investments are in denominations, including accrued interest, that are fully insured by the FDIC.

Loans and Leases — Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. Interest income is accrued as earned based on unpaid principal balances. Origination fees and direct loan and lease origination costs are deferred, and the net amount amortized to interest income over the estimated life of the related loan or lease. Loan commitment fees are deferred and amortized into other income over the commitment period.

Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment.

The accrual of interest on loans and leases is discontinued when a loan or lease becomes contractually delinquent for 90 days, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential mortgage loans and consumer loans that are well secured and in the process of collection. Residential mortgage loans are placed on nonaccrual at the time the loan is placed in foreclosure. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the reserve for loan and lease losses. However, in some cases, the Company may elect to continue the accrual of interest when the net realizable value of collateral is sufficient to cover the principal and accrued interest. When a loan or lease is classified as nonaccrual and the future collectability of the recorded loan or lease balance is doubtful, collections on interest and principal are applied as a reduction to principal outstanding. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, which is typically evidenced by a sustained repayment performance of at least six months.

A loan or lease is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Interest on impaired loans and leases, which are not classified as nonaccrual, is recognized on the accrual basis. The Company evaluates loans and leases exceeding $100,000 where the internal credit quality grade is at or below a predetermined classification for impairment and establishes a specific reserve as a component of the reserve for loan and lease losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan or lease and the recorded investment in the loan or lease exceeds its fair value.

Loans and leases that have been modified and economic concessions have been granted to borrowers who have experienced financial difficulties are considered a troubled debt restructuring (TDR) and, by definition, are deemed an impaired loan. These concessions typically result from the Company’s loss mitigation activities and may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

When the Company modifies loans and leases in a TDR, it evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or uses the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a reserve for loan and lease losses estimate or a charge-off to the reserve for loan and lease losses. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the reserve for loan and lease losses.

The Company sells mortgage loans to the Government National Mortgage Association (GNMA) in the normal course of business and retains the servicing rights. The GNMA programs under which the loans are sold allow the Company to repurchase individual delinquent loans that meet certain criteria from the securitized loan pool. At its option, and without GNMA’s prior authorization, the Company may repurchase a delinquent loan for an amount equal to 100% of the remaining principal balance on the loan. Once the Company has the unconditional ability to repurchase a delinquent loan, the Company is deemed to have regained effective control over the loan and the Company is required to recognize the loan on its balance sheet and record an offsetting liability, regardless of its intent to repurchase the loan. At December 31, 2018 and 2017, residential real estate portfolio loans included $1.39 million and $2.65 million, respectively, of loans available for repurchase under the GNMA optional repurchase programs with the offsetting liability recorded within other short-term borrowings.

Mortgage Banking Activities — Loans held for sale are composed of performing one-to-four family residential mortgage loans originated for resale. Mortgage loans originated with the intent to sell are carried at fair value.

The Company recognizes the rights to service mortgage loans for others as separate assets, whether the servicing rights are acquired through a separate purchase or through the sale of originated loans with servicing rights retained. The Company allocates a portion of the total proceeds of a mortgage loan to servicing rights based on the relative fair value. These assets are amortized as reductions of mortgage servicing fee income over the estimated servicing period in proportion to the estimated servicing income to be received. Gains and losses on the sale of MSRs are recognized in Noninterest Income on the Statements of Income in the period in which such rights are sold.

MSRs are evaluated for impairment at each reporting date. For purposes of impairment measurement, MSRs are stratified based on the predominant risk characteristics of the underlying servicing, principally by loan type. If temporary impairment exists within a tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the fair value. If it is later determined all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced through a recovery of income.

MSRs are also reviewed for other-than-temporary impairment. Other-than-temporary impairment exists when recoverability of a recorded valuation allowance is determined to be remote considering historical and projected interest rates, prepayments, and loan pay-off activity. When this situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the MSRs. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the MSRs and the valuation allowance, precluding subsequent recoveries.

As part of mortgage banking operations, the Company enters into commitments to originate loans whereby the interest rate on these loans is determined prior to funding (“rate lock commitments”). Similar to loans held for sale, the fair value of rate lock commitments is subject to change primarily due to changes in interest rates. Under the Company’s risk management policy, these fair values are hedged primarily by selling forward contracts on agency securities. The rate lock commitments on mortgage loans intended to be sold and the related hedging instruments are recorded at fair value with changes in fair value recorded in current earnings.

Reserve for Loan and Lease Losses — The reserve for loan and lease losses is maintained at a level believed to be appropriate by the Company to absorb probable losses inherent in the loan and lease portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan and lease losses related to specifically identified impaired loans and leases as well as probable losses in the remainder of the various loan and lease portfolios. For purposes of determining the reserve, the Company has segmented loans and leases into classes based on the associated risk within these segments. The Company has determined that eight classes exist within the loan and lease portfolio. The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, formula reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not deemed impaired, and reserves for pooled homogenous loans and leases. The Company’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change.

Specific reserves are established for certain business and specialty finance credits based on a regular analysis of special attention loans and leases. This analysis is performed by the Credit Policy Committee (CPC), the Loan Review Department, Credit Administration, and the Loan Workout Departments. The specific reserves are based on an analysis of underlying collateral values, cash flow considerations and, if applicable, guarantor capacity. Sources for determining collateral values include appraisals, evaluations, auction values and industry guides. Generally, for loans secured by commercial real estate and dependent on cash flows from the underlying collateral to service the debt, a new appraisal is obtained at the time the credit is deemed to be impaired. For non-income producing commercial real estate, an appraisal or evaluation is ordered depending on an analysis of the underlying factors, including an assessment of the overall credit worthiness of the borrower, the value of non-real estate collateral supporting the transaction and the date of the most recent existing appraisal or evaluation. An evaluation may be performed in lieu of obtaining a new appraisal for less complex transactions secured by local market properties. Values based on evaluations are discounted more heavily than those determined by appraisals when calculating loan impairment. Appraisals, evaluations and industry guides are used to determine aircraft values. Appraisals, industry guides and auction values are used to determine construction equipment, truck and auto values.

The formula reserves determined for each business lending division portfolio are calculated quarterly by applying loss factors to outstanding loans and leases based upon a review of historical loss experience and qualitative factors, which include but are not limited to, economic trends, current market risk assessment by industry, recent loss experience in particular segments of the portfolios, movement in equipment values collateralizing specialized industry portfolios, concentrations of credit, delinquencies, trends in volume, experience and depth of relationship managers and division management, and the effects of changes in lending policies and practices, including changes in quality of the loan and lease origination, servicing and risk management processes. Special attention loans and leases without specific reserves receive a higher percentage allocation ratio than credits not considered special attention.

Pooled loans and leases are smaller credits and are homogenous in nature, such as consumer credits and residential mortgages. Pooled loan and lease loss reserves are based on historical net charge-offs, adjusted for delinquencies, the effects of lending practices and programs and current economic conditions, and current trends in the geographic markets which the Company serves.

A comprehensive analysis of the reserve is performed on a quarterly basis by reviewing all loans and leases over a fixed dollar amount ($100,000) where the internal credit quality grade is at or below a predetermined classification. Although the Company determines the amount of each element of the reserve separately and relies on this process as an important credit management tool, the entire reserve is available for the entire loan and lease portfolio. The actual amount of losses incurred can vary significantly from the estimated amounts both positively and negatively. The Company’s methodology includes several factors intended to minimize the difference between estimated and actual losses. These factors allow the Company to adjust its estimate of losses based on the most recent information available.

Impaired loans are reviewed quarterly to assess the probability of being able to collect the portion considered impaired. When a review and analysis of the underlying credit and collateral indicates ultimate collection is improbable, the deficiency is charged-off and deducted from the reserve. Loans and leases, which are deemed uncollectible or have a low likelihood of collection, are charged-off and deducted from the reserve, while recoveries of amounts previously charged-off are credited to the reserve. A (recovery of) provision for loan and lease losses is credited or charged to operations based on the Company’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

Equipment Owned Under Operating Leases — The Company finances various types of construction equipment, medium and heavy duty trucks, automobiles and other equipment under leases classified as operating leases. The equipment underlying the operating leases is reported at cost, net of accumulated depreciation, in the Statements of Financial Condition. These operating lease arrangements require the lessee to make a fixed monthly rental payment over a specified lease term generally ranging from three to seven years. Revenue consists of the contractual lease payments and is recognized on a straight-line basis over the lease term and reported as noninterest income. Leased assets are being depreciated on a straight-line method over the lease term to the estimate of the equipment’s fair market value at lease termination, also referred to as “residual” value. The depreciation of these operating lease assets is reported as Noninterest Expense on the Statements of Income. For automobile leases, fair value is based upon published industry market guides. For other equipment leases, fair value may be based upon observable market prices, third-party valuations, or prices received on sales of similar assets at the end of the lease term. These residual values are reviewed annually to ensure the recorded amount does not exceed the fair market value at the lease termination. At the end of the lease, the operating lease asset is either purchased by the lessee or returned to the Company.

Other Real Estate — Other real estate acquired through partial or total satisfaction of nonperforming loans is included in Other Assets and recorded at fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property less cost to sell, and the carrying value of the loan charged to the reserve for loan and lease losses or other income, if a positive adjustment. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs, property maintenance costs, and gains or losses recognized upon the sale of other real estate are recognized in Noninterest Expense on the Statements of Income. Gains or losses resulting from the sale of other real estate are recognized on the date of sale. As of December 31, 2018 and 2017, other real estate had carrying values of $0.30 million and $1.31 million, respectively, and is included in Other Assets in the Statements of Financial Condition.

Repossessed Assets — Repossessed assets may include fixtures and equipment, inventory and receivables, aircraft, construction equipment, and vehicles acquired from business banking and specialty finance activities. Repossessed assets are included in Other Assets at fair value of the equipment or vehicle less estimated selling costs. At the time of repossession, the recorded amount of the loan or lease is written down to the fair value of the equipment or vehicle by a charge to the reserve for loan and lease losses or other income, if a positive adjustment. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs, equipment maintenance costs, and gains or losses recognized upon the sale of repossessions are recognized in Noninterest Expense on the Statements of Income. Gains or losses resulting from the sale of repossessed assets are recognized on the date of sale. Repossessed assets totaled $6.66 million and $10.11 million, as of December 31, 2018 and 2017, respectively, and are included in Other Assets in the Statements of Financial Condition.

Premises and Equipment — Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed by the straight-line method, primarily with useful lives ranging from three to 31.5 years. Maintenance and repairs are charged to expense as incurred, while improvements, which extend the useful life, are capitalized and depreciated over the estimated remaining life.

Goodwill and Intangibles — Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Goodwill is reviewed for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the carrying amount. Goodwill is allocated into two reporting units. Fair value for each reporting unit is estimated using stock price multiples or earnings before interest, tax, depreciation and amortization (EBITDA) multiples. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to impairment testing. All of the Company’s other intangible assets have finite lives and are amortized on a straight-line basis over varying periods not exceeding twenty-five years. The Company performed the required annual impairment test of goodwill during the fourth quarter of 2018 and determined that no impairment exists.

Partnership Investments — The partnerships in which the Company has investments account for their investments at fair value. As a result, the Company’s investments in these partnerships reflect the underlying fair value of the partnerships’ investments. The Company accounts for its investments in partnerships for which it owns three percent or more of the partnership on the equity method. The Company accounts for its investments in partnerships of which it owns less than three percent at fair value less impairment. The Company has elected to use the practical expedient to estimate fair value of an investment in an investment company using the net asset value of its partnership interest. The Company uses the hypothetical liquidation book value (HLBV) method for equity investments when the liquidation rights and priorities as defined by an equity investment agreement differ from what is reflected by the underlying percentage ownership interests. The HLBV method is commonly applied to equity investments in the renewable energy industry, where cash percentages vary at different points in time and are not directly linked to an investor’s ownership percentage. A calculation is prepared at each balance sheet date to determine the amount that the Company would receive if an equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is 1st Source’s share of the earnings or losses from the equity investment for the period. Investments in partnerships are included in Other Assets in the Statements of Financial Condition. The balances as of December 31, 2018 and 2017 were $23.46 million and $23.76 million, respectively.

Short-Term Borrowings — Short-term borrowings consist of Federal funds purchased, securities sold under agreements to repurchase, commercial paper, Federal Home Loan Bank notes, and borrowings from non-affiliated banks. Federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings mature within one to 365 days of the transaction date. Commercial paper matures within seven to 270 days. Other short-term borrowings in the Statements of Financial Condition include the Company’s liability related to mortgage loans available for repurchase under GNMA optional repurchase programs.

Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third-party is continually monitored and additional collateral obtained or requested to be returned to the Company as deemed appropriate.

Revenue Recognition — The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial services offered primarily through 1st Source Bank and its subsidiaries.

Interest Income — The largest source of revenue for the Company is interest income which is primarily recognized on an accrual basis according to nondiscretionary formulas in written contracts, such as loan and lease agreements or investment securities contracts.

Noninterest Income — The Company earns noninterest income through a variety of financial and transaction services provided to corporate and consumer clients such as trust and wealth advisory, deposit account, debit card, mortgage banking, insurance, and equipment rental services. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.

Trust and Wealth AdvisoryFees — Trust and wealth advisory fees are recognized on the accrual basis.

Income Taxes — 1st Source and its subsidiaries file a consolidated Federal income tax return. The provision for incomes taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, the Company believes it is more likely than not that all of the deferred tax assets will be realized.

The Company uses the deferral method of accounting on investments that generate investment tax credits. Under this method, the investment tax credits are recognized as a reduction to the related asset. The expense on certain qualified affordable housing investments is included in Tax Expense in the Statements of Income.

Positions taken in the tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within Income Tax Expense in the Statements of Income.

Net Income Per Common Share — Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding, plus the dilutive effect of outstanding stock options, stock warrants and nonvested stock-based compensation awards.

Stock-Based Employee Compensation — The Company recognizes stock-based compensation as compensation cost in the Statements of Income based on their fair values on the measurement date, which, for its purposes, is the date of grant. The Company recognizes forfeitures as they occur.

Segment Information — 1st Source has one principal business segment, commercial banking. While our chief decision makers monitor the revenue streams of various products and services, the identifiable segments’ operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company’s financial service operations are considered to be aggregated in one reportable operating segment.

Derivative Financial Instruments — The Company occasionally enters into derivative financial instruments as part of its interest rate risk management strategies. These derivative financial instruments consist primarily of interest rate swaps. All derivative instruments are recorded on the Statements of Financial Condition, as either an asset or liability, at their fair value. The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the derivative. For a derivative used to hedge changes in fair value of a recognized asset or liability, or an unrecognized firm commitment, the gain or loss on the derivative will be recognized in earnings together with the offsetting loss or gain on the hedged item. This results in an earnings impact only to the extent that the hedge is ineffective in achieving offsetting changes in fair value. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in earnings. For a derivative used to hedge changes in cash flows associated with forecasted transactions, the gain or loss on the effective portion of the derivative will be deferred, and reported as accumulated other comprehensive income, a component of shareholders’ equity, until such time the hedged transaction affects earnings. For derivative instruments not accounted for as hedges, changes in fair value are recognized in noninterest income/expense. Deferred gains and losses from derivatives that are terminated and were in a cash flow hedge are amortized over the shorter of the original remaining term of the derivative or the remaining life of the underlying asset or liability.

Fair Value Measurements — The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale, mortgage loans held for sale, and derivative instruments are carried at fair value on a recurring basis. Fair value measurements are also utilized to determine the initial value of certain assets and liabilities, to perform impairment assessments, and for disclosure purposes. The Company uses quoted market prices and observable inputs to the maximum extent possible when measuring fair value. In the absence of quoted market prices, various valuation techniques are utilized to measure fair value. When possible, observable market data for identical or similar financial instruments are used in the valuation. When market data is not available, fair value is determined using valuation models that incorporate management’s estimates of the assumptions a market participant would use in pricing the asset or liability.

Fair value measurements are classified within one of three levels based on the observability of the inputs used to determine fair value, as follows:

Level 1 — The valuation is based on quoted prices in active markets for identical instruments.

Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 — The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.

Reclassifications — Certain amounts in the prior periods consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on total assets, shareholders’ equity or net income as previously reported.

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Recent Accounting Pronouncements

12 Months Ended

Dec. 31, 2018

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Recent Accounting Pronouncements

Recent Accounting Pronouncements

Intangibles - Internal-Use Software: In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contact with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The guidance is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is assessing ASU 2018-15 and the impact on its accounting and disclosures.

Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” These amendments modify the disclosure requirements in Topic 820 as follows:

Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.

Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is assessing ASU 2018-13 and the impact on its disclosures.

Share Based Payment Accounting: In June 2018, the FASB issued ASU No. 2018-07 “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company adopted ASU 2018-07 on January 1, 2019 and it did not have an impact on its accounting and disclosures.

Income Taxes: In March 2018, the FASB issued ASU 2018-05 “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118.” These amendments add SEC guidance to the FASB Accounting Standards Codification regarding the Tax Cuts and Jobs Act pursuant to the issuance of SAB 118. The amendments are effective upon addition to the FASB Codification. Disclosures related to the effect of the Tax Cuts and Jobs Act and the Company’s utilization of SAB 118 appear in Note 17 - Income Taxes.

Accumulated Other Comprehensive Income (Loss): In February 2018, the FASB issued ASU No. 2018-02 “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” These amendments provide financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The guidance is effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The amendments should be applied either in the period adopted or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company early adopted ASU 2018-02 on January 1, 2018 through a $0.72 million cumulative-effect adjustment from AOCI to increase retained earnings related to unrealized gains and losses on available-for-sale securities. No other income tax effects related to the application of the Tax Cuts and Jobs Act were reclassified from AOCI to retained earnings.

Premium Amortization: In March 2017, the FASB issued ASU No. 2017-08 “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted ASU 2017-08 on January 1, 2019 and recognized a cumulative-effect adjustment to retained earnings of $0.30 million.

Simplifying the Test for Goodwill Impairment: In January 2017, the FASB issued ASU No. 2017-04 “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company has assessed ASU 2017-04 and does not expect it to have a material impact on its accounting and disclosures.

Measurement of Credit Losses on Financial Instruments: In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the financial assets.

For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense.

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.

ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has a cross-functional team working through an implementation plan which includes assessment and documentation of processes, internal controls and data as well as model development. The Company is also in the process of implementing a third-party software solution to assist in the application of the new standard. The impact of adopting ASU 2016-13 cannot be reasonably estimated at this point.

Leases: In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early adoption is permitted.

In July 2018, the FASB issued amendments (ASU No. 2018-11) which provide entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The amendments in ASU 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met. For entities that have not adopted Topic 842 before the issuance of ASU No. 2018-11, the effective date and transition requirements for the amendments related to separating components of a contract are the same as the effective date and transition requirements in ASU No. 2016-02. In December 2018, the FASB issued amendments (ASU No. 2018-20) which addresses issues facing lessors when applying the leases standard. The amendments in ASU 2018-20 provide for certain accounting policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Entities that have not yet adopted Topic 842 before the issuance of ASU 2018-20 should apply ASU 2018-20 to all new and existing leases when the entity first applies Topic 842 and should apply the same transition method elected for Topic 842.

The Company adopted ASU 2016-02, 2018-11, and ASU 2018-20 on January 1, 2019. Upon adoption, the Company recognized discounted right of use assets and lease liabilities of $9.97 million and $10.75 million, respectively. The Company chose not to adopt the hindsight practical expedient and instead chose to utilize the transition method of adoption whereby comparative periods shown in the period of adoption will continue to be in accordance with Topic 840. The Company elected to apply the practical expedients where an entity may choose to not reassess: whether expired or existing contracts contain leases under the new definition of a lease; lease classification for expired or existing leases; and whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. Additionally, the Company will make an accounting policy election not to apply the recognition guidance in ASU 2016-02 to any short-term leases. The Company also elected the practical expedient, as an accounting policy election by class of underlying asset, to account for lease and nonlease components together as a single lease component. The Company made an accounting policy election as a lessor to exclude sales taxes and other similar taxes from being reported as lease revenue with an associated expense.

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Investment Securities

12 Months Ended

Dec. 31, 2018

Investments, Debt and Equity Securities [Abstract]

Investment Securities

Investment Securities Available-For-Sale

The following table shows investment securities available-for-sale.

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2018
U.S. Treasury and Federal agencies securities	$	537,913	$	196	$	(6,886	)	$	531,223
U.S. States and political subdivisions securities	95,346		172		(936		)	94,582
Mortgage-backed securities - Federal agencies	324,390		718		(6,875		)	318,233
Corporate debt securities	45,843		—		(451		)	45,392
Foreign government and other securities	700		—		(1		)	699
Total investment securities available-for-sale	$	1,004,192	$	1,086	$	(15,149	)	$	990,129
December 31, 2017
U.S. Treasury and Federal agencies securities	$	471,508	$	57	$	(3,446	)	$	468,119
U.S. States and political subdivisions securities	116,260		648		(908		)	116,000
Mortgage-backed securities - Federal agencies	289,327		1,456		(2,873		)	287,910
Corporate debt securities	31,573		5		(284		)	31,294
Foreign government and other securities	700		10		—			710
Total investment securities available-for-sale	$	909,368	$	2,176	$	(7,511	)	$	904,033

At December 31, 2018, the residential mortgage-backed securities held by the Company consisted primarily of GNMA, FNMA and FHLMC pass-through certificates which are guaranteed by those respective agencies of the United States government (Government Sponsored Enterprise, GSEs).

The Company did not hold any marketable equity securities at December 31, 2018 and 2017.

The following table shows the contractual maturities of investments in debt securities available-for-sale at December 31, 2018. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	127,476	$	126,664
Due after one year through five years	541,389		534,377
Due after five years through ten years	10,937		10,855
Due after ten years	—		—
Mortgage-backed securities	324,390		318,233
Total debt securities available-for-sale	$	1,004,192	$	990,129

The following table summarizes gross unrealized losses and fair value by investment category and age. At December 31, 2018, the Company’s available-for-sale securities portfolio consisted of 639 securities, 437 of which were in an unrealized loss position.

	Less than 12 Months					12 months or Longer					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2018
U.S. Treasury and Federal agencies securities	$	55,491	$	(177	)	$	424,269	$	(6,709	)	$	479,760	$	(6,886	)
U.S. States and political subdivisions securities	21,059		(61		)	45,365		(875		)	66,424		(936		)
Mortgage-backed securities - Federal agencies	65,554		(511		)	198,221		(6,364		)	263,775		(6,875		)
Corporate debt securities	21,496		(143		)	23,896		(308		)	45,392		(451		)
Foreign government and other securities	699		(1		)	—		—			699		(1		)
Total temporarily impaired available-for-sale securities	$	164,299	$	(893	)	$	691,751	$	(14,256	)	$	856,050	$	(15,149	)
December 31, 2017
U.S. Treasury and Federal agencies securities	$	311,865	$	(1,161	)	$	89,617	$	(2,285	)	$	401,482	$	(3,446	)
U.S. States and political subdivisions securities	34,971		(287		)	24,909		(621		)	59,880		(908		)
Mortgage-backed securities - Federal agencies	137,169		(1,336		)	60,162		(1,537		)	197,331		(2,873		)
Corporate debt securities	13,747		(57		)	10,048		(227		)	23,795		(284		)
Foreign government and other securities	—		—			—		—			—		—
Total temporarily impaired available-for-sale securities	$	497,752	$	(2,841	)	$	184,736	$	(4,670	)	$	682,488	$	(7,511	)

At December 31, 2018, the Company does not have the intent to sell any of the available-for-sale securities in the table above and believes that it is more likely than not that it will not have to sell any such securities before an anticipated recovery of cost. The unrealized losses on debt securities are due to market volatility. The fair value is expected to recover on all debt securities as they approach their maturity date or repricing date or if market yields for such investments decline. The Company does not believe any of the securities are impaired due to reasons of credit quality.

The following table shows the gross realized gains and losses from the securities available-for-sale portfolio, including marketable equity securities.

(Dollars in thousands)	2018			2017			2016
Gross realized gains	$	2		$	7,425		$	2,090
Gross realized losses	(347		)	(2,895		)	—
OTTI losses	—			(190		)	(294		)
Net realized (losses) gains	$	(345	)	$	4,340		$	1,796

At December 31, 2018 and 2017, investment securities with carrying values of $242.31 million and $289.05 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.

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Loan and Lease Financings

12 Months Ended

Dec. 31, 2018

Receivables [Abstract]

Loan and Lease Financings

Loan and Lease Financings

Total loans and leases outstanding were recorded net of unearned income and deferred loan fees and costs at December 31, 2018 and 2017, and totaled $4.84 billion and $4.53 billion, respectively. At December 31, 2018 and 2017, net deferred loan and lease costs were $4.54 million and $3.85 million, respectively.

The loan and lease portfolio includes direct financing leases, which are included in commercial and agricultural, auto and light truck, medium and heavy duty truck, aircraft, and construction equipment on the Consolidated Statements of Financial Condition.

The following table shows the summary of the gross investment in lease financing and the components of the investment in lease financing at December 31, 2018 and 2017.

(Dollars in thousands)	2018			2017
Direct finance leases:
Rentals receivable	$	219,301		$	208,295
Estimated residual value of leased assets	38,138			29,638
Gross investment in lease financing	257,439			237,933
Unearned income	(46,709		)	(37,851		)
Net investment in lease financing	$	210,730		$	200,082

At December 31, 2018, the direct financing minimum future lease payments receivable for each of the years 2019 through 2023 were $53.04 million, $46.58 million, $38.69 million, $36.32 million, and $30.79 million, respectively.

In the ordinary course of business, the Company has extended loans to certain directors, executive officers, and principal shareholders of equity securities of 1st Source and to their affiliates. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Company and did not involve more than the normal risk of collectability, or present other unfavorable features. The loans are consistent with sound banking practices and within applicable regulatory and lending limitations. The aggregate dollar amounts of these loans were $11.38 million and $14.61 million at December 31, 2018 and 2017, respectively. During 2018, $8.73 million of new loans and other additions were made and repayments and other reductions totaled $11.96 million.

The Company evaluates loans and leases for credit quality at least annually but more frequently if certain circumstances occur (such as material new information which becomes available and indicates a potential change in credit risk). The Company uses two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.

All loans and leases, except residential real estate and home equity loans and consumer loans, are assigned credit quality grades on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on our safety and soundness. Loans or leases graded 7 or weaker are considered “special attention” credits and, as such, relationships in excess of $100,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the reserve for loan and lease losses. Grade 7 credits are defined as “watch” and contain greater than average credit risk and are monitored to limit our exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered ‘‘classified’’ and are graded 9 through 12 corresponding to the regulatory definitions of “substandard” (grades 9 and 10) and the more severe ‘‘doubtful’’ (grade 11) and ‘‘loss’’ (grade 12).

The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.

	Credit Quality Grades
(Dollars in thousands)	1-6		7-12		Total
December 31, 2018
Commercial and agricultural	$	1,043,019	$	30,186	$	1,073,205
Auto and light truck	528,174		31,813		559,987
Medium and heavy duty truck	281,834		1,710		283,544
Aircraft	768,442		34,669		803,111
Construction equipment	625,579		19,660		645,239
Commercial real estate	787,376		22,510		809,886
Total	$	4,034,424	$	140,548	$	4,174,972
December 31, 2017
Commercial and agricultural	$	906,074	$	23,923	$	929,997
Auto and light truck	482,455		14,361		496,816
Medium and heavy duty truck	293,318		3,617		296,935
Aircraft	815,956		28,701		844,657
Construction equipment	552,684		10,753		563,437
Commercial real estate	726,134		15,434		741,568
Total	$	3,776,621	$	96,789	$	3,873,410

For residential real estate and home equity and consumer loans, credit quality is based on the aging status of the loan and by payment activity. The following table shows the recorded investment in residential real estate and home equity and consumer loans by performing or nonperforming status. Nonperforming loans are those loans which are on nonaccrual status or are 90 days or more past due.

(Dollars in thousands)	Performing		Nonperforming		Total
December 31, 2018
Residential real estate and home equity	$	521,846	$	2,009	$	523,855
Consumer	136,423		214		136,637
Total	$	658,269	$	2,223	$	660,492
December 31, 2017
Residential real estate and home equity	$	523,803	$	2,319	$	526,122
Consumer	127,982		164		128,146
Total	$	651,785	$	2,483	$	654,268

The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.

(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Total Accruing Loans		Nonaccrual		Total Financing Receivables
December 31, 2018
Commercial and agricultural	$	1,070,530	$	22	$	—	$	—	$	1,070,552	$	2,653	$	1,073,205
Auto and light truck	544,022		3,154		1,437		—		548,613		11,374		559,987
Medium and heavy duty truck	283,284		154		—		—		283,438		106		283,544
Aircraft	790,233		4,149		1,168		—		795,550		7,561		803,111
Construction equipment	641,270		1,643		—		—		642,913		2,326		645,239
Commercial real estate	807,793		109		—		—		807,902		1,984		809,886
Residential real estate and home equity	520,124		1,267		455		295		522,141		1,714		523,855
Consumer	135,591		682		150		73		136,496		141		136,637
Total	$	4,792,847	$	11,180	$	3,210	$	368	$	4,807,605	$	27,859	$	4,835,464
December 31, 2017
Commercial and agricultural	$	927,113	$	281	$	—	$	—	$	927,394	$	2,603	$	929,997
Auto and light truck	485,885		2,869		21		—		488,775		8,041		496,816
Medium and heavy duty truck	296,564		—		—		—		296,564		371		296,935
Aircraft	823,638		14,570		4,492		—		842,700		1,957		844,657
Construction equipment	561,665		333		448		—		562,446		991		563,437
Commercial real estate	738,006		23		121		—		738,150		3,418		741,568
Residential real estate and home equity	521,943		1,508		352		429		524,232		1,890		526,122
Consumer	127,107		776		99		30		128,012		134		128,146
Total	$	4,481,921	$	20,360	$	5,533	$	459	$	4,508,273	$	19,405	$	4,527,678

Interest income for the years ended December 31, 2018, 2017, and 2016, would have increased by approximately $2.18 million, $1.14 million, and $1.11 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.

The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Reserve
December 31, 2018
With no related reserve recorded:
Commercial and agricultural	$	2,471	$	2,471	$	—
Auto and light truck	7,504		7,504		—
Medium and heavy duty truck	106		106		—
Aircraft	556		556		—
Construction equipment	905		905		—
Commercial real estate	1,131		1,131		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	12,673		12,673		—
With a reserve recorded:
Commercial and agricultural	—		—		—
Auto and light truck	3,840		3,840		372
Medium and heavy duty truck	—		—		—
Aircraft	7,004		7,004		1,255
Construction equipment	1,340		1,340		279
Commercial real estate	759		759		51
Residential real estate and home equity	344		346		126
Consumer	—		—		—
Total with a reserve recorded	13,287		13,289		2,083
Total impaired loans	$	25,960	$	25,962	$	2,083
December 31, 2017
With no related reserve recorded:
Commercial and agricultural	$	2,439	$	2,439	$	—
Auto and light truck	—		—		—
Medium and heavy duty truck	371		371		—
Aircraft	1,901		1,901		—
Construction equipment	584		584		—
Commercial real estate	2,375		2,375		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	7,670		7,670		—
With a reserve recorded:
Commercial and agricultural	—		—		—
Auto and light truck	7,780		7,780		243
Medium and heavy duty truck	—		—		—
Aircraft	—		—		—
Construction equipment	344		344		108
Commercial real estate	971		971		181
Residential real estate and home equity	352		354		134
Consumer	—		—		—
Total with a reserve recorded	9,447		9,449		666
Total impaired loans	$	17,117	$	17,119	$	666

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class, for years ending December 31, 2018, 2017 and 2016.

	2018				2017				2016
(Dollars in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Commercial and agricultural	$	2,812	$	—	$	4,526	$	1	$	3,484	$	6
Auto and light truck	9,352		—		766		—		10		—
Medium and heavy duty truck	247		—		658		—		—		—
Aircraft	9,987		20		4,873		5		6,291		2
Construction equipment	1,663		—		1,011		—		766		—
Commercial real estate	2,303		—		3,220		2		5,417		123
Residential real estate and home equity	347		15		355		15		415		15
Consumer loans	—		—		—		—		—		—
Total	$	26,711	$	35	$	15,409	$	23	$	16,383	$	146

The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during 2018, 2017 and 2016, segregated by class, as well as the recorded investment as of December 31. The classification between nonperforming and performing is shown at the time of modification. Modification programs focused on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. The modifications did not result in the contractual forgiveness of principal or interest. There were no modifications during 2018, one modification during 2017, and one modification during 2016 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modifications was immaterial.

	2018			2017			2016
(Dollars in thousands)	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Performing TDRs:
Commercial and agricultural	—	$	—	—	$	—	—	$	—
Auto and light truck	—	—		—	—		—	—
Medium and heavy duty truck	—	—		—	—		—	—
Aircraft	—	—		—	—		—	—
Construction equipment	—	—		—	—		—	—
Commercial real estate	—	—		—	—		—	—
Residential real estate and home equity	—	—		—	—		—	—
Consumer	—	—		—	—		—	—
Total performing TDR modifications	—	—		—	—		—	—
Nonperforming TDRs:
Commercial and agricultural	—	—		1	—		—	—
Auto and light truck	1	285		—	—		—	—
Medium and heavy duty truck	—	—		—	—		—	—
Aircraft	—	—		—	—		—	—
Construction equipment	—	—		—	—		1	562
Commercial real estate	—	—		—	—		—	—
Residential real estate and home equity	—	—		—	—		1	314
Consumer	—	—		—	—		—	—
Total nonperforming TDR modifications	1	285		1	—		2	876
Total TDR modifications	1	$	285	1	$	—	2	$	876

There were no TDRs which had a payment default within the twelve months following modification during the year ended December 31, 2018, one nonperforming construction equipment TDR with a recorded investment of $0.41 million which had a payment default within the twelve months following modification for the year ended December 31, 2017 and no TDRs which had payment defaults within the twelve months following modification during the year ended December 31, 2016.

The classification between nonperforming and performing is shown at the time of modification. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of December 31.

Year Ended December 31 (Dollars in thousands)	2018		2017
Performing TDRs	$	344	$	352
Nonperforming TDRs	316		537
Total TDRs	$	660	$	889

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Reserve for Loan and Lease Losses

12 Months Ended

Dec. 31, 2018

Financing Receivable, Allowance for Credit Loss, Additional Information [Abstract]

Reserve for Loan and Lease Losses

Reserve for Loan and Lease Losses

The following table shows the changes in the reserve for loan and lease losses, segregated by class, for each of the three years ended December 31.

(Dollars in thousands)	Commercial and agricultural			Auto and light truck			Medium and heavy duty truck			Aircraft		Construction equipment			Commercial real estate			Residential real estate and home equity			Consumer		Total
2018
Balance, beginning of year	$	16,228		$	10,103		$	4,844		$	34,619	$	9,343		$	14,792		$	3,666		$	1,288	$	94,883
Charge-offs	229			3,308			23			12,222		288			70			63			909		17,112
Recoveries	222			68			—			2,499		100			53			23			271		3,236
Net charge-offs	7			3,240			23			9,723		188			17			40			638		13,876
Provision (recovery of provision)	842			7,826			(518		)	8,151		1,767			930			(201		)	665		19,462
Balance, end of year	$	17,063		$	14,689		$	4,303		$	33,047	$	10,922		$	15,705		$	3,425		$	1,315	$	100,469
2017
Balance, beginning of year	$	14,668		$	8,064		$	4,740		$	34,352	$	8,207		$	13,677		$	3,550		$	1,285	$	88,543
Charge-offs	2,415			774			—			1,872		164			344			124			836		6,529
Recoveries	984			1,153			—			227		298			851			109			267		3,889
Net charge-offs (recoveries)	1,431			(379		)	—			1,645		(134		)	(507		)	15			569		2,640
Provision (recovery of provision)	2,991			1,660			104			1,912		1,002			608			131			572		8,980
Balance, end of year	$	16,228		$	10,103		$	4,844		$	34,619	$	9,343		$	14,792		$	3,666		$	1,288	$	94,883
2016
Balance, beginning of year	$	15,456		$	9,269		$	4,699		$	32,373	$	7,592		$	13,762		$	3,662		$	1,299	$	88,112
Charge-offs	547			4			—			6,123		128			32			219			888		7,941
Recoveries	509			253			10			528		461			469			31			278		2,539
Net charge-offs (recoveries)	38			(249		)	(10		)	5,595		(333		)	(437		)	188			610		5,402
Provision (recovery of provision)	(750		)	(1,454		)	31			7,574		282			(522		)	76			596		5,833
Balance, end of year	$	14,668		$	8,064		$	4,740		$	34,352	$	8,207		$	13,677		$	3,550		$	1,285	$	88,543

The following table shows the reserve for loan and lease losses and recorded investment in loans and leases, segregated by class, separated by individually and collectively evaluated for impairment as of December 31, 2018 and 2017.

(Dollars in thousands)	Commercial and agricultural		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer		Total
December 31, 2018
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	$	—	$	372	$	—	$	1,255	$	279	$	51	$	126	$	—	$	2,083
Ending balance, collectively evaluated for impairment	17,063		14,317		4,303		31,792		10,643		15,654		3,299		1,315		98,386
Total reserve for loan and lease losses	$	17,063	$	14,689	$	4,303	$	33,047	$	10,922	$	15,705	$	3,425	$	1,315	$	100,469
Recorded investment in loans
Ending balance, individually evaluated for impairment	$	2,471	$	11,344	$	106	$	7,560	$	2,245	$	1,890	$	344	$	—	$	25,960
Ending balance, collectively evaluated for impairment	1,070,734		548,643		283,438		795,551		642,994		807,996		523,511		136,637		4,809,504
Total recorded investment in loans	$	1,073,205	$	559,987	$	283,544	$	803,111	$	645,239	$	809,886	$	523,855	$	136,637	$	4,835,464
December 31, 2017
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	$	—	$	243	$	—	$	—	$	108	$	181	$	134	$	—	$	666
Ending balance, collectively evaluated for impairment	16,228		9,860		4,844		34,619		9,235		14,611		3,532		1,288		94,217
Total reserve for loan and lease losses	$	16,228	$	10,103	$	4,844	$	34,619	$	9,343	$	14,792	$	3,666	$	1,288	$	94,883
Recorded investment in loans
Ending balance, individually evaluated for impairment	$	2,439	$	7,780	$	371	$	1,901	$	928	$	3,346	$	352	$	—	$	17,117
Ending balance, collectively evaluated for impairment	927,558		489,036		296,564		842,756		562,509		738,222		525,770		128,146		4,510,561
Total recorded investment in loans	$	929,997	$	496,816	$	296,935	$	844,657	$	563,437	$	741,568	$	526,122	$	128,146	$	4,527,678

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Operating Leases

12 Months Ended

Dec. 31, 2018

Leases, Operating [Abstract]

Operating Leases

Operating Leases

Operating lease equipment at December 31, 2018 and 2017 was $134.44 million and $139.58 million, respectively, net of accumulated depreciation of $65.51 million and $49.74 million, respectively.

The minimum future lease rental payments due from clients on operating lease equipment at December 31, 2018, totaled $99.89 million, of which $30.54 million is due in 2019, $32.83 million in 2020, $18.68 million in 2021, $10.76 million in 2022, $5.29 million in 2023, and $1.79 million thereafter. Depreciation expense related to operating lease equipment for the years ended December 31, 2018, 2017 and 2016 was $26.25 million, $25.22 million and $21.68 million, respectively.

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Premises and Equipment

12 Months Ended

Dec. 31, 2018

Property, Plant and Equipment [Abstract]

Premises and Equipment

Premises and Equipment

The following table shows premises and equipment as of December 31.

(Dollars in thousands)	2018			2017
Land	$	15,223		$	15,413
Buildings and improvements	59,691			58,981
Furniture and equipment	40,789			39,978
Total premises and equipment	115,703			114,372
Accumulated depreciation and amortization	(63,564		)	(59,760		)
Net premises and equipment	$	52,139		$	54,612

Depreciation and amortization of properties and equipment totaled $5.62 million in 2018, $5.66 million in 2017, and $5.25 million in 2016.

During 2018, 2017 and 2016, the Company recorded long-lived asset impairment charges totaling $100,000, $410,000 and $0, respectively. The impairment charges were recorded as a result of appraisals on buildings and were recognized in Other Expense on the Statements of Income.

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Mortgage Servicing Rights

12 Months Ended

Dec. 31, 2018

Transfers and Servicing of Financial Assets [Abstract]

Mortgage Servicing Rights

Mortgage Servicing Rights

The unpaid principal balance of residential mortgage loans serviced for third parties was $734.30 million at December 31, 2018, compared to $752.99 million at December 31, 2017, and $761.85 million at December 31, 2016.

Amortization expense on MSRs is expected to total $0.60 million, $0.53 million, $0.46 million, $0.40 million, and $0.35 million in 2019, 2020, 2021, 2022 and 2023, respectively. Projected amortization excludes the impact of future asset additions or disposals.

The following table shows changes in the carrying value of MSRs and the associated valuation allowance.

(Dollars in thousands)	2018			2017
Mortgage servicing rights:
Balance at beginning of year	$	4,349		$	4,297
Additions	890			1,144
Amortization	(956		)	(1,092		)
Sales	—			—
Carrying value before valuation allowance at end of year	4,283			4,349
Valuation allowance:
Balance at beginning of year	—			—
Impairment recoveries	—			—
Balance at end of year	$	—		$	—
Net carrying value of mortgage servicing rights at end of year	$	4,283		$	4,349
Fair value of mortgage servicing rights at end of year	$	7,238		$	7,187

At December 31, 2018, the fair value of MSRs exceeded the carrying value reported in the Statements of Financial Condition by $2.96 million. This difference represents increases in the fair value of certain MSRs that could not be recorded above cost basis.

Funds held in trust at 1st Source for the payment of principal, interest, taxes and insurance premiums applicable to mortgage loans being serviced for others, were approximately $10.28 million and $10.42 million at December 31, 2018 and December 31, 2017, respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were $2.61 million, $2.70 million, and $2.69 million for 2018, 2017, and 2016, respectively. Mortgage loan contractual servicing fees are included in Mortgage Banking Income on the Consolidated Statements of Income.

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Intangible Assets and Goodwill

12 Months Ended

Dec. 31, 2018

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets and Goodwill

Intangible Assets and Goodwill

At December 31, 2018, intangible assets consisted of goodwill of $83.87 million and other intangible assets of $0.13 million, which was net of accumulated amortization of $0.07 million. At December 31, 2017, intangible assets consisted of goodwill of $83.68 million and other intangible assets of $0.06 million, which was net of accumulated amortization of $9.48 million. Intangible asset amortization was $0.08 million, $0.36 million, and $0.58 million for 2018, 2017, and 2016, respectively. Amortization on other intangible assets is expected to total $0.03 million, $0.02 million, $0.02 million, $0.02 million, and $0.02 million in 2019, 2020, 2021, 2022, and 2023, respectively.

The following table shows a summary of core deposit intangible and other intangible assets as of December 31.

(Dollars in thousands)	2018			2017
Core deposit intangibles:
Gross carrying amount	$	—		$	8,689
Less: accumulated amortization	—			(8,657		)
Net carrying amount	$	—		$	32
Other intangibles:
Gross carrying amount	$	204		$	857
Less: accumulated amortization	(71		)	(827		)
Net carrying amount	$	133		$	30

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Deposits

12 Months Ended

Dec. 31, 2018

Banking and Thrift [Abstract]

Deposits

Deposits

The aggregate amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more outstanding at December 31, 2018 and 2017 was $666.89 million and $553.80 million, respectively.

The following table shows the amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more outstanding at December 31, 2018, by time remaining until maturity.

(Dollars in thousands)
Under 3 months	$	135,940
4 – 6 months	87,102
7 – 12 months	144,960
Over 12 months	298,890
Total	$	666,892

The following table shows scheduled maturities of time deposits, including both private and public funds, at December 31, 2018.

(Dollars in thousands)
2019	$	755,605
2020	489,445
2021	125,404
2022	52,512
2023	37,145
Thereafter	7,655
Total	$	1,467,766

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Borrowed Funds and Mandatorily Redeemable Securities

12 Months Ended

Dec. 31, 2018

Debt Disclosure [Abstract]

Borrowed Funds And Mandatorily Redeemable Securities

Borrowed Funds and Mandatorily Redeemable Securities

The following table shows the details of long-term debt and mandatorily redeemable securities as of December 31, 2018 and 2017.

(Dollars in thousands)	2018		2017
Federal Home Loan Bank borrowings (1.04% – 5.04%)	$	46,444	$	47,114
Mandatorily redeemable securities	16,542		18,948
Other long-term debt	8,137		3,998
Total long-term debt and mandatorily redeemable securities	$	71,123	$	70,060

Annual maturities of long-term debt outstanding at December 31, 2018, for the next five years and thereafter beginning in 2019, are as follows (in thousands): $2,565; $2,460; $2,748; $4,410; $1,630; and $57,310.

At December 31, 2018, the Federal Home Loan Bank borrowings represented a source of funding for community economic development activities, agricultural loans and general funding for the bank and consisted of 17 fixed rate notes with maturities ranging from 2021 to 2027. These notes were collateralized by $58.04 million of certain real estate loans.

Mandatorily redeemable securities as of December 31, 2018 and 2017, of $16.54 million and $18.95 million, respectively reflected the “book value” shares under the 1st Source Executive Incentive Plan. See Note 16 - Stock Based Compensation (Stock Award Plans) for additional information. Dividends paid on these shares and changes in book value per share are recorded as other interest expense. Total interest expense recorded for 2018, 2017, and 2016 was $1.61 million, $1.68 million, and $1.45 million, respectively.

The following table shows the details of short-term borrowings as of December 31, 2018 and 2017.

	2018				2017
(Dollars in thousands)	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Federal funds purchased	$	10,000	2.70	%	$	56,000	1.63	%
Security repurchase agreements	103,627		0.25		149,834		0.20
Commercial paper	4,325		0.29		6,115		0.27
Federal Home Loan Bank advances	80,000		2.57		—		—
Other short-term borrowings	1,392		—		2,646		—
Total short-term borrowings	$	199,344	1.30	%	$	214,595	0.57	%

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Variable Interest Entities

12 Months Ended

Dec. 31, 2018

Variable Interest Entities

Variable Interest Entities

Variable Interest Entities

A variable interest entity (VIE) is a partnership, limited liability company, trust or other legal entity that meets any one of the following criteria:

• The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.

• The entity’s investors lack the power to direct the activities that most significantly affect the entity’s economic performance.

• The entity’s at-risk holders do not have the obligation to absorb the losses or the right to receive residual returns.

• The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entity’s activities involve, or are conducted on behalf of, investors with disproportionately few voting rights.

The Company is involved in various entities that are considered to be VIEs. The Company’s investments in VIEs are primarily related to investments promoting affordable housing, community development and renewable energy sources. Some of these tax-advantaged investments support the Company’s regulatory compliance with the Community Reinvestment Act. The Company’s investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits are recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related investment asset. The Company recognized federal income tax credits related to its affordable housing and community development tax-advantaged investments in tax expense of $1.29 million, $1.15 million and $1.03 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Company also recognized $10.45 million, $18.16 million and $2.91 million of investment tax credits for the years ended December 31, 2018, 2017 and 2016, respectively.

The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. As a limited partner in these operating partnerships, we are allocated credits and deductions associated with the underlying properties. The Company has determined that it is not the primary beneficiary of these investments because the general partners have the power to direct activities that most significantly influence the economic performance of their respective partnerships.

The Company’s investments in these unconsolidated VIEs are carried in Other Assets on the Consolidated Statements of Financial Condition. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are generally carried in Other Liabilities on the Consolidated Statements of Financial Condition. The Company’s maximum exposure to loss from these unconsolidated VIEs include the investment recorded on the Company’s Consolidated Statements of Financial Condition, net of unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business, housing projects and renewable energy projects completely fail and do not meet certain taxing authority compliance requirements resulting in recapture of the related tax credits.

The following table provides a summary of investments in affordable housing, community development and renewable energy VIEs that the Company has not consolidated as of December 31, 2018 and 2017.

(Dollars in thousands)	2018		2017
Investment carrying amount	$	15,083	$	23,759
Unfunded capital and other commitments	6,449		15,712
Maximum exposure to loss	40,705		29,926

The Company is required to consolidate VIEs in which it has concluded it has significant involvement in and the ability to direct the activities that impact the entity’s economic performance. The Company is the managing general partner of an entity to which it shares interest in tax-advantaged investments with a third party. At December 31, 2018, approximately $8.38 million of the Company’s assets and $6.70 million of its liabilities included on the Consolidated Statements of Financial Condition were related to the tax-advantaged investment VIE which the Company has consolidated. No amounts were outstanding as of December 31, 2017. The assets of the consolidated VIE are reported in Other Assets, the liabilities are reported in Other Liabilities and the non-controlling interest is reported in Equity on the Consolidated Statements of Financial Condition. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIE do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIE is generally limited to the carrying value of its variable interest plus any related tax credits previously recognized.

Additionally, the Company sponsors one trust, 1st Source Master Trust (Capital Trust) of which 100% of the common equity is owned by the Company. The Capital Trust was formed in 2007 for the purpose of issuing corporation-obligated mandatorily redeemable capital securities (the capital securities) to third-party investors and investing the proceeds from the sale of the capital securities solely in junior subordinated debenture securities of the Company (the subordinated notes). The subordinated notes held by the Capital Trust are the sole assets of the Capital Trust. The Capital Trust qualifies as a variable interest entity for which the Company is not the primary beneficiary and therefore reported in the financial statements as an unconsolidated subsidiary. The junior subordinated debentures are reflected as subordinated notes in the Statements of Financial Condition with the corresponding interest distributions reflected as Interest Expense in the Statements of Income. The common shares issued by the Capital Trust are included in Other Assets in the Statements of Financial Condition.

Distributions on the capital securities issued by the Capital Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Capital Trust on the subordinated notes held by the Capital Trust. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated notes. The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The capital securities held by the Capital Trust qualify as Tier 1 capital under Federal Reserve Board guidelines.

The following table shows subordinated notes at December 31, 2018.

(Dollars in thousands)	Amount of Subordinated Notes		Interest Rate		Maturity Date
June 2007 issuance (1)	$	41,238	7.22	%	6/15/2037
August 2007 issuance (2)	17,526		4.27	%	9/15/2037
Total	$	58,764

(1) Fixed rate through life of debt.

(2) 3-Month LIBOR +1.48% through remaining life of debt.

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Earnings Per Share

12 Months Ended

Dec. 31, 2018

Earnings Per Share [Abstract]

Earnings Per Share

Earnings Per Share

Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards. Non-vested restricted stock awards are considered participating securities to the extent the holders of these securities receive non-forfeitable dividends at the same rate as holders of common stock. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

Stock options, where the exercise price was greater than the average market price of the common shares, were excluded from the computation of diluted earnings per common share because the result would have been antidilutive. No stock options were considered antidilutive as of December 31, 2018, 2017 and 2016.

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share for the three years ending December 31.

(Dollars in thousands - except per share amounts)	2018		2017		2016
Distributed earnings allocated to common stock	$	24,894	$	19,701	$	18,707
Undistributed earnings allocated to common stock	56,975		47,830		38,670
Net earnings allocated to common stock	81,869		67,531		57,377
Net earnings allocated to participating securities	545		520		409
Net income allocated to common stock and participating securities	$	82,414	$	68,051	$	57,786
Weighted average shares outstanding for basic earnings per common share	25,937,599		25,925,820		25,879,397
Dilutive effect of stock compensation	—		—		—
Weighted average shares outstanding for diluted earnings per common share	25,937,599		25,925,820		25,879,397
Basic earnings per common share	$	3.16	$	2.60	$	2.22
Diluted earnings per common share	$	3.16	$	2.60	$	2.22

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Accumulated Other Comprehensive Income

12 Months Ended

Dec. 31, 2018

Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]

Accumulated Other Comprehensive Income

Accumulated Other Comprehensive Income

The following table presents reclassifications out of accumulated other comprehensive income related to unrealized gains and losses on available-for-sale securities for the two years ending December 31.

(Dollars in thousands)	2018			2017			Affected Line Item in the Statements of Income
Realized (losses) gains included in net income	$	(345	)	$	4,340		(Losses) gains on investment securities available-for-sale
	(345		)	4,340			Income before income taxes
Tax effect	83			(1,629		)	Income tax expense
Net of tax	$	(262	)	$	2,711		Net income

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Employee Benefit Plans

12 Months Ended

Dec. 31, 2018

Retirement Benefits [Abstract]

Employee Benefit Plans

Employee Benefit Plans

The 1st Source Corporation Employee Stock Ownership and Profit Sharing Plan (as amended, the “Plan”) includes an employee stock ownership component, which is designed to invest in and hold 1st Source common stock, and a 401(k) plan component, which holds all Plan assets not invested in 1st Source common stock. The Plan encourages diversification of investments with opportunities to change investment elections and contribution levels.

Employees are eligible to participate in the Plan the first of the month following 90 days of employment. The Company matches dollar for dollar on the first 4% of deferred compensation, plus 50 cents on the dollar of the next 2% deferrals. The Company will also contribute to the Plan an amount designated as a fixed 2% employer contribution. The amount of fixed contribution is equal to two percent of the participant’s eligible compensation. Additionally, each year the Company may, in its sole discretion, make a discretionary profit sharing contribution. As of December 31, 2018 and 2017, there were 1,007,611 and 1,126,939 shares, respectively, of 1st Source Corporation common stock held in relation to employee benefit plans.

The Company contributions are allocated among the participants on the basis of compensation. Each participant’s account is credited with cash and/or shares of 1st Source common stock based on that participant’s compensation earned during the year. After completing 5 years of service in which they worked at least 1,000 hours per year, a participant will be completely vested in the Company’s contribution. An employee is always 100% vested in their deferral. Plan participants are entitled to receive distributions from their Plan accounts upon termination of service, retirement, or death.

Contribution expense for the years ended December 31, 2018, 2017, and 2016, amounted to $4.87 million, $4.88 million, and $4.71 million, respectively.

In addition to the 1st Source Corporation Employee Stock Ownership and Profit Sharing Plan, the Company provides a limited health care and life insurance benefit for some of its retired employees. Effective March 31, 2009, the Company amended the plan so that no new retirees would be covered by the plan. The amendment will have no effect on the coverage for retirees covered at the time of the amendment. Prior to amendment, all full-time employees became eligible for these retiree benefits upon reaching age 55 with 20 years of credited service. The retiree medical plan pays a stated percentage of eligible medical expenses reduced by any deductibles and payments made by government programs and other group coverage. The lifetime maximum benefit payable under the medical plan is $15,000 and for life insurance is $3,000.

The Company’s net periodic post retirement benefit (recovery) cost recognized in Salaries and Employee Benefits in the Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016, amounted to $(0.01) million, $(0.01) million, and $(0.01) million, respectively. The accrued post retirement benefit cost was not material at December 31, 2018, 2017, and 2016.

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Employee Stock Benefit Plans

12 Months Ended

Dec. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Employee Stock Benefit Plans

Stock Based Compensation

As of December 31, 2018, the Company had four active stock-based employee compensation plans. These plans include three executive stock award plans, the Executive Incentive Plan (EIP), the Restricted Stock Award Plan (RSAP), the Strategic Deployment Incentive Plan (SDP); and the Employee Stock Purchase Plan (ESPP). The 2011 Stock Option Plan was approved by the shareholders on April 21, 2011 but the Company had not made any grants through December 31, 2018. These stock-based employee compensation plans were established to help retain and motivate key employees. All of the plans have been approved by the shareholders of 1st Source Corporation. The Executive Compensation and Human Resources Committee (the “Committee”) of the 1st Source Corporation Board of Directors has sole authority to select the employees, establish the awards to be issued, and approve the terms and conditions of each award under the stock-based compensation plans.

Stock-based compensation to employees is recognized as compensation cost in the Statements of Income based on their fair values on the measurement date, which, for 1st Source, is the date of grant. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. The total fair value of share awards vested was $3.53 million during 2018, $2.37 million in 2017, and $4.53 million in 2016.

The following table shows the combined summary of activity regarding active stock option and stock award plans.

			Non-Vested Stock Awards Outstanding
	Shares Available for Grant		Number of Shares		Weighted-Average Grant-Date Fair Value
Balance, January 1, 2016	2,450,799		358,861		$	21.93
Shares authorized - 2016 EIP	59,342		—		—
Shares authorized - Restricted Stock Award Plan(1)	229,439		—		—
Granted	(79,118	)	79,118		26.19
Stock awards vested	—		(155,981	)	20.47
Forfeited	3,543		(5,383	)	23.39
Canceled	(1,950,000	)	—		—
Balance, December 31, 2016	714,005		276,615		23.94
Shares authorized - 2017 EIP	59,064		—		—
Granted	(98,625	)	98,625		33.54
Stock awards vested	—		(76,858	)	22.71
Forfeited	2,000		(2,456	)	29.93
Balance, December 31, 2017	676,444		295,926		27.41
Shares authorized - 2018 EIP	70,461		—		—
Granted	(74,981	)	74,981		29.11
Stock awards vested	—		(106,513	)	25.79
Forfeited	3,135		(10,575	)	27.51
Balance, December 31, 2018	675,059		253,819		$	28.59

(1) Shares issuable under the Plan, after taking into account previously granted and forfeited shares, were adjusted to 250,000 shares effective November 9, 2016.

Stock Option Plans — Incentive stock option plans include the 2011 Stock Option Plan (the “2011 Plan”). Shares available for issuance under the 2011 Plan were reduced from 2,200,000 shares to 250,000 shares effective November 9, 2016.

Each award from the plan is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Committee determines. The option price is equal to the fair market value of a share of 1st Source Corporation’s common stock on the date of grant. Options granted expire at such time as the Committee determines at the date of grant and in no event does the exercise period exceed a maximum of ten years. Upon merger, consolidation, or other corporate consolidation in which 1st Source Corporation is not the surviving corporation, as defined in the plans, all outstanding options immediately vest.

There were zero stock options exercised during 2018, 2017 or 2016. All shares issued in connection with stock option exercises and non-vested stock awards are issued from available treasury stock.

No stock-based compensation expense related to stock options was recognized in 2018, 2017 or 2016.

The fair value of each option on the date of grant is estimated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility estimated over a period equal to the expected life of the options. In estimating the fair value of stock options under the Black-Scholes valuation model, separate groups of employees that have similar historical exercise behavior are considered separately. The expected life of the options granted is derived based on past experience and represents the period of time that options granted are expected to be outstanding.

Stock Award Plans — Incentive stock award plans include the EIP, the SDP and the RSAP. The EIP is administered by the Committee. Awards under the EIP and SDP include “book value” shares and “market value” shares of common stock. These shares are awarded annually based on weighted performance criteria and generally vest over a period of five years. The EIP book value shares may only be sold to 1st Source and such sale is mandatory in the event of death, retirement, disability, or termination of employment. The RSAP is designed for key employees. Awards under the RSAP are made to employees recommended by the Chief Executive Officer and approved by the Committee. Shares granted under the RSAP vest over two to ten years and vesting is based upon meeting certain various criteria, including continued employment with 1st Source. Shares issuable under the RSAP, after taking into account previously granted and forfeited shares, were adjusted to 250,000 shares effective November 9, 2016.

Stock-based compensation expense relating to the EIP, SDP and RSAP totaled $3.55 million in 2018, $2.96 million in 2017, and $2.88 million in 2016. The total income tax benefit recognized in the accompanying Statements of Income related to stock-based compensation was $0.86 million in 2018, $1.11 million in 2017, and $1.07 million in 2016. Unrecognized stock-based compensation expense related to non-vested stock awards (EIP/SDP/RSAP) was $5.13 million at December 31, 2018. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 3.00 years.

The fair value of non-vested stock awards for the purposes of recognizing stock-based compensation expense is market price of the stock on the measurement date, which, for the Company’s purposes is the date of the award.

Employee Stock Purchase Plan — The Company offers an ESPP for substantially all employees with at least two years of service on the effective date of an offering under the plan. Eligible employees may elect to purchase any dollar amount of stock, so long as such amount does not exceed 25% of their base rate of pay and the aggregate stock accrual rate for all offerings does not exceed $25,000 in any calendar year. The purchase price for shares offered is the lower of the closing market bid price for the offering date or the average market bid price for the five business days preceding the offering date. The purchase price and premium/(discount) to the actual market closing price on the offering date for the 2018, 2017, and 2016 offerings were $53.84 (-0.09%), $46.18 (-1.32%), and $33.87 (-0.29%), respectively. Payment for the stock is made through payroll deductions over the offering period, and employees may discontinue the deductions at any time and exercise the option or take the funds out of the program. The most recent offering began June 1, 2018 and runs through June 1, 2020, with $206,402 in stock value to be purchased at $53.84 per share.

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Income Taxes

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The following table shows the composition of income tax expense.

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Current:
Federal	$	20,167		$	26,012		$	25,479
State	2,996			4,530			3,005
Total current	23,163			30,542			28,484
Deferred:
Federal	(875		)	5,869			2,530
State	1,200			(488		)	326
Deferred tax liability remeasurement	(875		)	(2,614		)	—
Total deferred	(550		)	2,767			2,856
Total provision	$	22,613		$	33,309		$	31,340

The following table shows the reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate (21% for 2018 and 35% for 2017 and 2016) to income before income taxes.

	2018					2017					2016
Year Ended December 31 (Dollars in thousands)	Amount			Percent of Pretax Income		Amount			Percent of Pretax Income		Amount			Percent of Pretax Income
Statutory federal income tax	$	22,056		21.0	%	$	35,476		35.0	%	$	31,194		35.0	%
(Decrease) increase in income taxes resulting from:
Tax-exempt interest income	(650		)	(0.6	)	(1,197		)	(1.2	)	(1,235		)	(1.4	)
State taxes, net of federal income tax benefit	3,315			3.2		2,627			2.6		2,165			2.4
Deferred tax liability remeasurement	(875		)	(0.8	)	(2,614		)	(2.6	)	—			—
Other	(1,233		)	(1.3	)	(983		)	(0.9	)	(784		)	(0.8	)
Total	$	22,613		21.5	%	$	33,309		32.9	%	$	31,340		35.2	%

The tax expense related to (losses) gains on investment securities available-for-sale for the years 2018, 2017, and 2016 was approximately $(83,000), $1,629,000, and $674,000, respectively.

The following table shows the composition of deferred tax assets and liabilities as of December 31, 2018 and 2017.

(Dollars in thousands)	2018			2017
Deferred tax assets:
Reserve for loan and lease losses	$	25,386		$	23,791
Accruals for employee benefits	2,974			2,369
Net unrealized losses on securities available-for-sale	3,386			1,285
Other	127			622
Total deferred tax assets	31,873			28,067
Deferred tax liabilities:
Differing depreciable bases in premises and leased equipment	21,184			22,641
Differing bases in assets related to acquisitions	4,021			3,954
Tax advantaged partnerships	4,354			1,921
Mortgage servicing	586			745
Capitalized loan costs	1,110			867
Prepaid expenses	273			387
Other	364			222
Total deferred tax liabilities	31,892			30,737
Net deferred tax liability	$	(19	)	$	(2,670	)

No valuation allowance for deferred tax assets was recorded at December 31, 2018 and 2017 as the Company believes it is more likely than not that all of the deferred tax assets will be realized.

The following table shows a reconciliation of the beginning and ending amounts of unrecognized tax benefits.

(Dollars in thousands)	2018			2017		2016
Balance, beginning of year	$	1,112		$	762	$	380
Additions based on tax positions related to the current year	—			350		382
Additions for tax positions of prior years	—			—		—
Reductions for tax positions of prior years	—			—		—
Reductions due to lapse in statute of limitations	—			—		—
Settlements	(1,112		)	—		—
Balance, end of year	$	—		$	1,112	$	762

The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was $0.00 million at December 31, 2018, $0.72 million at December 31, 2017, and $0.50 million at December 31, 2016. Interest and penalties are recognized through the income tax provision. For the years 2018, 2017 and 2016, the Company recognized approximately $(0.09) million, $0.05 million and $0.04 million in interest, net of tax effect, and penalties, respectively. There was $0.00 million, $0.09 million and $0.04 million accrued interest and penalties at December 31, 2018, 2017 and 2016, respectively.

Tax years that remain open and subject to audit include the federal 2015-2018 years and the Indiana 2015-2018 years. Additionally, in 2018 the Company reached a state tax settlement for the 2015-2017 years and as a result, recorded a reduction of unrecognized tax benefits in the amount of $1.11 million. The Company does not anticipate a significant change in the amount of uncertain tax positions within the next 12 months.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%. At December 31, 2017, the Company had not fully completed its accounting for the tax effects of enactment of the Act and recorded a provisional benefit of $2.61 million which is included as a component of Income Tax Expense in the Consolidated Statements of Income related to the remeasurement of its deferred tax balance. During the third quarter of 2018, the Company completed its accounting for the provisional amounts recognized at December 31, 2017 and recorded an additional $0.88 million benefit as provided by the SEC’s Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

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Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies Disclosure [Abstract]

Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk

Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk

Contingent Liabilities —1st Source and its subsidiaries are defendants in various legal proceedings arising in the normal course of business. In the opinion of management, based upon present information including the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Company’s consolidated financial position or results of operations.

1st Source Bank sells residential mortgage loans to Fannie Mae as well as FHA-insured, USDA-insured and VA-guaranteed loans in Ginnie Mae mortgage-backed securities. Additionally, the Bank has sold loans on a service released basis to various other financial institutions in the past. The agreements under which the Bank sells these mortgage loans contain various representations and warranties regarding the acceptability of loans for purchase. On occasion, the Bank may be required to indemnify the loan purchaser for credit losses on loans that were later deemed ineligible for purchase or may be required to repurchase a loan. Both circumstances are collectively referred to as “repurchases.”

The Company’s liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was $0.29 million and $0.39 million as of December 31, 2018 and 2017, respectively. The mortgage repurchase liability represents the Company’s best estimate of the loss that it may incur. The estimate is based on specific loan repurchase requests and a historical loss ratio with respect to origination dollar volume. Because the level of mortgage loan repurchase losses are dependent on economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment.

Commitments — 1st Source and its subsidiaries are obligated under operating leases for certain office premises and equipment. The Company also leases certain owned premises and receives rental income from such lease agreements. Future minimum rental commitments for all noncancellable operating leases total approximately, $3.45 million in 2019, $3.26 million in 2020, $2.07 million in 2021, $0.81 million in 2022, $0.42 million in 2023, and $1.71 million, thereafter.

The following table shows rental expense of office premises and equipment and rental income from owned premises.

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Gross rental expense	$	3,727		$	4,183		$	3,995
Gross rental income	(873		)	(856		)	(921		)
Net rental expense	$	2,854		$	3,327		$	3,074

Financial Instruments with Off-Balance-Sheet Risk — To meet the financing needs of our clients, 1st Source and its subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business. These off-balance-sheet financial instruments include commitments to originate and sell loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.

Financial instruments, whose contract amounts represent credit risk as of December 31, were as follows:

(Dollars in thousands)	2018		2017
Amounts of commitments:
Loan commitments to extend credit	$	1,095,053	$	1,030,334
Standby letters of credit	$	31,133	$	29,961
Commercial and similar letters of credit	$	2,500	$	1,837

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments and standby letters of credit is represented by the dollar amount of those instruments. The Company uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company grants mortgage loan commitments to borrowers subject to normal loan underwriting standards. The interest rate risk associated with these loan commitments is managed by entering into contracts for future deliveries of loans.

Standby letters of credit are conditional commitments issued to guarantee the performance of a client to a third party. The credit risk involved in and collateral obtained when issuing standby letters of credit are essentially the same as those involved in extending loan commitments to clients. Standby letters of credit generally have terms ranging from six months to one year.

Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. Commercial letters of credit generally have terms ranging from three months to six months.

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Derivative Financial Instruments

12 Months Ended

Dec. 31, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

Commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments. See Note 18 for further information.

The Company has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Statements of Financial Condition and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s results of operations.

The following table shows the amounts of non-hedging derivative financial instruments at December 31, 2018 and 2017.

			Asset derivatives			Liability derivatives
(Dollars in thousands)	Notional or contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification	Fair value
Interest rate swap contracts	$	855,848	Other assets	$	7,124	Other liabilities	$	7,250
Loan commitments	5,871		Mortgages held for sale	112		N/A	—
Forward contracts - mortgage loan	14,087		N/A	—		Mortgages held for sale	135
Total - December 31, 2018	$	875,806		$	7,236		$	7,385
Interest rate swap contracts	$	756,550	Other assets	$	5,167	Other liabilities	$	5,262
Loan commitments	8,504		Mortgages held for sale	66		N/A	—
Forward contracts - mortgage loan	19,390		N/A	—		Mortgages held for sale	10
Total - December 31, 2017	$	784,444		$	5,233		$	5,272

The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments at December 31, 2018, 2017 and 2016.

		Gain (loss)
(Dollars in thousands)	Statement of Income classification	2018			2017			2016
Interest rate swap contracts	Other expense	$	(30	)	$	26		$	64
Interest rate swap contracts	Other income	1,028			1,585			730
Loan commitments	Mortgage banking	46			23			(4		)
Forward contracts - mortgage loan	Mortgage banking	(125		)	(232		)	209
Total		$	919		$	1,402		$	999

The following table shows the offsetting of financial assets and derivative assets at December 31, 2018 and 2017.

							Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
December 31, 2018
Interest rate swaps	$	7,128	$	4	$	7,124	$	177	$	610	$	6,337
December 31, 2017
Interest rate swaps	$	5,194	$	27	$	5,167	$	—	$	—	$	5,167

The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2018 and 2017.

							Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount
December 31, 2018
Interest rate swaps	$	7,254	$	4	$	7,250	$	1,700	$	—	$	5,550
Repurchase agreements	103,627		—		103,627		103,627		—		—
Total	$	110,881	$	4	$	110,877	$	105,327	$	—	$	5,550
December 31, 2017
Interest rate swaps	$	5,289	$	27	$	5,262	$	—	$	2,705	$	2,557
Repurchase agreements	149,835		—		149,835		149,835		—		—
Total	$	155,124	$	27	$	155,097	$	149,835	$	2,705	$	2,557

If a default in performance of any obligation of a repurchase or derivative agreement occurs, each party will set-off property held, or loan indebtedness owing, in respect of transactions against obligations owing in respect of any other transactions. At December 31, 2018 and December 31, 2017, repurchase agreements had a remaining contractual maturity of $102.34 million and $148.22 million in overnight, $1.29 million and $1.32 million in up to 30 days and $0.00 million and $0.30 million in greater than 90 days, respectively and were collateralized by U.S. Treasury and Federal agencies securities.

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Regulatory Matters

12 Months Ended

Dec. 31, 2018

Regulatory Capital Requirements [Abstract]

Regulatory Matters

Regulatory Matters

The Company is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total capital, Tier 1 capital, and common equity Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. The Company believes that it meets all capital adequacy requirements to which it is subject.

The most recent notification from the Federal bank regulators categorized 1st Source Bank, the largest of its subsidiaries, as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that the Company believes will have changed the institution’s category.

As discussed in Note 12, the capital securities held by the Capital Trusts qualify as Tier 1 capital under Federal Reserve Board guidelines. The following table shows the actual and required capital amounts and ratios for 1st Source Corporation and 1st Source Bank as of December 31, 2018 and 2017.

	Actual				Minimum Capital Adequacy				Minimum Capital Adequacy with Capital Buffer(1)				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
2018
Total Capital (to Risk-Weighted Assets):
1st Source Corporation	$	821,975	14.68	%	$	447,909	8.00	%	$	552,888	9.875	%	$	559,887	10.00	%
1st Source Bank	744,326		13.29		448,152		8.00		553,188		9.875		560,190		10.00
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	751,575		13.42		335,932		6.00		440,911		7.875		447,909		8.00
1st Source Bank	673,888		12.03		336,114		6.00		441,150		7.875		448,152		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	693,067		12.38		251,949		4.50		356,928		6.375		363,926		6.50
1st Source Bank	672,380		12.00		252,086		4.50		357,121		6.375		364,124		6.50
Tier 1 Capital (to Average Assets):
1st Source Corporation	751,575		12.06		249,185		4.00		N/A		N/A		311,481		5.00
1st Source Bank	673,888		10.82		249,052		4.00		N/A		N/A		311,315		5.00
2017
Total Capital (to Risk-Weighted Assets):
1st Source Corporation	$	764,853	14.70	%	$	416,174	8.00	%	$	481,201	9.250	%	$	520,218	10.00	%
1st Source Bank	696,248		13.36		416,902		8.00		482,043		9.250		521,127		10.00
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	699,420		13.44		312,131		6.00		377,158		7.250		416,174		8.00
1st Source Bank	630,702		12.10		312,676		6.00		377,817		7.250		416,902		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	642,420		12.35		234,098		4.50		299,125		5.750		338,142		6.50
1st Source Bank	630,702		12.10		234,507		4.50		299,648		5.750		338,733		6.50
Tier 1 Capital (to Average Assets):
1st Source Corporation	699,420		12.17		229,890		4.00		N/A		N/A		287,362		5.00
1st Source Bank	630,702		10.98		229,789		4.00		N/A		N/A		287,236		5.00

(1) The capital conservation buffer requirement will be phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis.

The Bank was not required to maintain noninterest bearing cash balances with the Federal Reserve Bank as of December 31, 2018 and 2017.

Dividends that may be paid by a subsidiary bank to the parent company are subject to certain legal and regulatory limitations and also may be affected by capital needs, as well as other factors.

Due to the Company’s mortgage activities, 1st Source Bank is required to maintain minimum net worth capital requirements established by various governmental agencies. 1st Source Bank’s net worth requirements are governed by the Department of Housing and Urban Development and GNMA. As of December 31, 2018, 1st Source Bank met its minimum net worth capital requirements.

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Fair Value Measurements

12 Months Ended

Dec. 31, 2018

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

The Company determines the fair values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. The Company elected fair value accounting for mortgages held for sale. The Company believes the election for mortgages held for sale (which are economically hedged with free-standing derivatives) will reduce certain timing differences and better match changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. At December 31, 2018 and 2017, all mortgages held for sale are carried at fair value.

The following table shows the differences between fair value carrying amount of mortgages held for sale measured at fair value and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity on December 31, 2018 and 2017.

(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Excess of fair value carrying amount over (under) unpaid principal
December 31, 2018
Mortgages held for sale reported at fair value:
Total Loans	$	11,290	$	11,076	$	214	(1)
December 31, 2017
Mortgages held for sale reported at fair value:
Total Loans	$	13,123	$	12,967	$	156	(1)

(1) The excess of fair value carrying amount over (under) unpaid principal is included in mortgage banking income and includes changes in fair value at and subsequent to funding and gains and losses on the related loan commitment prior to funding.

Financial Instruments on Recurring Basis:

The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis:

Investment securities available-for-sale are valued primarily by a third-party pricing agent. Prices supplied by the independent pricing agent, as well as their pricing methodologies and assumptions, are reviewed by the Company for reasonableness and to ensure such prices are aligned with market levels. In general, the Company’s investment securities do not possess a complex structure that could introduce greater valuation risk. The portfolio mainly consists of traditional investments including U.S. Treasury and Federal agencies securities, federal agency mortgage pass-through securities, and general obligation and revenue municipal bonds. Pricing for such instruments is fairly generic and is easily obtained. On a quarterly basis, prices supplied by the pricing agent are validated by comparison to prices obtained from other third party sources for a material portion of the portfolio.

The valuation policy and procedures for Level 3 fair value measurements of available-for-sale debt securities are decided through collaboration between management of the Corporate Accounting and Funds Management departments. The changes in fair value measurement for Level 3 securities are analyzed on a periodic basis under a collaborative framework with the aforementioned departments. The methodology and variables used for input are derived from the combination of observable and unobservable inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external factors, such as market movement and credit rating adjustments.

Both the market and income valuation approaches are implemented using the following types of inputs:

• U.S. treasuries are priced using the market approach and utilizing live data feeds from active market exchanges for identical securities.

• Government-sponsored agency debt securities and corporate bonds are primarily priced using available market information through processes such as benchmark curves, market valuations of like securities, sector groupings and matrix pricing.

• Other government-sponsored agency securities, mortgage-backed securities and some of the actively traded REMICs and CMOs, are primarily priced using available market information including benchmark yields, prepayment speeds, spreads and volatility of similar securities.

• Inactively traded government-sponsored agency securities are primarily priced using consensus pricing and dealer quotes.

• State and political subdivisions are largely grouped by characteristics, i.e., geographical data and source of revenue in trade dissemination systems. Since some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities. Local direct placement municipal securities, with very little market activity, are priced using an appropriate market yield curve which incorporates a credit spread assumption.

Mortgages held for sale and the related loan commitments and forward contracts (hedges) are valued using a market value approach and utilizing an appropriate current market yield and a loan commitment closing rate based on historical analysis.

Interest rate swap positions, both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their basis readily observable market parameters. This valuation process considers various factors including interest rate yield curves, time value and volatility factors. Validation of third-party agent valuations is accomplished by comparing those values to the Company’s swap counterparty valuations. Management believes an adjustment is required to “mid-market” valuations for derivatives tied to its performing loan portfolio to recognize the imprecision and related exposure inherent in the process of estimating expected credit losses as well as velocity of deterioration evident with systemic risks embedded in these portfolios. Any change in the mid-market derivative valuation adjustment will be recognized immediately through the Consolidated Statements of Income.

The following table shows the balance of assets and liabilities measured at fair value on a recurring basis.

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2018
Assets:
Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities	$	33,746	$	497,477	$	—	$	531,223
U.S. States and political subdivisions securities	—		93,557		1,025		94,582
Mortgage-backed securities - Federal agencies	—		318,233		—		318,233
Corporate debt securities	—		45,392		—		45,392
Foreign government and other securities	—		699		—		699
Total debt securities available-for-sale	33,746		955,358		1,025		990,129
Mortgages held for sale	—		11,290		—		11,290
Accrued income and other assets (interest rate swap agreements)	—		7,124		—		7,124
Total	$	33,746	$	973,772	$	1,025	$	1,008,543
Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	$	—	$	7,250	$	—	$	7,250
Total	$	—	$	7,250	$	—	$	7,250
December 31, 2017
Assets:
Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities	$	27,971	$	440,148	$	—	$	468,119
U.S. States and political subdivisions securities	—		113,845		2,155		116,000
Mortgage-backed securities - Federal agencies	—		287,910		—		287,910
Corporate debt securities	—		31,294		—		31,294
Foreign government and other securities	—		—		710		710
Total debt securities available-for-sale	27,971		873,197		2,865		904,033
Mortgages held for sale	—		13,123		—		13,123
Accrued income and other assets (interest rate swap agreements)	—		5,167		—		5,167
Total	$	27,971	$	891,487	$	2,865	$	922,323
Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	$	—	$	5,262	$	—	$	5,262
Total	$	—	$	5,262	$	—	$	5,262

The following table shows the changes in Level 3 assets and liabilities measured at fair value on a recurring basis.

(Dollars in thousands)	U.S. States and political subdivisions securities			Foreign government and other securities			Investment securities available-for-sale
Beginning balance January 1, 2018	$	2,155		$	710		$	2,865
Total gains or losses (realized/unrealized):
Included in earnings	—			—			—
Included in other comprehensive income	6			(11		)	(5		)
Purchases	—			200			200
Issuances	—			—			—
Sales	—			—			—
Settlements	—			—			—
Maturities	(1,136		)	(200		)	(1,336		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			(699		)	(699		)
Ending balance December 31, 2018	$	1,025		$	—		$	1,025
Beginning balance January 1, 2017	$	2,699		$	807		$	3,506
Total gains or losses (realized/unrealized):
Included in earnings	—			—			—
Included in other comprehensive income	31			3			34
Purchases	1,437			500			1,937
Issuances	—			—			—
Sales	—			—			—
Settlements	—			—			—
Maturities	(2,012		)	(600		)	(2,612		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Ending balance December 31, 2017	$	2,155		$	710		$	2,865

There were no gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at December 31, 2018 or 2017. A foreign government debt security was transferred from Level 3 to Level 2 during 2018 due to the Company’s periodic review of valuation methodologies and inputs. The Company determined that the observable inputs used in determining fair value warranted a transfer to Level 2 as the unobservable inputs were deemed to be insignificant to the overall fair value measurement. No transfers between levels occurred during 2017.

The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a recurring basis.

(Dollars in thousands)	Fair value		Valuation Methodology	Unobservable Inputs	Range of Inputs
December 31, 2018
Debt securities available-for-sale
Direct placement municipal securities	$	1,025	Discounted cash flows	Credit spread assumption	0.17% - 3.02%
December 31, 2017
Debt securities available-for-sale
Direct placement municipal securities	$	2,155	Discounted cash flows	Credit spread assumption	2.21% - 2.93%
Foreign government	$	710	Discounted cash flows	Market yield assumption	0.35% - 1.23%

The sensitivity to changes in the unobservable inputs and their impact on the fair value measurement can be significant. The significant unobservable input for direct placement municipal securities are the credit spread assumptions used to determine the fair value measure. An increase (decrease) in the estimated spread assumption of the market will decrease (increase) the fair value measure of the securities. The significant unobservable input for foreign government securities are the market yield assumptions. The market yield assumption is negatively correlated to the fair value measure. An increase (decrease) in the determined market yield assumption will decrease (increase) the fair value measurement.

Financial Instruments on Non-recurring Basis:

The Company may be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or market accounting or impairment charges of individual assets.

The Credit Policy Committee (CPC), a management committee, is responsible for overseeing the valuation processes and procedures for Level 3 measurements of impaired loans, other real estate and repossessions. The CPC reviews these assets on a quarterly basis to determine the accuracy of the observable inputs, generally third-party appraisals, auction values, values derived from trade publications and data submitted by the borrower, and the appropriateness of the unobservable inputs, generally discounts due to current market conditions and collection issues. The CPC establishes discounts based on asset type and valuation source; deviations from the standard are documented. The discounts are reviewed periodically, annually at a minimum, to determine they remain appropriate. Consideration is given to current trends in market values for the asset categories and gain and losses on sales of similar assets. The Loan and Funds Management Committee of the Board of Directors is responsible for overseeing the CPC.

Discounts vary depending on the nature of the assets and the source of value. Aircraft are generally valued using quarterly trade publications adjusted for engine time, condition, maintenance programs, discounted by 10%. Likewise, autos are valued using current auction values, discounted by 10%; medium and heavy duty trucks are valued using trade publications and auction values, discounted by 15%. Construction equipment is generally valued using trade publications and auction values, discounted by 20%. Real estate is valued based on appraisals or evaluations, discounted by 20% at a minimum with higher discounts for property in poor condition or property with characteristics which may make it more difficult to market. Commercial loans subject to borrowing base certificates are generally discounted by 20% for receivables and 40% - 75% for inventory with higher discounts when monthly borrowing base certificates are not required or received.

Impaired loans and related write-downs are based on the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are reviewed quarterly and estimated using customized discounting criteria, appraisals and dealer and trade magazine quotes which are used in a market valuation approach. In accordance with fair value measurements, only impaired loans for which a reserve for loan loss has been established based on the fair value of collateral require classification in the fair value hierarchy. As a result, only a portion of the Company’s impaired loans are classified in the fair value hierarchy.

During 2017, partnership investments and the adjustments to fair value primarily resulted from application of lower of cost or fair value accounting. The partnership investments were priced using financial statements provided by the partnerships. Quantitative unobservable inputs were not reasonably available for reporting purposes.

The Company has established MSRs valuation policies and procedures based on industry standards and to ensure valuation methodologies are consistent and verifiable. MSRs and related adjustments to fair value result from application of lower of cost or fair value accounting. For purposes of impairment, MSRs are stratified based on the predominant risk characteristics of the underlying servicing, principally by loan type. The fair value of each tranche of the servicing portfolio is estimated by calculating the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. Prepayment rates and discount rates are derived through a third-party pricing agent. Changes in the most significant inputs, including prepayment rates and discount rates, are compared to the changes in the fair value measurements and appropriate resolution is made. A fair value analysis is also obtained from an independent third-party agent and compared to the internal valuation for reasonableness. MSRs do not trade in an active, open market with readily observable prices and though sales of MSRs do occur, precise terms and conditions typically are not readily available and the characteristics of the Company’s servicing portfolio may differ from those of any servicing portfolios that do trade.

Other real estate is based on the fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and reflect a market value approach. Fair values are reviewed quarterly and new appraisals are obtained annually. Repossessions are similarly valued.

For assets measured at fair value on a nonrecurring basis the following represents impairment charges (recoveries) recognized on these assets during the year ended December 31, 2018 and 2017, respectively: impaired loans - $12.46 million and $0.50 million; partnership investments - $0.00 million and $0.00 million; MSRs - $0.00 million and $0.00 million; repossessions - $1.92 million and $0.79 million, and other real estate - $0.00 million and $0.05 million.

The following table shows the carrying value of assets measured at fair value on a non-recurring basis.

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2018
Impaired loans - collateral based	$	—	$	—	$	7,306	$	7,306
Accrued income and other assets (mortgage servicing rights)	—		—		4,283		4,283
Accrued income and other assets (repossessions)	—		—		6,666		6,666
Accrued income and other assets (other real estate)	—		—		299		299
Total	$	—	$	—	$	18,554	$	18,554
December 31, 2017
Impaired loans - collateral based	$	—	$	—	$	7,994	$	7,994
Accrued income and other assets (partnership investments)	—		—		1,000		1,000
Accrued income and other assets (mortgage servicing rights)	—		—		4,349		4,349
Accrued income and other assets (repossessions)	—		—		10,114		10,114
Accrued income and other assets (other real estate)	—		—		1,312		1,312
Total	$	—	$	—	$	24,769	$	24,769

The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a non-recurring basis.

(Dollars in thousands)	Carrying Value		Fair value		Valuation Methodology	Unobservable Inputs	Range of Inputs
December 31, 2018
Impaired loans	$	7,306	$	7,306	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	20% - 35%
Mortgage servicing rights	4,283		7,238		Discounted cash flows	Constant prepayment rate (CPR)	7.2% - 24.8%
						Discount rate	10.3% - 13.1%
Repossessions	6,666		6,991		Appraisals, trade publications and auction values	Discount for lack of marketability	4% - 6%
Other real estate	299		305		Appraisals	Discount for lack of marketability	0% - 10%
December 31, 2017
Impaired loans	$	7,994	$	7,994	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	3% - 20%
Mortgage servicing rights	4,349		7,187		Discounted cash flows	Constant prepayment rate (CPR)	8.6% - 20.7%
						Discount rate	9.6% - 12.5%
Repossessions	10,114		10,493		Appraisals, trade publications and auction values	Discount for lack of marketability	3% - 10%
Other real estate	1,312		1,441		Appraisals	Discount for lack of marketability	7% - 9%

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.

The following table shows the fair values of the Company’s financial instruments.

(Dollars in thousands)	Carrying or Contract Value		Fair Value		Level 1		Level 2		Level 3
December 31, 2018
Assets:
Cash and due from banks	$	94,907	$	94,907	$	94,907	$	—	$	—
Federal funds sold and interest bearing deposits with other banks	4,172		4,172		4,172		—		—
Investment securities, available-for-sale	990,129		990,129		33,746		955,358		1,025
Other investments	28,404		28,404		28,404		—		—
Mortgages held for sale	11,290		11,290		—		11,290		—
Loans and leases, net of reserve for loan and lease losses	4,734,995		4,689,267		—		—		4,689,267
Mortgage servicing rights	4,283		7,238		—		—		7,238
Interest rate swaps	7,124		7,124		—		7,124		—
Liabilities:
Deposits	$	5,122,322	$	5,111,711	$	3,654,556	$	1,457,155	$	—
Short-term borrowings	199,344		199,344		113,734		85,610		—
Long-term debt and mandatorily redeemable securities	71,123		68,751		—		68,751		—
Subordinated notes	58,764		45,874		—		45,874		—
Interest rate swaps	7,250		7,250		—		7,250		—
Off-balance-sheet instruments *	—		259		—		259		—
December 31, 2017
Assets:
Cash and due from banks	$	73,635	$	73,635	$	73,635	$	—	$	—
Federal funds sold and interest bearing deposits with other banks	4,398		4,398		4,398		—		—
Investment securities, available-for-sale	904,033		904,033		27,971		873,197		2,865
Other investments	25,953		25,953		25,953		—		—
Mortgages held for sale	13,123		13,123		—		13,123		—
Loans and leases, net of reserve for loan and lease losses	4,432,795		4,428,848		—		—		4,428,848
Mortgage servicing rights	4,349		7,187		—		—		7,187
Interest rate swaps	5,167		5,167		—		5,167		—
Liabilities:
Deposits	$	4,752,730	$	4,745,111	$	3,482,757	$	1,262,354	$	—
Short-term borrowings	214,595		214,595		206,862		7,733		—
Long-term debt and mandatorily redeemable securities	70,060		67,857		—		67,857		—
Subordinated notes	58,764		57,103		—		57,103		—
Interest rate swaps	5,262		5,262		—		5,262		—
Off-balance-sheet instruments *	—		286		—		286		—

* Represents estimated cash outflows required to currently settle the obligations at current market rates.

These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. These estimates are subjective in nature and require considerable judgment to interpret market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange, nor are they intended to represent the fair value of the Company as a whole. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of the respective balance sheet date. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Other significant assets, such as premises and equipment, other assets, and liabilities not defined as financial instruments, are not included in the above disclosures. Also, the fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

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1st Source Corporation (Parent Company Only) Financial Information

12 Months Ended

Dec. 31, 2018

Condensed Financial Information Disclosure [Abstract]

1st Source Corporation (Parent Company Only) Financial Information

1st Source Corporation (Parent Company Only) Financial Information

STATEMENTS OF FINANCIAL CONDITION

December 31(Dollars in thousands)	2018		2017
ASSETS
Cash and cash equivalents	$	106,647	$	100,155
Short-term investments with bank subsidiary	500		500
Investments in:
Bank subsidiaries	740,697		706,119
Non-bank subsidiaries	1		1
Other assets	4,191		2,696
Total assets	$	852,036	$	809,471
LIABILITIES AND SHAREHOLDERS’ EQUITY
Commercial paper	$	4,325	$	6,115
Long-term debt and mandatorily redeemable securities	24,676		22,942
Subordinated notes	58,764		58,764
Other liabilities	2,189		3,113
Total liabilities	89,954		90,934
Total shareholders’ equity	762,082		718,537
Total liabilities and shareholders’ equity	$	852,036	$	809,471

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Year Ended December 31 (Dollars in thousands)	2018			2017		2016
Income:
Dividends from bank subsidiary	$	45,080		$	38,317	$	36,064
Dividends from non-bank subsidiary	—			958		—
Rental income from subsidiaries	2,613			2,354		2,363
Other	367			422		444
Investment securities and other investment (losses) gains	(180		)	6,431		3,901
Total income	47,880			48,482		42,772
Expenses:
Interest on subordinated notes	3,625			4,002		4,220
Interest on long-term debt and mandatorily redeemable securities	1,624			1,685		1,454
Interest on commercial paper and other short-term borrowings	14			17		20
Rent	1,774			2,070		1,739
Other	642			1,733		1,179
Total expenses	7,679			9,507		8,612
Income before income tax benefit and equity in undistributed income of subsidiaries	40,201			38,975		34,160
Income tax benefit	1,009			204		741
Income before equity in undistributed income of subsidiaries	41,210			39,179		34,901
Equity in undistributed income of subsidiaries:
Bank subsidiaries	41,204			28,872		22,569
Non-bank subsidiaries	—			—		316
Net income	$	82,414		$	68,051	$	57,786
Comprehensive income	$	75,788		$	63,375	$	52,575

STATEMENTS OF CASH FLOWS

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Operating activities:
Net income	$	82,414		$	68,051		$	57,786
Adjustments to reconcile net income to net cash provided by operating activities:
Equity (undistributed) distributed in excess of income of subsidiaries	(41,204		)	(28,872		)	(22,885		)
Depreciation of premises and equipment	2			2			4
Stock-based compensation	71			48			52
Realized/unrealized investment securities and other investment losses (gains)	180			(6,431		)	(3,901		)
Other	45			4,122			3,132
Net change in operating activities	41,508			36,920			34,188
Investing activities:
Proceeds from sales and maturities of investment securities	—			6,327			1,795
Net change in partnership investments	(980		)	(62		)	2,903
Return of capital from subsidiaries	—			854			—
Net change in investing activities	(980		)	7,119			4,698
Financing activities:
Net change in commercial paper	(1,790		)	354			(2,281		)
Proceeds from issuance of long-term debt and mandatorily redeemable securities	1,867			1,248			1,607
Payments on long-term debt and mandatorily redeemable securities	(1,064		)	(667		)	(627		)
Stock issued under stock purchase plans	145			153			120
Net proceeds from issuance of treasury stock	1,763			2,176			2,636
Acquisition of treasury stock	(9,271		)	(41		)	(8,030		)
Cash dividends paid on common stock	(25,686		)	(20,431		)	(19,416		)
Net change in financing activities	(34,036		)	(17,208		)	(25,991		)
Net change in cash and cash equivalents	6,492			26,831			12,895
Cash and cash equivalents, beginning of year	100,155			73,324			60,429
Cash and cash equivalents, end of year	$	106,647		$	100,155		$	73,324

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Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2018

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation — The financial statements consolidate 1st Source, its subsidiaries (principally the Bank) and any variable interest entities (“VIEs”) for which the Company has concluded it has significant involvement in and the ability to direct the activities that impact the entity’s economic performance. All significant intercompany balances and transactions have been eliminated. For purposes of the parent company only financial information presented in Note 22, investments in subsidiaries are carried at equity in the underlying net assets.

Use of Estimates in the Preparation of Financial Statements

Use of Estimates in the Preparation of Financial Statements — Financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Business Combinations

Business Combinations — Business combinations are accounted for under the purchase method of accounting. Under the purchase method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition.

Cash Flows

Cash Flows — For purposes of the consolidated and parent company only statements of cash flows, the Company considers cash and due from banks, federal funds sold and interest bearing deposits with other banks with original maturities of three months or less as cash and cash equivalents.

Securities

Securities — Securities that the Company has the ability and positive intent to hold to maturity are classified as investment securities held-to-maturity. Held-to-maturity investment securities, when present, are carried at amortized cost. As of December 31, 2018 and 2017, the Company held no securities classified as held-to-maturity. Securities that may be sold in response to, or in anticipation of, changes in interest rates and resulting prepayment risk, or for other factors, are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on debt securities are reported, net of applicable taxes, as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity. Unrealized gains and losses on equity securities are reflected, net of applicable taxes, in earnings.

The initial indication of potential other-than-temporary impairment (OTTI) for both debt and equity securities is a decline in fair value below amortized cost. Quarterly, any impaired securities are analyzed on a qualitative and quantitative basis in determining OTTI. Declines in the fair value of available-for-sale debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. In estimating OTTI impairment losses, the Company considers among other things, (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether it is more likely than not that the Company will not have to sell any such securities before an anticipated recovery of cost.

Debt and equity securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading account securities and are carried at fair value with unrealized gains and losses reported in earnings. Realized gains and losses on the sales of all securities are reported in earnings and computed using the specific identification cost basis.

Other investments consist of shares of Federal Home Loan Bank of Indianapolis (FHLBI) and Federal Reserve Bank stock. As restricted member stocks, these investments are carried at cost. Both cash and stock dividends received on the stocks are reported as income. Quarterly, the Company reviews its investment in FHLBI for impairment. Factors considered in determining impairment are: history of dividend payments; determination of cause for any net loss; adequacy of capital; and review of the most recent financial statements. As of December 31, 2018 and 2017, it was determined that the Company’s investment in FHLBI stock is appropriately valued at cost, which equates to par value. In addition, other investments include interest bearing deposits with other banks with original maturities of greater than three months. These investments are in denominations, including accrued interest, that are fully insured by the FDIC.

Loans and Leases

Loans and Leases — Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. Interest income is accrued as earned based on unpaid principal balances. Origination fees and direct loan and lease origination costs are deferred, and the net amount amortized to interest income over the estimated life of the related loan or lease. Loan commitment fees are deferred and amortized into other income over the commitment period.

Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment.

The accrual of interest on loans and leases is discontinued when a loan or lease becomes contractually delinquent for 90 days, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential mortgage loans and consumer loans that are well secured and in the process of collection. Residential mortgage loans are placed on nonaccrual at the time the loan is placed in foreclosure. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the reserve for loan and lease losses. However, in some cases, the Company may elect to continue the accrual of interest when the net realizable value of collateral is sufficient to cover the principal and accrued interest. When a loan or lease is classified as nonaccrual and the future collectability of the recorded loan or lease balance is doubtful, collections on interest and principal are applied as a reduction to principal outstanding. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, which is typically evidenced by a sustained repayment performance of at least six months.

A loan or lease is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Interest on impaired loans and leases, which are not classified as nonaccrual, is recognized on the accrual basis. The Company evaluates loans and leases exceeding $100,000 where the internal credit quality grade is at or below a predetermined classification for impairment and establishes a specific reserve as a component of the reserve for loan and lease losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan or lease and the recorded investment in the loan or lease exceeds its fair value.

Loans and leases that have been modified and economic concessions have been granted to borrowers who have experienced financial difficulties are considered a troubled debt restructuring (TDR) and, by definition, are deemed an impaired loan. These concessions typically result from the Company’s loss mitigation activities and may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

When the Company modifies loans and leases in a TDR, it evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or uses the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a reserve for loan and lease losses estimate or a charge-off to the reserve for loan and lease losses. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the reserve for loan and lease losses.

The Company sells mortgage loans to the Government National Mortgage Association (GNMA) in the normal course of business and retains the servicing rights. The GNMA programs under which the loans are sold allow the Company to repurchase individual delinquent loans that meet certain criteria from the securitized loan pool. At its option, and without GNMA’s prior authorization, the Company may repurchase a delinquent loan for an amount equal to 100% of the remaining principal balance on the loan. Once the Company has the unconditional ability to repurchase a delinquent loan, the Company is deemed to have regained effective control over the loan and the Company is required to recognize the loan on its balance sheet and record an offsetting liability, regardless of its intent to repurchase the loan. At December 31, 2018 and 2017, residential real estate portfolio loans included $1.39 million and $2.65 million, respectively, of loans available for repurchase under the GNMA optional repurchase programs with the offsetting liability recorded within other short-term borrowings.

Mortgage Banking Activities

Mortgage Banking Activities — Loans held for sale are composed of performing one-to-four family residential mortgage loans originated for resale. Mortgage loans originated with the intent to sell are carried at fair value.

The Company recognizes the rights to service mortgage loans for others as separate assets, whether the servicing rights are acquired through a separate purchase or through the sale of originated loans with servicing rights retained. The Company allocates a portion of the total proceeds of a mortgage loan to servicing rights based on the relative fair value. These assets are amortized as reductions of mortgage servicing fee income over the estimated servicing period in proportion to the estimated servicing income to be received. Gains and losses on the sale of MSRs are recognized in Noninterest Income on the Statements of Income in the period in which such rights are sold.

MSRs are evaluated for impairment at each reporting date. For purposes of impairment measurement, MSRs are stratified based on the predominant risk characteristics of the underlying servicing, principally by loan type. If temporary impairment exists within a tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the fair value. If it is later determined all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced through a recovery of income.

MSRs are also reviewed for other-than-temporary impairment. Other-than-temporary impairment exists when recoverability of a recorded valuation allowance is determined to be remote considering historical and projected interest rates, prepayments, and loan pay-off activity. When this situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the MSRs. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the MSRs and the valuation allowance, precluding subsequent recoveries.

As part of mortgage banking operations, the Company enters into commitments to originate loans whereby the interest rate on these loans is determined prior to funding (“rate lock commitments”). Similar to loans held for sale, the fair value of rate lock commitments is subject to change primarily due to changes in interest rates. Under the Company’s risk management policy, these fair values are hedged primarily by selling forward contracts on agency securities. The rate lock commitments on mortgage loans intended to be sold and the related hedging instruments are recorded at fair value with changes in fair value recorded in current earnings.

Reserve for Loan and Lease Losses

Reserve for Loan and Lease Losses — The reserve for loan and lease losses is maintained at a level believed to be appropriate by the Company to absorb probable losses inherent in the loan and lease portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan and lease losses related to specifically identified impaired loans and leases as well as probable losses in the remainder of the various loan and lease portfolios. For purposes of determining the reserve, the Company has segmented loans and leases into classes based on the associated risk within these segments. The Company has determined that eight classes exist within the loan and lease portfolio. The methodology for assessing the appropriateness of the reserve consists of several key elements, which include: specific reserves for impaired loans, formula reserves for each business lending division portfolio including percentage allocations for special attention loans and leases not deemed impaired, and reserves for pooled homogenous loans and leases. The Company’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and geopolitical events, all of which are subject to judgment and will change.

Specific reserves are established for certain business and specialty finance credits based on a regular analysis of special attention loans and leases. This analysis is performed by the Credit Policy Committee (CPC), the Loan Review Department, Credit Administration, and the Loan Workout Departments. The specific reserves are based on an analysis of underlying collateral values, cash flow considerations and, if applicable, guarantor capacity. Sources for determining collateral values include appraisals, evaluations, auction values and industry guides. Generally, for loans secured by commercial real estate and dependent on cash flows from the underlying collateral to service the debt, a new appraisal is obtained at the time the credit is deemed to be impaired. For non-income producing commercial real estate, an appraisal or evaluation is ordered depending on an analysis of the underlying factors, including an assessment of the overall credit worthiness of the borrower, the value of non-real estate collateral supporting the transaction and the date of the most recent existing appraisal or evaluation. An evaluation may be performed in lieu of obtaining a new appraisal for less complex transactions secured by local market properties. Values based on evaluations are discounted more heavily than those determined by appraisals when calculating loan impairment. Appraisals, evaluations and industry guides are used to determine aircraft values. Appraisals, industry guides and auction values are used to determine construction equipment, truck and auto values.

The formula reserves determined for each business lending division portfolio are calculated quarterly by applying loss factors to outstanding loans and leases based upon a review of historical loss experience and qualitative factors, which include but are not limited to, economic trends, current market risk assessment by industry, recent loss experience in particular segments of the portfolios, movement in equipment values collateralizing specialized industry portfolios, concentrations of credit, delinquencies, trends in volume, experience and depth of relationship managers and division management, and the effects of changes in lending policies and practices, including changes in quality of the loan and lease origination, servicing and risk management processes. Special attention loans and leases without specific reserves receive a higher percentage allocation ratio than credits not considered special attention.

Pooled loans and leases are smaller credits and are homogenous in nature, such as consumer credits and residential mortgages. Pooled loan and lease loss reserves are based on historical net charge-offs, adjusted for delinquencies, the effects of lending practices and programs and current economic conditions, and current trends in the geographic markets which the Company serves.

A comprehensive analysis of the reserve is performed on a quarterly basis by reviewing all loans and leases over a fixed dollar amount ($100,000) where the internal credit quality grade is at or below a predetermined classification. Although the Company determines the amount of each element of the reserve separately and relies on this process as an important credit management tool, the entire reserve is available for the entire loan and lease portfolio. The actual amount of losses incurred can vary significantly from the estimated amounts both positively and negatively. The Company’s methodology includes several factors intended to minimize the difference between estimated and actual losses. These factors allow the Company to adjust its estimate of losses based on the most recent information available.

Impaired loans are reviewed quarterly to assess the probability of being able to collect the portion considered impaired. When a review and analysis of the underlying credit and collateral indicates ultimate collection is improbable, the deficiency is charged-off and deducted from the reserve. Loans and leases, which are deemed uncollectible or have a low likelihood of collection, are charged-off and deducted from the reserve, while recoveries of amounts previously charged-off are credited to the reserve. A (recovery of) provision for loan and lease losses is credited or charged to operations based on the Company’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

Equipment Owned Under Operating Leases

Equipment Owned Under Operating Leases — The Company finances various types of construction equipment, medium and heavy duty trucks, automobiles and other equipment under leases classified as operating leases. The equipment underlying the operating leases is reported at cost, net of accumulated depreciation, in the Statements of Financial Condition. These operating lease arrangements require the lessee to make a fixed monthly rental payment over a specified lease term generally ranging from three to seven years. Revenue consists of the contractual lease payments and is recognized on a straight-line basis over the lease term and reported as noninterest income. Leased assets are being depreciated on a straight-line method over the lease term to the estimate of the equipment’s fair market value at lease termination, also referred to as “residual” value. The depreciation of these operating lease assets is reported as Noninterest Expense on the Statements of Income. For automobile leases, fair value is based upon published industry market guides. For other equipment leases, fair value may be based upon observable market prices, third-party valuations, or prices received on sales of similar assets at the end of the lease term. These residual values are reviewed annually to ensure the recorded amount does not exceed the fair market value at the lease termination. At the end of the lease, the operating lease asset is either purchased by the lessee or returned to the Company.

Other Real Estate

Other Real Estate — Other real estate acquired through partial or total satisfaction of nonperforming loans is included in Other Assets and recorded at fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property less cost to sell, and the carrying value of the loan charged to the reserve for loan and lease losses or other income, if a positive adjustment. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs, property maintenance costs, and gains or losses recognized upon the sale of other real estate are recognized in Noninterest Expense on the Statements of Income. Gains or losses resulting from the sale of other real estate are recognized on the date of sale. As of December 31, 2018 and 2017, other real estate had carrying values of $0.30 million and $1.31 million, respectively, and is included in Other Assets in the Statements of Financial Condition.

Repossessed Assets

Repossessed Assets — Repossessed assets may include fixtures and equipment, inventory and receivables, aircraft, construction equipment, and vehicles acquired from business banking and specialty finance activities. Repossessed assets are included in Other Assets at fair value of the equipment or vehicle less estimated selling costs. At the time of repossession, the recorded amount of the loan or lease is written down to the fair value of the equipment or vehicle by a charge to the reserve for loan and lease losses or other income, if a positive adjustment. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs, equipment maintenance costs, and gains or losses recognized upon the sale of repossessions are recognized in Noninterest Expense on the Statements of Income. Gains or losses resulting from the sale of repossessed assets are recognized on the date of sale. Repossessed assets totaled $6.66 million and $10.11 million, as of December 31, 2018 and 2017, respectively, and are included in Other Assets in the Statements of Financial Condition.

Premises and Equipment

Premises and Equipment — Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed by the straight-line method, primarily with useful lives ranging from three to 31.5 years. Maintenance and repairs are charged to expense as incurred, while improvements, which extend the useful life, are capitalized and depreciated over the estimated remaining life.

Goodwill and Intangibles

Goodwill and Intangibles — Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Goodwill is reviewed for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the carrying amount. Goodwill is allocated into two reporting units. Fair value for each reporting unit is estimated using stock price multiples or earnings before interest, tax, depreciation and amortization (EBITDA) multiples. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to impairment testing. All of the Company’s other intangible assets have finite lives and are amortized on a straight-line basis over varying periods not exceeding twenty-five years. The Company performed the required annual impairment test of goodwill during the fourth quarter of 2018 and determined that no impairment exists.

Partnership Investment

Partnership Investments — The partnerships in which the Company has investments account for their investments at fair value. As a result, the Company’s investments in these partnerships reflect the underlying fair value of the partnerships’ investments. The Company accounts for its investments in partnerships for which it owns three percent or more of the partnership on the equity method. The Company accounts for its investments in partnerships of which it owns less than three percent at fair value less impairment. The Company has elected to use the practical expedient to estimate fair value of an investment in an investment company using the net asset value of its partnership interest. The Company uses the hypothetical liquidation book value (HLBV) method for equity investments when the liquidation rights and priorities as defined by an equity investment agreement differ from what is reflected by the underlying percentage ownership interests. The HLBV method is commonly applied to equity investments in the renewable energy industry, where cash percentages vary at different points in time and are not directly linked to an investor’s ownership percentage. A calculation is prepared at each balance sheet date to determine the amount that the Company would receive if an equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is 1st Source’s share of the earnings or losses from the equity investment for the period. Investments in partnerships are included in Other Assets in the Statements of Financial Condition. The balances as of December 31, 2018 and 2017 were $23.46 million and $23.76 million, respectively.

Short-Term Borrowings

Short-Term Borrowings — Short-term borrowings consist of Federal funds purchased, securities sold under agreements to repurchase, commercial paper, Federal Home Loan Bank notes, and borrowings from non-affiliated banks. Federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings mature within one to 365 days of the transaction date. Commercial paper matures within seven to 270 days. Other short-term borrowings in the Statements of Financial Condition include the Company’s liability related to mortgage loans available for repurchase under GNMA optional repurchase programs.

Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third-party is continually monitored and additional collateral obtained or requested to be returned to the Company as deemed appropriate.

Revenue Recognition

Revenue Recognition — The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial services offered primarily through 1st Source Bank and its subsidiaries.

Interest Income — The largest source of revenue for the Company is interest income which is primarily recognized on an accrual basis according to nondiscretionary formulas in written contracts, such as loan and lease agreements or investment securities contracts.

Noninterest Income — The Company earns noninterest income through a variety of financial and transaction services provided to corporate and consumer clients such as trust and wealth advisory, deposit account, debit card, mortgage banking, insurance, and equipment rental services. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.

Trust and Wealth Advisory Fees

Trust and Wealth AdvisoryFees — Trust and wealth advisory fees are recognized on the accrual basis.

Income Taxes

Income Taxes — 1st Source and its subsidiaries file a consolidated Federal income tax return. The provision for incomes taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, the Company believes it is more likely than not that all of the deferred tax assets will be realized.

The Company uses the deferral method of accounting on investments that generate investment tax credits. Under this method, the investment tax credits are recognized as a reduction to the related asset. The expense on certain qualified affordable housing investments is included in Tax Expense in the Statements of Income.

Positions taken in the tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within Income Tax Expense in the Statements of Income.

Net Income Per Common Share

Net Income Per Common Share — Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding, plus the dilutive effect of outstanding stock options, stock warrants and nonvested stock-based compensation awards.

Stock-Based Employee Compensation

Stock-Based Employee Compensation — The Company recognizes stock-based compensation as compensation cost in the Statements of Income based on their fair values on the measurement date, which, for its purposes, is the date of grant. The Company recognizes forfeitures as they occur.

Segment Information

Segment Information — 1st Source has one principal business segment, commercial banking. While our chief decision makers monitor the revenue streams of various products and services, the identifiable segments’ operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company’s financial service operations are considered to be aggregated in one reportable operating segment.

Derivative Financial Instruments

Derivative Financial Instruments — The Company occasionally enters into derivative financial instruments as part of its interest rate risk management strategies. These derivative financial instruments consist primarily of interest rate swaps. All derivative instruments are recorded on the Statements of Financial Condition, as either an asset or liability, at their fair value. The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the derivative. For a derivative used to hedge changes in fair value of a recognized asset or liability, or an unrecognized firm commitment, the gain or loss on the derivative will be recognized in earnings together with the offsetting loss or gain on the hedged item. This results in an earnings impact only to the extent that the hedge is ineffective in achieving offsetting changes in fair value. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in earnings. For a derivative used to hedge changes in cash flows associated with forecasted transactions, the gain or loss on the effective portion of the derivative will be deferred, and reported as accumulated other comprehensive income, a component of shareholders’ equity, until such time the hedged transaction affects earnings. For derivative instruments not accounted for as hedges, changes in fair value are recognized in noninterest income/expense. Deferred gains and losses from derivatives that are terminated and were in a cash flow hedge are amortized over the shorter of the original remaining term of the derivative or the remaining life of the underlying asset or liability.

Fair Value Measurements

Fair Value Measurements — The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale, mortgage loans held for sale, and derivative instruments are carried at fair value on a recurring basis. Fair value measurements are also utilized to determine the initial value of certain assets and liabilities, to perform impairment assessments, and for disclosure purposes. The Company uses quoted market prices and observable inputs to the maximum extent possible when measuring fair value. In the absence of quoted market prices, various valuation techniques are utilized to measure fair value. When possible, observable market data for identical or similar financial instruments are used in the valuation. When market data is not available, fair value is determined using valuation models that incorporate management’s estimates of the assumptions a market participant would use in pricing the asset or liability.

Fair value measurements are classified within one of three levels based on the observability of the inputs used to determine fair value, as follows:

Level 1 — The valuation is based on quoted prices in active markets for identical instruments.

Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 — The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.

Reclassifications

Reclassifications — Certain amounts in the prior periods consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on total assets, shareholders’ equity or net income as previously reported.

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Investment Securities (Tables)

12 Months Ended

Dec. 31, 2018

Investments, Debt and Equity Securities [Abstract]

Schedule of investment securities available-for-sale

The following table shows investment securities available-for-sale.

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2018
U.S. Treasury and Federal agencies securities	$	537,913	$	196	$	(6,886	)	$	531,223
U.S. States and political subdivisions securities	95,346		172		(936		)	94,582
Mortgage-backed securities - Federal agencies	324,390		718		(6,875		)	318,233
Corporate debt securities	45,843		—		(451		)	45,392
Foreign government and other securities	700		—		(1		)	699
Total investment securities available-for-sale	$	1,004,192	$	1,086	$	(15,149	)	$	990,129
December 31, 2017
U.S. Treasury and Federal agencies securities	$	471,508	$	57	$	(3,446	)	$	468,119
U.S. States and political subdivisions securities	116,260		648		(908		)	116,000
Mortgage-backed securities - Federal agencies	289,327		1,456		(2,873		)	287,910
Corporate debt securities	31,573		5		(284		)	31,294
Foreign government and other securities	700		10		—			710
Total investment securities available-for-sale	$	909,368	$	2,176	$	(7,511	)	$	904,033

Schedule of contractual maturities of investments in debt securities available-for-sale

The following table shows the contractual maturities of investments in debt securities available-for-sale at December 31, 2018. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	127,476	$	126,664
Due after one year through five years	541,389		534,377
Due after five years through ten years	10,937		10,855
Due after ten years	—		—
Mortgage-backed securities	324,390		318,233
Total debt securities available-for-sale	$	1,004,192	$	990,129

Schedule of gross unrealized losses and fair value by investment category and age

The following table summarizes gross unrealized losses and fair value by investment category and age. At December 31, 2018, the Company’s available-for-sale securities portfolio consisted of 639 securities, 437 of which were in an unrealized loss position.

	Less than 12 Months					12 months or Longer					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2018
U.S. Treasury and Federal agencies securities	$	55,491	$	(177	)	$	424,269	$	(6,709	)	$	479,760	$	(6,886	)
U.S. States and political subdivisions securities	21,059		(61		)	45,365		(875		)	66,424		(936		)
Mortgage-backed securities - Federal agencies	65,554		(511		)	198,221		(6,364		)	263,775		(6,875		)
Corporate debt securities	21,496		(143		)	23,896		(308		)	45,392		(451		)
Foreign government and other securities	699		(1		)	—		—			699		(1		)
Total temporarily impaired available-for-sale securities	$	164,299	$	(893	)	$	691,751	$	(14,256	)	$	856,050	$	(15,149	)
December 31, 2017
U.S. Treasury and Federal agencies securities	$	311,865	$	(1,161	)	$	89,617	$	(2,285	)	$	401,482	$	(3,446	)
U.S. States and political subdivisions securities	34,971		(287		)	24,909		(621		)	59,880		(908		)
Mortgage-backed securities - Federal agencies	137,169		(1,336		)	60,162		(1,537		)	197,331		(2,873		)
Corporate debt securities	13,747		(57		)	10,048		(227		)	23,795		(284		)
Foreign government and other securities	—		—			—		—			—		—
Total temporarily impaired available-for-sale securities	$	497,752	$	(2,841	)	$	184,736	$	(4,670	)	$	682,488	$	(7,511	)

Schedule of gross realized gains and losses from securities available-for-sale portfolio

The following table shows the gross realized gains and losses from the securities available-for-sale portfolio, including marketable equity securities.

(Dollars in thousands)	2018			2017			2016
Gross realized gains	$	2		$	7,425		$	2,090
Gross realized losses	(347		)	(2,895		)	—
OTTI losses	—			(190		)	(294		)
Net realized (losses) gains	$	(345	)	$	4,340		$	1,796

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Loan and Lease Financings (Tables)

12 Months Ended

Dec. 31, 2018

Receivables [Abstract]

Summary of the gross investment in lease financing and the components of the investment in lease financing

The following table shows the summary of the gross investment in lease financing and the components of the investment in lease financing at December 31, 2018 and 2017.

(Dollars in thousands)	2018			2017
Direct finance leases:
Rentals receivable	$	219,301		$	208,295
Estimated residual value of leased assets	38,138			29,638
Gross investment in lease financing	257,439			237,933
Unearned income	(46,709		)	(37,851		)
Net investment in lease financing	$	210,730		$	200,082

Schedule of credit quality grades of the recorded investment in loans and leases, segregated by class

The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.

	Credit Quality Grades
(Dollars in thousands)	1-6		7-12		Total
December 31, 2018
Commercial and agricultural	$	1,043,019	$	30,186	$	1,073,205
Auto and light truck	528,174		31,813		559,987
Medium and heavy duty truck	281,834		1,710		283,544
Aircraft	768,442		34,669		803,111
Construction equipment	625,579		19,660		645,239
Commercial real estate	787,376		22,510		809,886
Total	$	4,034,424	$	140,548	$	4,174,972
December 31, 2017
Commercial and agricultural	$	906,074	$	23,923	$	929,997
Auto and light truck	482,455		14,361		496,816
Medium and heavy duty truck	293,318		3,617		296,935
Aircraft	815,956		28,701		844,657
Construction equipment	552,684		10,753		563,437
Commercial real estate	726,134		15,434		741,568
Total	$	3,776,621	$	96,789	$	3,873,410

Schedule of recorded investment in residential real estate and home equity and consumer loans by performing or nonperforming status

The following table shows the recorded investment in residential real estate and home equity and consumer loans by performing or nonperforming status. Nonperforming loans are those loans which are on nonaccrual status or are 90 days or more past due.

(Dollars in thousands)	Performing		Nonperforming		Total
December 31, 2018
Residential real estate and home equity	$	521,846	$	2,009	$	523,855
Consumer	136,423		214		136,637
Total	$	658,269	$	2,223	$	660,492
December 31, 2017
Residential real estate and home equity	$	523,803	$	2,319	$	526,122
Consumer	127,982		164		128,146
Total	$	651,785	$	2,483	$	654,268

Schedule of recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status

The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.

(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Total Accruing Loans		Nonaccrual		Total Financing Receivables
December 31, 2018
Commercial and agricultural	$	1,070,530	$	22	$	—	$	—	$	1,070,552	$	2,653	$	1,073,205
Auto and light truck	544,022		3,154		1,437		—		548,613		11,374		559,987
Medium and heavy duty truck	283,284		154		—		—		283,438		106		283,544
Aircraft	790,233		4,149		1,168		—		795,550		7,561		803,111
Construction equipment	641,270		1,643		—		—		642,913		2,326		645,239
Commercial real estate	807,793		109		—		—		807,902		1,984		809,886
Residential real estate and home equity	520,124		1,267		455		295		522,141		1,714		523,855
Consumer	135,591		682		150		73		136,496		141		136,637
Total	$	4,792,847	$	11,180	$	3,210	$	368	$	4,807,605	$	27,859	$	4,835,464
December 31, 2017
Commercial and agricultural	$	927,113	$	281	$	—	$	—	$	927,394	$	2,603	$	929,997
Auto and light truck	485,885		2,869		21		—		488,775		8,041		496,816
Medium and heavy duty truck	296,564		—		—		—		296,564		371		296,935
Aircraft	823,638		14,570		4,492		—		842,700		1,957		844,657
Construction equipment	561,665		333		448		—		562,446		991		563,437
Commercial real estate	738,006		23		121		—		738,150		3,418		741,568
Residential real estate and home equity	521,943		1,508		352		429		524,232		1,890		526,122
Consumer	127,107		776		99		30		128,012		134		128,146
Total	$	4,481,921	$	20,360	$	5,533	$	459	$	4,508,273	$	19,405	$	4,527,678

Schedule of impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses

The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Reserve
December 31, 2018
With no related reserve recorded:
Commercial and agricultural	$	2,471	$	2,471	$	—
Auto and light truck	7,504		7,504		—
Medium and heavy duty truck	106		106		—
Aircraft	556		556		—
Construction equipment	905		905		—
Commercial real estate	1,131		1,131		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	12,673		12,673		—
With a reserve recorded:
Commercial and agricultural	—		—		—
Auto and light truck	3,840		3,840		372
Medium and heavy duty truck	—		—		—
Aircraft	7,004		7,004		1,255
Construction equipment	1,340		1,340		279
Commercial real estate	759		759		51
Residential real estate and home equity	344		346		126
Consumer	—		—		—
Total with a reserve recorded	13,287		13,289		2,083
Total impaired loans	$	25,960	$	25,962	$	2,083
December 31, 2017
With no related reserve recorded:
Commercial and agricultural	$	2,439	$	2,439	$	—
Auto and light truck	—		—		—
Medium and heavy duty truck	371		371		—
Aircraft	1,901		1,901		—
Construction equipment	584		584		—
Commercial real estate	2,375		2,375		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	7,670		7,670		—
With a reserve recorded:
Commercial and agricultural	—		—		—
Auto and light truck	7,780		7,780		243
Medium and heavy duty truck	—		—		—
Aircraft	—		—		—
Construction equipment	344		344		108
Commercial real estate	971		971		181
Residential real estate and home equity	352		354		134
Consumer	—		—		—
Total with a reserve recorded	9,447		9,449		666
Total impaired loans	$	17,117	$	17,119	$	666

Schedule of average recorded investment and interest income recognized on impaired loans and leases, segregated by class

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class, for years ending December 31, 2018, 2017 and 2016.

	2018				2017				2016
(Dollars in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Commercial and agricultural	$	2,812	$	—	$	4,526	$	1	$	3,484	$	6
Auto and light truck	9,352		—		766		—		10		—
Medium and heavy duty truck	247		—		658		—		—		—
Aircraft	9,987		20		4,873		5		6,291		2
Construction equipment	1,663		—		1,011		—		766		—
Commercial real estate	2,303		—		3,220		2		5,417		123
Residential real estate and home equity	347		15		355		15		415		15
Consumer loans	—		—		—		—		—		—
Total	$	26,711	$	35	$	15,409	$	23	$	16,383	$	146

Schedule of loans and leases classified as troubled debt restructuring and number of modifications

The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during 2018, 2017 and 2016, segregated by class, as well as the recorded investment as of December 31. The classification between nonperforming and performing is shown at the time of modification. Modification programs focused on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. The modifications did not result in the contractual forgiveness of principal or interest. There were no modifications during 2018, one modification during 2017, and one modification during 2016 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modifications was immaterial.

	2018			2017			2016
(Dollars in thousands)	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Performing TDRs:
Commercial and agricultural	—	$	—	—	$	—	—	$	—
Auto and light truck	—	—		—	—		—	—
Medium and heavy duty truck	—	—		—	—		—	—
Aircraft	—	—		—	—		—	—
Construction equipment	—	—		—	—		—	—
Commercial real estate	—	—		—	—		—	—
Residential real estate and home equity	—	—		—	—		—	—
Consumer	—	—		—	—		—	—
Total performing TDR modifications	—	—		—	—		—	—
Nonperforming TDRs:
Commercial and agricultural	—	—		1	—		—	—
Auto and light truck	1	285		—	—		—	—
Medium and heavy duty truck	—	—		—	—		—	—
Aircraft	—	—		—	—		—	—
Construction equipment	—	—		—	—		1	562
Commercial real estate	—	—		—	—		—	—
Residential real estate and home equity	—	—		—	—		1	314
Consumer	—	—		—	—		—	—
Total nonperforming TDR modifications	1	285		1	—		2	876
Total TDR modifications	1	$	285	1	$	—	2	$	876

Schedule of recorded investment in loans and leases classified as troubled debt restructuring

The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of December 31.

Year Ended December 31 (Dollars in thousands)	2018		2017
Performing TDRs	$	344	$	352
Nonperforming TDRs	316		537
Total TDRs	$	660	$	889

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Reserve for Loan and Lease Losses (Tables)

12 Months Ended

Dec. 31, 2018

Financing Receivable, Allowance for Credit Loss, Additional Information [Abstract]

Schedule of changes in reserve for loan and lease losses, segregated by class

The following table shows the changes in the reserve for loan and lease losses, segregated by class, for each of the three years ended December 31.

(Dollars in thousands)	Commercial and agricultural			Auto and light truck			Medium and heavy duty truck			Aircraft		Construction equipment			Commercial real estate			Residential real estate and home equity			Consumer		Total
2018
Balance, beginning of year	$	16,228		$	10,103		$	4,844		$	34,619	$	9,343		$	14,792		$	3,666		$	1,288	$	94,883
Charge-offs	229			3,308			23			12,222		288			70			63			909		17,112
Recoveries	222			68			—			2,499		100			53			23			271		3,236
Net charge-offs	7			3,240			23			9,723		188			17			40			638		13,876
Provision (recovery of provision)	842			7,826			(518		)	8,151		1,767			930			(201		)	665		19,462
Balance, end of year	$	17,063		$	14,689		$	4,303		$	33,047	$	10,922		$	15,705		$	3,425		$	1,315	$	100,469
2017
Balance, beginning of year	$	14,668		$	8,064		$	4,740		$	34,352	$	8,207		$	13,677		$	3,550		$	1,285	$	88,543
Charge-offs	2,415			774			—			1,872		164			344			124			836		6,529
Recoveries	984			1,153			—			227		298			851			109			267		3,889
Net charge-offs (recoveries)	1,431			(379		)	—			1,645		(134		)	(507		)	15			569		2,640
Provision (recovery of provision)	2,991			1,660			104			1,912		1,002			608			131			572		8,980
Balance, end of year	$	16,228		$	10,103		$	4,844		$	34,619	$	9,343		$	14,792		$	3,666		$	1,288	$	94,883
2016
Balance, beginning of year	$	15,456		$	9,269		$	4,699		$	32,373	$	7,592		$	13,762		$	3,662		$	1,299	$	88,112
Charge-offs	547			4			—			6,123		128			32			219			888		7,941
Recoveries	509			253			10			528		461			469			31			278		2,539
Net charge-offs (recoveries)	38			(249		)	(10		)	5,595		(333		)	(437		)	188			610		5,402
Provision (recovery of provision)	(750		)	(1,454		)	31			7,574		282			(522		)	76			596		5,833
Balance, end of year	$	14,668		$	8,064		$	4,740		$	34,352	$	8,207		$	13,677		$	3,550		$	1,285	$	88,543

The following table shows the reserve for loan and lease losses and recorded investment in loans and leases, segregated by class, separated by individually and collectively evaluated for impairment as of December 31, 2018 and 2017.

(Dollars in thousands)	Commercial and agricultural		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer		Total
December 31, 2018
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	$	—	$	372	$	—	$	1,255	$	279	$	51	$	126	$	—	$	2,083
Ending balance, collectively evaluated for impairment	17,063		14,317		4,303		31,792		10,643		15,654		3,299		1,315		98,386
Total reserve for loan and lease losses	$	17,063	$	14,689	$	4,303	$	33,047	$	10,922	$	15,705	$	3,425	$	1,315	$	100,469
Recorded investment in loans
Ending balance, individually evaluated for impairment	$	2,471	$	11,344	$	106	$	7,560	$	2,245	$	1,890	$	344	$	—	$	25,960
Ending balance, collectively evaluated for impairment	1,070,734		548,643		283,438		795,551		642,994		807,996		523,511		136,637		4,809,504
Total recorded investment in loans	$	1,073,205	$	559,987	$	283,544	$	803,111	$	645,239	$	809,886	$	523,855	$	136,637	$	4,835,464
December 31, 2017
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment	$	—	$	243	$	—	$	—	$	108	$	181	$	134	$	—	$	666
Ending balance, collectively evaluated for impairment	16,228		9,860		4,844		34,619		9,235		14,611		3,532		1,288		94,217
Total reserve for loan and lease losses	$	16,228	$	10,103	$	4,844	$	34,619	$	9,343	$	14,792	$	3,666	$	1,288	$	94,883
Recorded investment in loans
Ending balance, individually evaluated for impairment	$	2,439	$	7,780	$	371	$	1,901	$	928	$	3,346	$	352	$	—	$	17,117
Ending balance, collectively evaluated for impairment	927,558		489,036		296,564		842,756		562,509		738,222		525,770		128,146		4,510,561
Total recorded investment in loans	$	929,997	$	496,816	$	296,935	$	844,657	$	563,437	$	741,568	$	526,122	$	128,146	$	4,527,678

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Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2018

Property, Plant and Equipment [Abstract]

Schedule of premises and equipment

The following table shows premises and equipment as of December 31.

(Dollars in thousands)	2018			2017
Land	$	15,223		$	15,413
Buildings and improvements	59,691			58,981
Furniture and equipment	40,789			39,978
Total premises and equipment	115,703			114,372
Accumulated depreciation and amortization	(63,564		)	(59,760		)
Net premises and equipment	$	52,139		$	54,612

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Mortgage Servicing Rights (Tables)

12 Months Ended

Dec. 31, 2018

Transfers and Servicing of Financial Assets [Abstract]

Schedule of changes in carrying value of mortgage servicing rights and the associated valuation allowance

The following table shows changes in the carrying value of MSRs and the associated valuation allowance.

(Dollars in thousands)	2018			2017
Mortgage servicing rights:
Balance at beginning of year	$	4,349		$	4,297
Additions	890			1,144
Amortization	(956		)	(1,092		)
Sales	—			—
Carrying value before valuation allowance at end of year	4,283			4,349
Valuation allowance:
Balance at beginning of year	—			—
Impairment recoveries	—			—
Balance at end of year	$	—		$	—
Net carrying value of mortgage servicing rights at end of year	$	4,283		$	4,349
Fair value of mortgage servicing rights at end of year	$	7,238		$	7,187

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Intangible Assets and Goodwill (Tables)

12 Months Ended

Dec. 31, 2018

Goodwill and Intangible Assets Disclosure [Abstract]

Summary of core deposit intangible and other intangible assets

The following table shows a summary of core deposit intangible and other intangible assets as of December 31.

(Dollars in thousands)	2018			2017
Core deposit intangibles:
Gross carrying amount	$	—		$	8,689
Less: accumulated amortization	—			(8,657		)
Net carrying amount	$	—		$	32
Other intangibles:
Gross carrying amount	$	204		$	857
Less: accumulated amortization	(71		)	(827		)
Net carrying amount	$	133		$	30

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Deposits (Tables)

12 Months Ended

Dec. 31, 2018

Banking and Thrift [Abstract]

Schedule of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more by time remaining until maturity

The following table shows the amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more outstanding at December 31, 2018, by time remaining until maturity.

(Dollars in thousands)
Under 3 months	$	135,940
4 – 6 months	87,102
7 – 12 months	144,960
Over 12 months	298,890
Total	$	666,892

Schedule of maturities of time deposits, including both private and public funds

The following table shows scheduled maturities of time deposits, including both private and public funds, at December 31, 2018.

(Dollars in thousands)
2019	$	755,605
2020	489,445
2021	125,404
2022	52,512
2023	37,145
Thereafter	7,655
Total	$	1,467,766

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Borrowed Funds and Mandatorily Redeemable Securities (Tables)

12 Months Ended

Dec. 31, 2018

Debt Disclosure [Abstract]

Schedule of long-term debt and mandatorily redeemable securities

The following table shows the details of long-term debt and mandatorily redeemable securities as of December 31, 2018 and 2017.

(Dollars in thousands)	2018		2017
Federal Home Loan Bank borrowings (1.04% – 5.04%)	$	46,444	$	47,114
Mandatorily redeemable securities	16,542		18,948
Other long-term debt	8,137		3,998
Total long-term debt and mandatorily redeemable securities	$	71,123	$	70,060

Schedule of short-term borrowings

The following table shows the details of short-term borrowings as of December 31, 2018 and 2017.

	2018				2017
(Dollars in thousands)	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Federal funds purchased	$	10,000	2.70	%	$	56,000	1.63	%
Security repurchase agreements	103,627		0.25		149,834		0.20
Commercial paper	4,325		0.29		6,115		0.27
Federal Home Loan Bank advances	80,000		2.57		—		—
Other short-term borrowings	1,392		—		2,646		—
Total short-term borrowings	$	199,344	1.30	%	$	214,595	0.57	%

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Variable Interest Entities (Tables)

12 Months Ended

Dec. 31, 2018

Variable Interest Entities

Schedule of unconsolidated variable interest entities

The following table provides a summary of investments in affordable housing, community development and renewable energy VIEs that the Company has not consolidated as of December 31, 2018 and 2017.

(Dollars in thousands)	2018		2017
Investment carrying amount	$	15,083	$	23,759
Unfunded capital and other commitments	6,449		15,712
Maximum exposure to loss	40,705		29,926

Summary of subordinated notes

The following table shows subordinated notes at December 31, 2018.

(Dollars in thousands)	Amount of Subordinated Notes		Interest Rate		Maturity Date
June 2007 issuance (1)	$	41,238	7.22	%	6/15/2037
August 2007 issuance (2)	17,526		4.27	%	9/15/2037
Total	$	58,764

(1) Fixed rate through life of debt.

(2) 3-Month LIBOR +1.48% through remaining life of debt.

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Earnings Per Share (Tables)

12 Months Ended

Dec. 31, 2018

Earnings Per Share [Abstract]

Schedule of reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share for the three years ending December 31.

(Dollars in thousands - except per share amounts)	2018		2017		2016
Distributed earnings allocated to common stock	$	24,894	$	19,701	$	18,707
Undistributed earnings allocated to common stock	56,975		47,830		38,670
Net earnings allocated to common stock	81,869		67,531		57,377
Net earnings allocated to participating securities	545		520		409
Net income allocated to common stock and participating securities	$	82,414	$	68,051	$	57,786
Weighted average shares outstanding for basic earnings per common share	25,937,599		25,925,820		25,879,397
Dilutive effect of stock compensation	—		—		—
Weighted average shares outstanding for diluted earnings per common share	25,937,599		25,925,820		25,879,397
Basic earnings per common share	$	3.16	$	2.60	$	2.22
Diluted earnings per common share	$	3.16	$	2.60	$	2.22

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Accumulated Other Comprehensive Income (Tables)

12 Months Ended

Dec. 31, 2018

Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]

Schedule of reclassifications out of accumulated other comprehensive income

The following table presents reclassifications out of accumulated other comprehensive income related to unrealized gains and losses on available-for-sale securities for the two years ending December 31.

(Dollars in thousands)	2018			2017			Affected Line Item in the Statements of Income
Realized (losses) gains included in net income	$	(345	)	$	4,340		(Losses) gains on investment securities available-for-sale
	(345		)	4,340			Income before income taxes
Tax effect	83			(1,629		)	Income tax expense
Net of tax	$	(262	)	$	2,711		Net income

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Employee Stock Benefit Plans (Tables)

12 Months Ended

Dec. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Summary of activity regarding active stock option and stock award plans

The following table shows the combined summary of activity regarding active stock option and stock award plans.

			Non-Vested Stock Awards Outstanding
	Shares Available for Grant		Number of Shares		Weighted-Average Grant-Date Fair Value
Balance, January 1, 2016	2,450,799		358,861		$	21.93
Shares authorized - 2016 EIP	59,342		—		—
Shares authorized - Restricted Stock Award Plan(1)	229,439		—		—
Granted	(79,118	)	79,118		26.19
Stock awards vested	—		(155,981	)	20.47
Forfeited	3,543		(5,383	)	23.39
Canceled	(1,950,000	)	—		—
Balance, December 31, 2016	714,005		276,615		23.94
Shares authorized - 2017 EIP	59,064		—		—
Granted	(98,625	)	98,625		33.54
Stock awards vested	—		(76,858	)	22.71
Forfeited	2,000		(2,456	)	29.93
Balance, December 31, 2017	676,444		295,926		27.41
Shares authorized - 2018 EIP	70,461		—		—
Granted	(74,981	)	74,981		29.11
Stock awards vested	—		(106,513	)	25.79
Forfeited	3,135		(10,575	)	27.51
Balance, December 31, 2018	675,059		253,819		$	28.59

(1) Shares issuable under the Plan, after taking into account previously granted and forfeited shares, were adjusted to 250,000 shares effective November 9, 2016.

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Schedule of income tax expense

The following table shows the composition of income tax expense.

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Current:
Federal	$	20,167		$	26,012		$	25,479
State	2,996			4,530			3,005
Total current	23,163			30,542			28,484
Deferred:
Federal	(875		)	5,869			2,530
State	1,200			(488		)	326
Deferred tax liability remeasurement	(875		)	(2,614		)	—
Total deferred	(550		)	2,767			2,856
Total provision	$	22,613		$	33,309		$	31,340

Schedule of reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate

The following table shows the reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate (21% for 2018 and 35% for 2017 and 2016) to income before income taxes.

	2018					2017					2016
Year Ended December 31 (Dollars in thousands)	Amount			Percent of Pretax Income		Amount			Percent of Pretax Income		Amount			Percent of Pretax Income
Statutory federal income tax	$	22,056		21.0	%	$	35,476		35.0	%	$	31,194		35.0	%
(Decrease) increase in income taxes resulting from:
Tax-exempt interest income	(650		)	(0.6	)	(1,197		)	(1.2	)	(1,235		)	(1.4	)
State taxes, net of federal income tax benefit	3,315			3.2		2,627			2.6		2,165			2.4
Deferred tax liability remeasurement	(875		)	(0.8	)	(2,614		)	(2.6	)	—			—
Other	(1,233		)	(1.3	)	(983		)	(0.9	)	(784		)	(0.8	)
Total	$	22,613		21.5	%	$	33,309		32.9	%	$	31,340		35.2	%

Schedule of deferred tax assets and liabilities

The following table shows the composition of deferred tax assets and liabilities as of December 31, 2018 and 2017.

(Dollars in thousands)	2018			2017
Deferred tax assets:
Reserve for loan and lease losses	$	25,386		$	23,791
Accruals for employee benefits	2,974			2,369
Net unrealized losses on securities available-for-sale	3,386			1,285
Other	127			622
Total deferred tax assets	31,873			28,067
Deferred tax liabilities:
Differing depreciable bases in premises and leased equipment	21,184			22,641
Differing bases in assets related to acquisitions	4,021			3,954
Tax advantaged partnerships	4,354			1,921
Mortgage servicing	586			745
Capitalized loan costs	1,110			867
Prepaid expenses	273			387
Other	364			222
Total deferred tax liabilities	31,892			30,737
Net deferred tax liability	$	(19	)	$	(2,670	)

Schedule of reconciliation of the beginning and ending amounts of unrecognized tax benefits

The following table shows a reconciliation of the beginning and ending amounts of unrecognized tax benefits.

(Dollars in thousands)	2018			2017		2016
Balance, beginning of year	$	1,112		$	762	$	380
Additions based on tax positions related to the current year	—			350		382
Additions for tax positions of prior years	—			—		—
Reductions for tax positions of prior years	—			—		—
Reductions due to lapse in statute of limitations	—			—		—
Settlements	(1,112		)	—		—
Balance, end of year	$	—		$	1,112	$	762

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Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk (Tables)

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies Disclosure [Abstract]

Schedule of rental expense of office premises and equipment and rental income from owned premises

The following table shows rental expense of office premises and equipment and rental income from owned premises.

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Gross rental expense	$	3,727		$	4,183		$	3,995
Gross rental income	(873		)	(856		)	(921		)
Net rental expense	$	2,854		$	3,327		$	3,074

Schedule of financial instruments whose contract amounts represent credit risk

Financial instruments, whose contract amounts represent credit risk as of December 31, were as follows:

(Dollars in thousands)	2018		2017
Amounts of commitments:
Loan commitments to extend credit	$	1,095,053	$	1,030,334
Standby letters of credit	$	31,133	$	29,961
Commercial and similar letters of credit	$	2,500	$	1,837

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Derivative Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of amounts of non-hedging derivative financial instruments

The following table shows the amounts of non-hedging derivative financial instruments at December 31, 2018 and 2017.

			Asset derivatives			Liability derivatives
(Dollars in thousands)	Notional or contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification	Fair value
Interest rate swap contracts	$	855,848	Other assets	$	7,124	Other liabilities	$	7,250
Loan commitments	5,871		Mortgages held for sale	112		N/A	—
Forward contracts - mortgage loan	14,087		N/A	—		Mortgages held for sale	135
Total - December 31, 2018	$	875,806		$	7,236		$	7,385
Interest rate swap contracts	$	756,550	Other assets	$	5,167	Other liabilities	$	5,262
Loan commitments	8,504		Mortgages held for sale	66		N/A	—
Forward contracts - mortgage loan	19,390		N/A	—		Mortgages held for sale	10
Total - December 31, 2017	$	784,444		$	5,233		$	5,272

Schedule of amounts included in the consolidated statements of income for non-hedging derivative financial instruments

The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments at December 31, 2018, 2017 and 2016.

		Gain (loss)
(Dollars in thousands)	Statement of Income classification	2018			2017			2016
Interest rate swap contracts	Other expense	$	(30	)	$	26		$	64
Interest rate swap contracts	Other income	1,028			1,585			730
Loan commitments	Mortgage banking	46			23			(4		)
Forward contracts - mortgage loan	Mortgage banking	(125		)	(232		)	209
Total		$	919		$	1,402		$	999

Schedule of offsetting of financial assets and derivative assets

The following table shows the offsetting of financial assets and derivative assets at December 31, 2018 and 2017.

							Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
December 31, 2018
Interest rate swaps	$	7,128	$	4	$	7,124	$	177	$	610	$	6,337
December 31, 2017
Interest rate swaps	$	5,194	$	27	$	5,167	$	—	$	—	$	5,167

Schedule of offsetting of financial liabilities and derivative liabilities

The following table shows the offsetting of financial liabilities and derivative liabilities at December 31, 2018 and 2017.

							Gross Amounts Not Offset in the Statement of Financial Condition
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount
December 31, 2018
Interest rate swaps	$	7,254	$	4	$	7,250	$	1,700	$	—	$	5,550
Repurchase agreements	103,627		—		103,627		103,627		—		—
Total	$	110,881	$	4	$	110,877	$	105,327	$	—	$	5,550
December 31, 2017
Interest rate swaps	$	5,289	$	27	$	5,262	$	—	$	2,705	$	2,557
Repurchase agreements	149,835		—		149,835		149,835		—		—
Total	$	155,124	$	27	$	155,097	$	149,835	$	2,705	$	2,557

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Regulatory Matters (Tables)

12 Months Ended

Dec. 31, 2018

Regulatory Capital Requirements [Abstract]

Schedule of actual and required capital amounts and ratios

The following table shows the actual and required capital amounts and ratios for 1st Source Corporation and 1st Source Bank as of December 31, 2018 and 2017.

	Actual				Minimum Capital Adequacy				Minimum Capital Adequacy with Capital Buffer(1)				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
2018
Total Capital (to Risk-Weighted Assets):
1st Source Corporation	$	821,975	14.68	%	$	447,909	8.00	%	$	552,888	9.875	%	$	559,887	10.00	%
1st Source Bank	744,326		13.29		448,152		8.00		553,188		9.875		560,190		10.00
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	751,575		13.42		335,932		6.00		440,911		7.875		447,909		8.00
1st Source Bank	673,888		12.03		336,114		6.00		441,150		7.875		448,152		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	693,067		12.38		251,949		4.50		356,928		6.375		363,926		6.50
1st Source Bank	672,380		12.00		252,086		4.50		357,121		6.375		364,124		6.50
Tier 1 Capital (to Average Assets):
1st Source Corporation	751,575		12.06		249,185		4.00		N/A		N/A		311,481		5.00
1st Source Bank	673,888		10.82		249,052		4.00		N/A		N/A		311,315		5.00
2017
Total Capital (to Risk-Weighted Assets):
1st Source Corporation	$	764,853	14.70	%	$	416,174	8.00	%	$	481,201	9.250	%	$	520,218	10.00	%
1st Source Bank	696,248		13.36		416,902		8.00		482,043		9.250		521,127		10.00
Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	699,420		13.44		312,131		6.00		377,158		7.250		416,174		8.00
1st Source Bank	630,702		12.10		312,676		6.00		377,817		7.250		416,902		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
1st Source Corporation	642,420		12.35		234,098		4.50		299,125		5.750		338,142		6.50
1st Source Bank	630,702		12.10		234,507		4.50		299,648		5.750		338,733		6.50
Tier 1 Capital (to Average Assets):
1st Source Corporation	699,420		12.17		229,890		4.00		N/A		N/A		287,362		5.00
1st Source Bank	630,702		10.98		229,789		4.00		N/A		N/A		287,236		5.00

(1) The capital conservation buffer requirement will be phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis.

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Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2018

Fair value measurements

Schedule of differences between the fair value carrying amount of mortgages held for sale measured at fair value and the aggregate unpaid principal amount

The following table shows the differences between fair value carrying amount of mortgages held for sale measured at fair value and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity on December 31, 2018 and 2017.

(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Excess of fair value carrying amount over (under) unpaid principal
December 31, 2018
Mortgages held for sale reported at fair value:
Total Loans	$	11,290	$	11,076	$	214	(1)
December 31, 2017
Mortgages held for sale reported at fair value:
Total Loans	$	13,123	$	12,967	$	156	(1)

(1) The excess of fair value carrying amount over (under) unpaid principal is included in mortgage banking income and includes changes in fair value at and subsequent to funding and gains and losses on the related loan commitment prior to funding.

Schedule of assets and liabilities measured at fair value on a recurring basis

The following table shows the balance of assets and liabilities measured at fair value on a recurring basis.

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2018
Assets:
Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities	$	33,746	$	497,477	$	—	$	531,223
U.S. States and political subdivisions securities	—		93,557		1,025		94,582
Mortgage-backed securities - Federal agencies	—		318,233		—		318,233
Corporate debt securities	—		45,392		—		45,392
Foreign government and other securities	—		699		—		699
Total debt securities available-for-sale	33,746		955,358		1,025		990,129
Mortgages held for sale	—		11,290		—		11,290
Accrued income and other assets (interest rate swap agreements)	—		7,124		—		7,124
Total	$	33,746	$	973,772	$	1,025	$	1,008,543
Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	$	—	$	7,250	$	—	$	7,250
Total	$	—	$	7,250	$	—	$	7,250
December 31, 2017
Assets:
Investment securities available-for-sale:
U.S. Treasury and Federal agencies securities	$	27,971	$	440,148	$	—	$	468,119
U.S. States and political subdivisions securities	—		113,845		2,155		116,000
Mortgage-backed securities - Federal agencies	—		287,910		—		287,910
Corporate debt securities	—		31,294		—		31,294
Foreign government and other securities	—		—		710		710
Total debt securities available-for-sale	27,971		873,197		2,865		904,033
Mortgages held for sale	—		13,123		—		13,123
Accrued income and other assets (interest rate swap agreements)	—		5,167		—		5,167
Total	$	27,971	$	891,487	$	2,865	$	922,323
Liabilities:
Accrued expenses and other liabilities (interest rate swap agreements)	$	—	$	5,262	$	—	$	5,262
Total	$	—	$	5,262	$	—	$	5,262

Schedule of changes in Level 3 assets and liabilities measured at fair value on a recurring basis

The following table shows the changes in Level 3 assets and liabilities measured at fair value on a recurring basis.

(Dollars in thousands)	U.S. States and political subdivisions securities			Foreign government and other securities			Investment securities available-for-sale
Beginning balance January 1, 2018	$	2,155		$	710		$	2,865
Total gains or losses (realized/unrealized):
Included in earnings	—			—			—
Included in other comprehensive income	6			(11		)	(5		)
Purchases	—			200			200
Issuances	—			—			—
Sales	—			—			—
Settlements	—			—			—
Maturities	(1,136		)	(200		)	(1,336		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			(699		)	(699		)
Ending balance December 31, 2018	$	1,025		$	—		$	1,025
Beginning balance January 1, 2017	$	2,699		$	807		$	3,506
Total gains or losses (realized/unrealized):
Included in earnings	—			—			—
Included in other comprehensive income	31			3			34
Purchases	1,437			500			1,937
Issuances	—			—			—
Sales	—			—			—
Settlements	—			—			—
Maturities	(2,012		)	(600		)	(2,612		)
Transfers into Level 3	—			—			—
Transfers out of Level 3	—			—			—
Ending balance December 31, 2017	$	2,155		$	710		$	2,865

Schedule of carrying value of assets measured at fair value on a non-recurring basis

The following table shows the carrying value of assets measured at fair value on a non-recurring basis.

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2018
Impaired loans - collateral based	$	—	$	—	$	7,306	$	7,306
Accrued income and other assets (mortgage servicing rights)	—		—		4,283		4,283
Accrued income and other assets (repossessions)	—		—		6,666		6,666
Accrued income and other assets (other real estate)	—		—		299		299
Total	$	—	$	—	$	18,554	$	18,554
December 31, 2017
Impaired loans - collateral based	$	—	$	—	$	7,994	$	7,994
Accrued income and other assets (partnership investments)	—		—		1,000		1,000
Accrued income and other assets (mortgage servicing rights)	—		—		4,349		4,349
Accrued income and other assets (repossessions)	—		—		10,114		10,114
Accrued income and other assets (other real estate)	—		—		1,312		1,312
Total	$	—	$	—	$	24,769	$	24,769

Schedule of fair values of financial instruments

The following table shows the fair values of the Company’s financial instruments.

(Dollars in thousands)	Carrying or Contract Value		Fair Value		Level 1		Level 2		Level 3
December 31, 2018
Assets:
Cash and due from banks	$	94,907	$	94,907	$	94,907	$	—	$	—
Federal funds sold and interest bearing deposits with other banks	4,172		4,172		4,172		—		—
Investment securities, available-for-sale	990,129		990,129		33,746		955,358		1,025
Other investments	28,404		28,404		28,404		—		—
Mortgages held for sale	11,290		11,290		—		11,290		—
Loans and leases, net of reserve for loan and lease losses	4,734,995		4,689,267		—		—		4,689,267
Mortgage servicing rights	4,283		7,238		—		—		7,238
Interest rate swaps	7,124		7,124		—		7,124		—
Liabilities:
Deposits	$	5,122,322	$	5,111,711	$	3,654,556	$	1,457,155	$	—
Short-term borrowings	199,344		199,344		113,734		85,610		—
Long-term debt and mandatorily redeemable securities	71,123		68,751		—		68,751		—
Subordinated notes	58,764		45,874		—		45,874		—
Interest rate swaps	7,250		7,250		—		7,250		—
Off-balance-sheet instruments *	—		259		—		259		—
December 31, 2017
Assets:
Cash and due from banks	$	73,635	$	73,635	$	73,635	$	—	$	—
Federal funds sold and interest bearing deposits with other banks	4,398		4,398		4,398		—		—
Investment securities, available-for-sale	904,033		904,033		27,971		873,197		2,865
Other investments	25,953		25,953		25,953		—		—
Mortgages held for sale	13,123		13,123		—		13,123		—
Loans and leases, net of reserve for loan and lease losses	4,432,795		4,428,848		—		—		4,428,848
Mortgage servicing rights	4,349		7,187		—		—		7,187
Interest rate swaps	5,167		5,167		—		5,167		—
Liabilities:
Deposits	$	4,752,730	$	4,745,111	$	3,482,757	$	1,262,354	$	—
Short-term borrowings	214,595		214,595		206,862		7,733		—
Long-term debt and mandatorily redeemable securities	70,060		67,857		—		67,857		—
Subordinated notes	58,764		57,103		—		57,103		—
Interest rate swaps	5,262		5,262		—		5,262		—
Off-balance-sheet instruments *	—		286		—		286		—

* Represents estimated cash outflows required to currently settle the obligations at current market rates.

Recurring

Fair value measurements

Schedule of valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis

The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a recurring basis.

(Dollars in thousands)	Fair value		Valuation Methodology	Unobservable Inputs	Range of Inputs
December 31, 2018
Debt securities available-for-sale
Direct placement municipal securities	$	1,025	Discounted cash flows	Credit spread assumption	0.17% - 3.02%
December 31, 2017
Debt securities available-for-sale
Direct placement municipal securities	$	2,155	Discounted cash flows	Credit spread assumption	2.21% - 2.93%
Foreign government	$	710	Discounted cash flows	Market yield assumption	0.35% - 1.23%

Non-recurring

Fair value measurements

Schedule of valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis

The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a non-recurring basis.

(Dollars in thousands)	Carrying Value		Fair value		Valuation Methodology	Unobservable Inputs	Range of Inputs
December 31, 2018
Impaired loans	$	7,306	$	7,306	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	20% - 35%
Mortgage servicing rights	4,283		7,238		Discounted cash flows	Constant prepayment rate (CPR)	7.2% - 24.8%
						Discount rate	10.3% - 13.1%
Repossessions	6,666		6,991		Appraisals, trade publications and auction values	Discount for lack of marketability	4% - 6%
Other real estate	299		305		Appraisals	Discount for lack of marketability	0% - 10%
December 31, 2017
Impaired loans	$	7,994	$	7,994	Collateral based measurements including appraisals, trade publications, and auction values	Discount for lack of marketability and current conditions	3% - 20%
Mortgage servicing rights	4,349		7,187		Discounted cash flows	Constant prepayment rate (CPR)	8.6% - 20.7%
						Discount rate	9.6% - 12.5%
Repossessions	10,114		10,493		Appraisals, trade publications and auction values	Discount for lack of marketability	3% - 10%
Other real estate	1,312		1,441		Appraisals	Discount for lack of marketability	7% - 9%

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1st Source Corporation (Parent Company Only) Financial Information (Tables)

12 Months Ended

Dec. 31, 2018

Condensed Financial Information Disclosure [Abstract]

Schedule of statements of financial condition

STATEMENTS OF FINANCIAL CONDITION

December 31(Dollars in thousands)	2018		2017
ASSETS
Cash and cash equivalents	$	106,647	$	100,155
Short-term investments with bank subsidiary	500		500
Investments in:
Bank subsidiaries	740,697		706,119
Non-bank subsidiaries	1		1
Other assets	4,191		2,696
Total assets	$	852,036	$	809,471
LIABILITIES AND SHAREHOLDERS’ EQUITY
Commercial paper	$	4,325	$	6,115
Long-term debt and mandatorily redeemable securities	24,676		22,942
Subordinated notes	58,764		58,764
Other liabilities	2,189		3,113
Total liabilities	89,954		90,934
Total shareholders’ equity	762,082		718,537
Total liabilities and shareholders’ equity	$	852,036	$	809,471

Schedule of statements of income

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Year Ended December 31 (Dollars in thousands)	2018			2017		2016
Income:
Dividends from bank subsidiary	$	45,080		$	38,317	$	36,064
Dividends from non-bank subsidiary	—			958		—
Rental income from subsidiaries	2,613			2,354		2,363
Other	367			422		444
Investment securities and other investment (losses) gains	(180		)	6,431		3,901
Total income	47,880			48,482		42,772
Expenses:
Interest on subordinated notes	3,625			4,002		4,220
Interest on long-term debt and mandatorily redeemable securities	1,624			1,685		1,454
Interest on commercial paper and other short-term borrowings	14			17		20
Rent	1,774			2,070		1,739
Other	642			1,733		1,179
Total expenses	7,679			9,507		8,612
Income before income tax benefit and equity in undistributed income of subsidiaries	40,201			38,975		34,160
Income tax benefit	1,009			204		741
Income before equity in undistributed income of subsidiaries	41,210			39,179		34,901
Equity in undistributed income of subsidiaries:
Bank subsidiaries	41,204			28,872		22,569
Non-bank subsidiaries	—			—		316
Net income	$	82,414		$	68,051	$	57,786
Comprehensive income	$	75,788		$	63,375	$	52,575

Schedule of statements of cash flow

STATEMENTS OF CASH FLOWS

Year Ended December 31 (Dollars in thousands)	2018			2017			2016
Operating activities:
Net income	$	82,414		$	68,051		$	57,786
Adjustments to reconcile net income to net cash provided by operating activities:
Equity (undistributed) distributed in excess of income of subsidiaries	(41,204		)	(28,872		)	(22,885		)
Depreciation of premises and equipment	2			2			4
Stock-based compensation	71			48			52
Realized/unrealized investment securities and other investment losses (gains)	180			(6,431		)	(3,901		)
Other	45			4,122			3,132
Net change in operating activities	41,508			36,920			34,188
Investing activities:
Proceeds from sales and maturities of investment securities	—			6,327			1,795
Net change in partnership investments	(980		)	(62		)	2,903
Return of capital from subsidiaries	—			854			—
Net change in investing activities	(980		)	7,119			4,698
Financing activities:
Net change in commercial paper	(1,790		)	354			(2,281		)
Proceeds from issuance of long-term debt and mandatorily redeemable securities	1,867			1,248			1,607
Payments on long-term debt and mandatorily redeemable securities	(1,064		)	(667		)	(627		)
Stock issued under stock purchase plans	145			153			120
Net proceeds from issuance of treasury stock	1,763			2,176			2,636
Acquisition of treasury stock	(9,271		)	(41		)	(8,030		)
Cash dividends paid on common stock	(25,686		)	(20,431		)	(19,416		)
Net change in financing activities	(34,036		)	(17,208		)	(25,991		)
Net change in cash and cash equivalents	6,492			26,831			12,895
Cash and cash equivalents, beginning of year	100,155			73,324			60,429
Cash and cash equivalents, end of year	$	106,647		$	100,155		$	73,324

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Accounting Policies (Details)	12 Months Ended
	Dec. 31, 2018 USD ($) unit class segment	Dec. 31, 2017 USD ($)
Securities
Held-to-maturity investment securities	$ 0	$ 0
Loans and leases
Percentage of the principal balance that may be repurchased of a delinquent Ginnie Mae (GNMA) mortgage loan (as a percent)	100.00%
Reserve for loan and lease losses
Number of classes within loan and lease portfolio | class	8
Other real estate
Carrying value of other real estate	$ 300,000	1,310,000
Repossessed assets
Repossessed assets value	$ 6,660,000	10,110,000
Goodwill and intangibles
Number of reportable units used in goodwill allocation | unit	2
Partnership investment
Minimum percentage of partnership accounted for as equity investment	3.00%
Investment in partnership	$ 23,460,000	23,760,000
Segment reporting
Number of business segments aggregated as reportable operating segments | segment	1
Residential real estate portfolio
Loans and leases
Loans available for repurchase	$ 1,390,000	$ 2,650,000
Minimum
Loans and leases
Period of sustained performance required to change from non-performing to performing status	6 months
Amount necessary for impairment evaluation	$ 100,000
Reserve for loan and lease losses
Threshold value of loan or lease for evaluation of the appropriateness of the impairment reserve	$ 100,000
Equipment owned under operating lease
Lease term	3 years
Premises and equipment
Useful life of premises and equipment	3 years
Income taxes
Tax benefit realized on settlement, percentage	50.00%
Minimum | Federal funds purchased
Short-term borrowings:
Term of short-term debt	1 day
Minimum | Security repurchase agreements
Short-term borrowings:
Term of short-term debt	1 day
Minimum | Other short-term borrowings
Short-term borrowings:
Term of short-term debt	1 day
Minimum | Commercial paper
Short-term borrowings:
Term of short-term debt	7 days
Maximum
Equipment owned under operating lease
Lease term	7 years
Premises and equipment
Useful life of premises and equipment	31 years 6 months
Goodwill and intangibles
Useful life of finite lived assets	25 years
Maximum | Federal funds purchased
Short-term borrowings:
Term of short-term debt	365 days
Maximum | Security repurchase agreements
Short-term borrowings:
Term of short-term debt	365 days
Maximum | Other short-term borrowings
Short-term borrowings:
Term of short-term debt	365 days
Maximum | Commercial paper
Short-term borrowings:
Term of short-term debt	270 days

XML

Recent Accounting Pronouncements (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Item Effected
Retained earnings	$ 398,980	$ 339,959
Assets	6,293,745	5,887,284
Liabilities	5,530,155	$ 5,168,747
Accounting Standards Update 2017-08
Item Effected
Retained earnings	300
Accounting Standards Update 2016-02
Item Effected
Assets	9,970
Liabilities	10,750
Accounting Standards Update 2018-02
Item Effected
Reclassification of tax effects related to the Tax Cuts and Jobs Act	$ 720

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Investment Securities (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Contractual maturities of investments in debt securities available-for-sale, Amortized Cost
Due in one year or less	$ 127,476
Due after one year through five years	541,389
Due after five years through ten years	10,937
Due after ten years	0
Mortgage-backed securities	324,390
Total debt securities available-for-sale	1,004,192	$ 909,368
Contractual maturities of investments in debt securities available-for-sale, Fair Value
Due in one year or less	126,664
Due after one year through five years	534,377
Due after five years through ten years	10,855
Due after ten years	0
Mortgage-backed securities	318,233
Total debt securities available-for-sale	990,129	904,033
U.S. Treasury and Federal agencies securities
Contractual maturities of investments in debt securities available-for-sale, Amortized Cost
Total debt securities available-for-sale	537,913	471,508
Contractual maturities of investments in debt securities available-for-sale, Fair Value
Total debt securities available-for-sale	531,223	468,119
U.S. States and political subdivisions securities
Contractual maturities of investments in debt securities available-for-sale, Amortized Cost
Total debt securities available-for-sale	95,346	116,260
Contractual maturities of investments in debt securities available-for-sale, Fair Value
Total debt securities available-for-sale	94,582	116,000
Mortgage-backed securities - Federal agencies
Contractual maturities of investments in debt securities available-for-sale, Amortized Cost
Total debt securities available-for-sale	324,390	289,327
Contractual maturities of investments in debt securities available-for-sale, Fair Value
Total debt securities available-for-sale	318,233	287,910
Corporate debt securities
Contractual maturities of investments in debt securities available-for-sale, Amortized Cost
Total debt securities available-for-sale	45,843	31,573
Contractual maturities of investments in debt securities available-for-sale, Fair Value
Total debt securities available-for-sale	45,392	31,294
Foreign government and other securities
Contractual maturities of investments in debt securities available-for-sale, Amortized Cost
Total debt securities available-for-sale	700	700
Contractual maturities of investments in debt securities available-for-sale, Fair Value
Total debt securities available-for-sale	$ 699	$ 710

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Investment Securities (Details 2) $ in Thousands	12 Months Ended
	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)
Schedule Of Available For Sale Debt Securities [Line Items]
Total debt securities available-for-sale	$ 1,004,192	$ 909,368
Gross Unrealized Gains	1,086	2,176
Gross Unrealized Losses	(15,149)	(7,511)
Investment securities available-for-sale	990,129	904,033
Fair Value
Less than 12 Months	164,299	497,752
12 Months or Longer	691,751	184,736
Total fair value	856,050	682,488
Unrealized Losses
Less than 12 Months	(893)	(2,841)
12 Months or Longer	(14,256)	(4,670)
Total unrealized losses	(15,149)	(7,511)
Gross realized gains and losses
Gross realized gains	2
Gross realized gains (including equity securities)		7,425	$ 2,090
Gross realized losses	(347)
Gross realized losses (including equity securities)		(2,895)	0
OTTI losses	0
OTTI losses (including equity securities)		(190)	(294)
Net realized (losses) gains	(345)
Net realized (losses) gains (including equity securities)		4,340	$ 1,796
Investment securities pledged as collateral	$ 242,310	289,050
Number of available-for-sale debt securities	639
Number of available-for-sale debt securities in an unrealized loss position	437
U.S. Treasury and Federal agencies securities
Schedule Of Available For Sale Debt Securities [Line Items]
Total debt securities available-for-sale	$ 537,913	471,508
Gross Unrealized Gains	196	57
Gross Unrealized Losses	(6,886)	(3,446)
Investment securities available-for-sale	531,223	468,119
Fair Value
Less than 12 Months	55,491	311,865
12 Months or Longer	424,269	89,617
Total fair value	479,760	401,482
Unrealized Losses
Less than 12 Months	(177)	(1,161)
12 Months or Longer	(6,709)	(2,285)
Total unrealized losses	(6,886)	(3,446)
U.S. States and political subdivisions securities
Schedule Of Available For Sale Debt Securities [Line Items]
Total debt securities available-for-sale	95,346	116,260
Gross Unrealized Gains	172	648
Gross Unrealized Losses	(936)	(908)
Investment securities available-for-sale	94,582	116,000
Fair Value
Less than 12 Months	21,059	34,971
12 Months or Longer	45,365	24,909
Total fair value	66,424	59,880
Unrealized Losses
Less than 12 Months	(61)	(287)
12 Months or Longer	(875)	(621)
Total unrealized losses	(936)	(908)
Mortgage-backed securities - Federal agencies
Schedule Of Available For Sale Debt Securities [Line Items]
Total debt securities available-for-sale	324,390	289,327
Gross Unrealized Gains	718	1,456
Gross Unrealized Losses	(6,875)	(2,873)
Investment securities available-for-sale	318,233	287,910
Fair Value
Less than 12 Months	65,554	137,169
12 Months or Longer	198,221	60,162
Total fair value	263,775	197,331
Unrealized Losses
Less than 12 Months	(511)	(1,336)
12 Months or Longer	(6,364)	(1,537)
Total unrealized losses	(6,875)	(2,873)
Corporate debt securities
Schedule Of Available For Sale Debt Securities [Line Items]
Total debt securities available-for-sale	45,843	31,573
Gross Unrealized Gains	0	5
Gross Unrealized Losses	(451)	(284)
Investment securities available-for-sale	45,392	31,294
Fair Value
Less than 12 Months	21,496	13,747
12 Months or Longer	23,896	10,048
Total fair value	45,392	23,795
Unrealized Losses
Less than 12 Months	(143)	(57)
12 Months or Longer	(308)	(227)
Total unrealized losses	(451)	(284)
Foreign government and other securities
Schedule Of Available For Sale Debt Securities [Line Items]
Total debt securities available-for-sale	700	700
Gross Unrealized Gains	0	10
Gross Unrealized Losses	(1)	0
Investment securities available-for-sale	699	710
Fair Value
Less than 12 Months	699	0
12 Months or Longer	0	0
Total fair value	699	0
Unrealized Losses
Less than 12 Months	(1)	0
12 Months or Longer	0	0
Total unrealized losses	$ (1)	$ 0

XML

Loan and Lease Financings (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Receivables [Abstract]
Total loans and leases	$ 4,835,464	$ 4,527,678
Deferred loan and lease costs	4,540	3,850
Direct finance leases:
Rentals receivable	219,301	208,295
Estimated residual value of leased assets	38,138	29,638
Gross investment in lease financing	257,439	237,933
Unearned income	(46,709)	(37,851)
Net investment in lease financing	210,730	200,082
Minimum future lease payments receivable
2019	53,040
2020	46,580
2021	38,690
2022	36,320
2023	30,790
Loans to certain directors, executive officers, and principal shareholders of equity securities of the entity and to their affiliates
Loan to related parties	11,380	$ 14,610
New loans and other additions to related parties	8,730
Repayments and other reductions of loan given to related parties	$ 11,960

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Loan and Lease Financings (Details 2)	12 Months Ended
	Dec. 31, 2018 USD ($) method	Dec. 31, 2017 USD ($)
Receivables [Abstract]
Number of methods to assess credit risk | method	2
Loan and Lease Financings
Recorded investment in loans and leases	$ 4,835,464,000	$ 4,527,678,000
Loan and lease financings excluding residential real estate and consumer loans
Loan and Lease Financings
Recorded investment in loans and leases	4,174,972,000	3,873,410,000
Commercial and agricultural
Loan and Lease Financings
Recorded investment in loans and leases	1,073,205,000	929,997,000
Auto and light truck
Loan and Lease Financings
Recorded investment in loans and leases	559,987,000	496,816,000
Medium and heavy duty truck
Loan and Lease Financings
Recorded investment in loans and leases	283,544,000	296,935,000
Aircraft
Loan and Lease Financings
Recorded investment in loans and leases	803,111,000	844,657,000
Construction equipment
Loan and Lease Financings
Recorded investment in loans and leases	645,239,000	563,437,000
Commercial real estate
Loan and Lease Financings
Recorded investment in loans and leases	809,886,000	741,568,000
Credit Quality Grades 1-6 | Loan and lease financings excluding residential real estate and consumer loans
Loan and Lease Financings
Recorded investment in loans and leases	4,034,424,000	3,776,621,000
Credit Quality Grades 1-6 | Commercial and agricultural
Loan and Lease Financings
Recorded investment in loans and leases	1,043,019,000	906,074,000
Credit Quality Grades 1-6 | Auto and light truck
Loan and Lease Financings
Recorded investment in loans and leases	528,174,000	482,455,000
Credit Quality Grades 1-6 | Medium and heavy duty truck
Loan and Lease Financings
Recorded investment in loans and leases	281,834,000	293,318,000
Credit Quality Grades 1-6 | Aircraft
Loan and Lease Financings
Recorded investment in loans and leases	768,442,000	815,956,000
Credit Quality Grades 1-6 | Construction equipment
Loan and Lease Financings
Recorded investment in loans and leases	625,579,000	552,684,000
Credit Quality Grades 1-6 | Commercial real estate
Loan and Lease Financings
Recorded investment in loans and leases	787,376,000	726,134,000
Credit Quality Grades 7-12
Loan and Lease Financings
Threshold value of loan or lease for evaluation of the appropriateness of the impairment reserve	100,000
Credit Quality Grades 7-12 | Loan and lease financings excluding residential real estate and consumer loans
Loan and Lease Financings
Recorded investment in loans and leases	140,548,000	96,789,000
Credit Quality Grades 7-12 | Commercial and agricultural
Loan and Lease Financings
Recorded investment in loans and leases	30,186,000	23,923,000
Credit Quality Grades 7-12 | Auto and light truck
Loan and Lease Financings
Recorded investment in loans and leases	31,813,000	14,361,000
Credit Quality Grades 7-12 | Medium and heavy duty truck
Loan and Lease Financings
Recorded investment in loans and leases	1,710,000	3,617,000
Credit Quality Grades 7-12 | Aircraft
Loan and Lease Financings
Recorded investment in loans and leases	34,669,000	28,701,000
Credit Quality Grades 7-12 | Construction equipment
Loan and Lease Financings
Recorded investment in loans and leases	19,660,000	10,753,000
Credit Quality Grades 7-12 | Commercial real estate
Loan and Lease Financings
Recorded investment in loans and leases	$ 22,510,000	$ 15,434,000

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Loan and Lease Financings (Details 3) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Loan and Lease Financings
Recorded investment in loans and leases	$ 4,835,464	$ 4,527,678
Residential real estate and consumer loans
Loan and Lease Financings
Recorded investment in loans and leases	660,492	654,268
Residential real estate and home equity
Loan and Lease Financings
Recorded investment in loans and leases	523,855	526,122
Consumer
Loan and Lease Financings
Recorded investment in loans and leases	136,637	128,146
Performing | Residential real estate and consumer loans
Loan and Lease Financings
Recorded investment in loans and leases	658,269	651,785
Performing | Residential real estate and home equity
Loan and Lease Financings
Recorded investment in loans and leases	521,846	523,803
Performing | Consumer
Loan and Lease Financings
Recorded investment in loans and leases	$ 136,423	127,982
Nonperforming
Loan and Lease Financings
Classification of nonperforming loans, threshold period past due	90 days
Nonperforming | Residential real estate and consumer loans
Loan and Lease Financings
Recorded investment in loans and leases	$ 2,223	2,483
Nonperforming | Residential real estate and home equity
Loan and Lease Financings
Recorded investment in loans and leases	2,009	2,319
Nonperforming | Consumer
Loan and Lease Financings
Recorded investment in loans and leases	$ 214	$ 164

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Loan and Lease Financings (Details 4) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Current	$ 4,792,847	$ 4,481,921
90 Days or More Past Due and Accruing	368	459
Total Accruing Loans	4,807,605	4,508,273
Nonaccrual	27,859	19,405
Total loans and leases	4,835,464	4,527,678
Increase in interest income	2,180	1,140	$ 1,110
Commercial and agricultural
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Current	1,070,530	927,113
Total Accruing Loans	1,070,552	927,394
Nonaccrual	2,653	2,603
Total loans and leases	1,073,205	929,997
Auto and light truck
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Current	544,022	485,885
Total Accruing Loans	548,613	488,775
Nonaccrual	11,374	8,041
Total loans and leases	559,987	496,816
Medium and heavy duty truck
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Current	283,284	296,564
Total Accruing Loans	283,438	296,564
Nonaccrual	106	371
Total loans and leases	283,544	296,935
Aircraft
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Current	790,233	823,638
Total Accruing Loans	795,550	842,700
Nonaccrual	7,561	1,957
Total loans and leases	803,111	844,657
Construction equipment
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Current	641,270	561,665
Total Accruing Loans	642,913	562,446
Nonaccrual	2,326	991
Total loans and leases	645,239	563,437
Commercial real estate
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Current	807,793	738,006
Total Accruing Loans	807,902	738,150
Nonaccrual	1,984	3,418
Total loans and leases	809,886	741,568
Residential real estate and home equity
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Current	520,124	521,943
90 Days or More Past Due and Accruing	295	429
Total Accruing Loans	522,141	524,232
Nonaccrual	1,714	1,890
Total loans and leases	523,855	526,122
Consumer
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Current	135,591	127,107
90 Days or More Past Due and Accruing	73	30
Total Accruing Loans	136,496	128,012
Nonaccrual	141	134
Total loans and leases	136,637	128,146
30 to 59 Days Past Due
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	11,180	20,360
30 to 59 Days Past Due | Commercial and agricultural
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	22	281
30 to 59 Days Past Due | Auto and light truck
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	3,154	2,869
30 to 59 Days Past Due | Medium and heavy duty truck
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	154	0
30 to 59 Days Past Due | Aircraft
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	4,149	14,570
30 to 59 Days Past Due | Construction equipment
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	1,643	333
30 to 59 Days Past Due | Commercial real estate
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	109	23
30 to 59 Days Past Due | Residential real estate and home equity
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	1,267	1,508
30 to 59 Days Past Due | Consumer
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	682	776
60 to 89 Days Past Due
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	3,210	5,533
60 to 89 Days Past Due | Commercial and agricultural
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	0	0
60 to 89 Days Past Due | Auto and light truck
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	1,437	21
60 to 89 Days Past Due | Medium and heavy duty truck
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	0	0
60 to 89 Days Past Due | Aircraft
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	1,168	4,492
60 to 89 Days Past Due | Construction equipment
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	0	448
60 to 89 Days Past Due | Commercial real estate
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	0	121
60 to 89 Days Past Due | Residential real estate and home equity
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	455	352
60 to 89 Days Past Due | Consumer
Recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status
Past Due	$ 150	$ 99

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Loan and Lease Financings (Details 5) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Impaired loans and leases
Recorded Investment, With no related allowance recorded	$ 12,673	$ 7,670
Unpaid Principal Balance, With no related allowance recorded	12,673	7,670
Recorded Investment, With an allowance recorded	13,287	9,447
Unpaid Principal Balance, With an allowance recorded	13,289	9,449
Total Recorded Investment	25,960	17,117
Total Unpaid Principal Balance	25,962	17,119
Total Related Allowance	2,083	666
Average Recorded Investment	26,711	15,409	$ 16,383
Interest Income	35	23	146
Commercial and agricultural
Impaired loans and leases
Recorded Investment, With no related allowance recorded	2,471	2,439
Unpaid Principal Balance, With no related allowance recorded	2,471	2,439
Recorded Investment, With an allowance recorded	0	0
Unpaid Principal Balance, With an allowance recorded	0	0
Total Related Allowance	0	0
Average Recorded Investment	2,812	4,526	3,484
Interest Income	0	1	6
Auto and light truck
Impaired loans and leases
Recorded Investment, With no related allowance recorded	7,504	0
Unpaid Principal Balance, With no related allowance recorded	7,504	0
Recorded Investment, With an allowance recorded	3,840	7,780
Unpaid Principal Balance, With an allowance recorded	3,840	7,780
Total Related Allowance	372	243
Average Recorded Investment	9,352	766	10
Interest Income	0	0	0
Medium and heavy duty truck
Impaired loans and leases
Recorded Investment, With no related allowance recorded	106	371
Unpaid Principal Balance, With no related allowance recorded	106	371
Recorded Investment, With an allowance recorded	0	0
Unpaid Principal Balance, With an allowance recorded	0	0
Total Related Allowance	0	0
Average Recorded Investment	247	658	0
Interest Income	0	0	0
Aircraft
Impaired loans and leases
Recorded Investment, With no related allowance recorded	556	1,901
Unpaid Principal Balance, With no related allowance recorded	556	1,901
Recorded Investment, With an allowance recorded	7,004	0
Unpaid Principal Balance, With an allowance recorded	7,004	0
Total Related Allowance	1,255	0
Average Recorded Investment	9,987	4,873	6,291
Interest Income	20	5	2
Construction equipment
Impaired loans and leases
Recorded Investment, With no related allowance recorded	905	584
Unpaid Principal Balance, With no related allowance recorded	905	584
Recorded Investment, With an allowance recorded	1,340	344
Unpaid Principal Balance, With an allowance recorded	1,340	344
Total Related Allowance	279	108
Average Recorded Investment	1,663	1,011	766
Interest Income	0	0	0
Commercial real estate
Impaired loans and leases
Recorded Investment, With no related allowance recorded	1,131	2,375
Unpaid Principal Balance, With no related allowance recorded	1,131	2,375
Recorded Investment, With an allowance recorded	759	971
Unpaid Principal Balance, With an allowance recorded	759	971
Total Related Allowance	51	181
Average Recorded Investment	2,303	3,220	5,417
Interest Income	0	2	123
Residential real estate and home equity
Impaired loans and leases
Recorded Investment, With no related allowance recorded	0	0
Unpaid Principal Balance, With no related allowance recorded	0	0
Recorded Investment, With an allowance recorded	344	352
Unpaid Principal Balance, With an allowance recorded	346	354
Total Related Allowance	126	134
Average Recorded Investment	347	355	415
Interest Income	15	15	15
Consumer
Impaired loans and leases
Recorded Investment, With no related allowance recorded	0	0
Unpaid Principal Balance, With no related allowance recorded	0	0
Recorded Investment, With an allowance recorded	0	0
Unpaid Principal Balance, With an allowance recorded	0	0
Total Related Allowance	0	0
Average Recorded Investment	0	0	0
Interest Income	$ 0	$ 0	$ 0

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Loan and Lease Financings (Details 6) $ in Thousands	12 Months Ended
	Dec. 31, 2018 USD ($) default modification	Dec. 31, 2017 USD ($) default modification	Dec. 31, 2016 USD ($) default modification
Loans and leases classified as TDR
Financing Receivable, Modifications, Recorded Investment	$ 660	$ 889
Financing Receivable, Modifications, Number of Contracts | modification	1	1	2
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 285	$ 0	$ 876
Troubled debt restructured loans and leases which had payment defaults within twelve months following modification
Default threshold	90 days
Interest Rate Below Market Reduction
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts	0	1	1
Performing
Loans and leases classified as TDR
Financing Receivable, Modifications, Recorded Investment	$ 344	$ 352
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Financing Receivable, Modifications, Subsequent Default, Number of Contracts | default	0	0	0
Nonperforming
Loans and leases classified as TDR
Financing Receivable, Modifications, Recorded Investment	$ 316	$ 537
Financing Receivable, Modifications, Number of Contracts | modification	1	1	2
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 285	$ 0	$ 876
Financing Receivable, Modifications, Subsequent Default, Number of Contracts | default	0	1	0
Commercial and agricultural | Performing
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Commercial and agricultural | Nonperforming
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	1	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Auto and light truck | Performing
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Auto and light truck | Nonperforming
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	1	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 285	$ 0	$ 0
Medium and heavy duty truck | Performing
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Medium and heavy duty truck | Nonperforming
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Aircraft | Performing
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Aircraft | Nonperforming
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Construction equipment | Performing
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Construction equipment | Nonperforming
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	1
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 562
Financing Receivable, Modifications, Subsequent Default, Recorded Investment		$ 410
Commercial real estate | Performing
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Commercial real estate | Nonperforming
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Residential real estate and home equity | Performing
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Residential real estate and home equity | Nonperforming
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	1
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 314
Consumer | Performing
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0
Consumer | Nonperforming
Loans and leases classified as TDR
Financing Receivable, Modifications, Number of Contracts | modification	0	0	0
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 0	$ 0	$ 0

XML

Reserve for Loan and Lease Losses (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2018	Dec. 31, 2017
Changes in reserve for loan and lease losses
Balance at the beginning of the period	$ 94,883	$ 88,543	$ 88,112
Charge-offs	17,112	6,529	7,941
Recoveries	3,236	3,889	2,539
Net charge-offs (recoveries)	13,876	2,640	5,402
Provision (recovery of provision)	19,462	8,980	5,833
Balance at the end of the period	100,469	94,883	88,543
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment				$ 2,083	$ 666
Ending balance, collectively evaluated for impairment				98,386	94,217
Total reserve for loan and lease losses	94,883	88,543	88,112	100,469	94,883
Recorded investment in loans
Ending balance, individually evaluated for impairment				25,960	17,117
Ending balance, collectively evaluated for impairment				4,809,504	4,510,561
Total loans and leases				4,835,464	4,527,678
Commercial and agricultural
Changes in reserve for loan and lease losses
Balance at the beginning of the period	16,228	14,668	15,456
Charge-offs	229	2,415	547
Recoveries	222	984	509
Net charge-offs (recoveries)	7	1,431	38
Provision (recovery of provision)	842	2,991	(750)
Balance at the end of the period	17,063	16,228	14,668
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment				0	0
Ending balance, collectively evaluated for impairment				17,063	16,228
Total reserve for loan and lease losses	16,228	14,668	15,456	17,063	16,228
Recorded investment in loans
Ending balance, individually evaluated for impairment				2,471	2,439
Ending balance, collectively evaluated for impairment				1,070,734	927,558
Total loans and leases				1,073,205	929,997
Auto and light truck
Changes in reserve for loan and lease losses
Balance at the beginning of the period	10,103	8,064	9,269
Charge-offs	3,308	774	4
Recoveries	68	1,153	253
Net charge-offs (recoveries)	3,240	(379)	(249)
Provision (recovery of provision)	7,826	1,660	(1,454)
Balance at the end of the period	14,689	10,103	8,064
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment				372	243
Ending balance, collectively evaluated for impairment				14,317	9,860
Total reserve for loan and lease losses	10,103	8,064	9,269	14,689	10,103
Recorded investment in loans
Ending balance, individually evaluated for impairment				11,344	7,780
Ending balance, collectively evaluated for impairment				548,643	489,036
Total loans and leases				559,987	496,816
Medium and heavy duty truck
Changes in reserve for loan and lease losses
Balance at the beginning of the period	4,844	4,740	4,699
Charge-offs	23	0	0
Recoveries	0	0	10
Net charge-offs (recoveries)	23	0	(10)
Provision (recovery of provision)	(518)	104	31
Balance at the end of the period	4,303	4,844	4,740
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment				0	0
Ending balance, collectively evaluated for impairment				4,303	4,844
Total reserve for loan and lease losses	4,844	4,740	4,699	4,303	4,844
Recorded investment in loans
Ending balance, individually evaluated for impairment				106	371
Ending balance, collectively evaluated for impairment				283,438	296,564
Total loans and leases				283,544	296,935
Aircraft
Changes in reserve for loan and lease losses
Balance at the beginning of the period	34,619	34,352	32,373
Charge-offs	12,222	1,872	6,123
Recoveries	2,499	227	528
Net charge-offs (recoveries)	9,723	1,645	5,595
Provision (recovery of provision)	8,151	1,912	7,574
Balance at the end of the period	33,047	34,619	34,352
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment				1,255	0
Ending balance, collectively evaluated for impairment				31,792	34,619
Total reserve for loan and lease losses	34,619	34,352	32,373	33,047	34,619
Recorded investment in loans
Ending balance, individually evaluated for impairment				7,560	1,901
Ending balance, collectively evaluated for impairment				795,551	842,756
Total loans and leases				803,111	844,657
Construction equipment
Changes in reserve for loan and lease losses
Balance at the beginning of the period	9,343	8,207	7,592
Charge-offs	288	164	128
Recoveries	100	298	461
Net charge-offs (recoveries)	188	(134)	(333)
Provision (recovery of provision)	1,767	1,002	282
Balance at the end of the period	10,922	9,343	8,207
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment				279	108
Ending balance, collectively evaluated for impairment				10,643	9,235
Total reserve for loan and lease losses	9,343	8,207	7,592	10,922	9,343
Recorded investment in loans
Ending balance, individually evaluated for impairment				2,245	928
Ending balance, collectively evaluated for impairment				642,994	562,509
Total loans and leases				645,239	563,437
Commercial real estate
Changes in reserve for loan and lease losses
Balance at the beginning of the period	14,792	13,677	13,762
Charge-offs	70	344	32
Recoveries	53	851	469
Net charge-offs (recoveries)	17	(507)	(437)
Provision (recovery of provision)	930	608	(522)
Balance at the end of the period	15,705	14,792	13,677
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment				51	181
Ending balance, collectively evaluated for impairment				15,654	14,611
Total reserve for loan and lease losses	14,792	13,677	13,762	15,705	14,792
Recorded investment in loans
Ending balance, individually evaluated for impairment				1,890	3,346
Ending balance, collectively evaluated for impairment				807,996	738,222
Total loans and leases				809,886	741,568
Residential real estate and home equity
Changes in reserve for loan and lease losses
Balance at the beginning of the period	3,666	3,550	3,662
Charge-offs	63	124	219
Recoveries	23	109	31
Net charge-offs (recoveries)	40	15	188
Provision (recovery of provision)	(201)	131	76
Balance at the end of the period	3,425	3,666	3,550
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment				126	134
Ending balance, collectively evaluated for impairment				3,299	3,532
Total reserve for loan and lease losses	3,666	3,550	3,662	3,425	3,666
Recorded investment in loans
Ending balance, individually evaluated for impairment				344	352
Ending balance, collectively evaluated for impairment				523,511	525,770
Total loans and leases				523,855	526,122
Consumer
Changes in reserve for loan and lease losses
Balance at the beginning of the period	1,288	1,285	1,299
Charge-offs	909	836	888
Recoveries	271	267	278
Net charge-offs (recoveries)	638	569	610
Provision (recovery of provision)	665	572	596
Balance at the end of the period	1,315	1,288	1,285
Reserve for loan and lease losses
Ending balance, individually evaluated for impairment				0	0
Ending balance, collectively evaluated for impairment				1,315	1,288
Total reserve for loan and lease losses	$ 1,288	$ 1,285	$ 1,299	1,315	1,288
Recorded investment in loans
Ending balance, individually evaluated for impairment				0	0
Ending balance, collectively evaluated for impairment				136,637	128,146
Total loans and leases				$ 136,637	$ 128,146

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Operating Leases (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Leases, Operating [Abstract]
Carrying value of operating lease equipment after depreciation	$ 134,440	$ 139,581
Accumulated depreciation	65,510	49,740
Minimum future lease rental payments due from clients
Total	99,890
2019	30,540
2020	32,830
2021	18,680
2022	10,760
2023	5,290
Thereafter	1,790
Depreciation expense related to operating lease equipment	$ 26,248	$ 25,215	$ 21,678

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Premises and Equipment (Details) - USD ($)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Premises and equipment
Total premises and equipment	$ 115,703,000	$ 114,372,000
Accumulated depreciation and amortization	(63,564,000)	(59,760,000)
Net premises and equipment	52,139,000	54,612,000
Long-lived asset impairment charges	100,000	410,000	$ 0
Depreciation and amortization of properties and equipment	5,620,000	5,658,000	$ 5,245,000
Land
Premises and equipment
Total premises and equipment	15,223,000	15,413,000
Buildings and improvements
Premises and equipment
Total premises and equipment	59,691,000	58,981,000
Furniture and equipment
Premises and equipment
Total premises and equipment	$ 40,789,000	$ 39,978,000

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Mortgage Servicing Rights (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Expected amortization expense on mortgage servicing rights
2019	$ 600
2020	530
2021	460
2022	400
2023	350
Residential mortgage loans
Mortgage Servicing Rights
Unpaid principal balance	$ 734,300	$ 752,990	$ 761,850

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Mortgage Servicing Rights (Details 2) - Residential mortgage loans - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Changes in mortgage servicing rights
Balance at the beginning of the period	$ 4,349	$ 4,297
Additions	890	1,144
Amortization	(956)	(1,092)
Sales	0	0
Carrying value before valuation allowance at end of year	4,283	4,349	$ 4,297
Changes in valuation allowance
Balance at the beginning of the period	0	0
Impairment (charges) recoveries	0	0
Balance at the end of the period	0	0	0
Net carrying value of mortgage servicing rights at end of period	4,283	4,349
Fair value of mortgage servicing rights at end of period	7,238	7,187
Fair value of mortgage servicing rights exceeding the carrying value	2,960
Funds held in trust	10,280	10,420
Mortgage loan contractual servicing fees	$ 2,610	$ 2,700	$ 2,690

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Intangible Assets and Goodwill (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Goodwill and Intangible Assets Disclosure [Abstract]
Goodwill	$ 83,870	$ 83,680
Other intangible assets	130	60
Accumulated amortization on intangible assets	70	9,480
Intangible asset amortization	80	$ 360	$ 580
Expected amortization on other intangible assets
2019	30
2020	20
2021	20
2022	20
2023	$ 20

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Intangible Assets and Goodwill (Details 2) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Core deposit intangibles and other intangible assets
Less: accumulated amortization	$ (70)	$ (9,480)
Net carrying amount	130	60
Core deposit intangibles
Core deposit intangibles and other intangible assets
Gross carrying amount	0	8,689
Less: accumulated amortization	0	(8,657)
Net carrying amount	0	32
Other intangibles
Core deposit intangibles and other intangible assets
Gross carrying amount	204	857
Less: accumulated amortization	(71)	(827)
Net carrying amount	$ 133	$ 30

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Deposits (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Amount of certificates of deposit and other time deposits of $250,000 or more outstanding
Under 3 months	$ 135,940
4-6 months	87,102
7-12 months	144,960
Over 12 months	298,890
Total	666,892	$ 553,800
Maturities of time deposits, including both private and public funds
2019	755,605
2020	489,445
2021	125,404
2022	52,512
2023	37,145
Thereafter	7,655
Total	$ 1,467,766	$ 1,269,973

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Borrowed Funds and Mandatorily Redeemable Securities (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2018 USD ($) note	Dec. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)
Borrowed funds and mandatorily redeemable securities
Total long-term debt and mandatorily redeemable securities	$ 71,123	$ 70,060
Annual maturities of long-term debt
2019	2,565
2020	2,460
2021	2,748
2022	4,410
2023	1,630
Thereafter	57,310
Mandatorily redeemable securities
Interest expense	1,610	1,680	$ 1,450
Securities subject to mandatory redemption
Borrowed funds and mandatorily redeemable securities
Mandatorily redeemable securities	16,542	18,948
Federal Home Loan Bank borrowings
Borrowed funds and mandatorily redeemable securities
Long-term debt	$ 46,444	47,114
Annual maturities of long-term debt
Number of Federal Home Loan Bank borrowings, fixed rate notes | note	17
Collateral security	$ 58,040
Other long-term debt
Borrowed funds and mandatorily redeemable securities
Long-term debt	$ 8,137	$ 3,998
Minimum | Federal Home Loan Bank borrowings
Borrowed funds and mandatorily redeemable securities
Interest rate on Federal Home Loan Bank borrowings (as a percent)	1.04%
Maximum | Federal Home Loan Bank borrowings
Borrowed funds and mandatorily redeemable securities
Interest rate on Federal Home Loan Bank borrowings (as a percent)	5.04%

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Borrowed Funds and Mandatorily Redeemable Securities (Details 2) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Short-term borrowings:
Short-term borrowings	$ 199,344	$ 214,595
Short-term borrowings, weighted average interest rate	1.30%	0.57%
Federal funds purchased
Short-term borrowings:
Short-term borrowings	$ 10,000	$ 56,000
Short-term borrowings, weighted average interest rate	2.70%	1.63%
Security repurchase agreements
Short-term borrowings:
Short-term borrowings	$ 103,627	$ 149,834
Short-term borrowings, weighted average interest rate	0.25%	0.20%
Commercial paper
Short-term borrowings:
Short-term borrowings	$ 4,325	$ 6,115
Short-term borrowings, weighted average interest rate	0.29%	0.27%
Federal Home Loan Bank advances
Short-term borrowings:
Short-term borrowings	$ 80,000	$ 0
Short-term borrowings, weighted average interest rate	2.57%	0.00%
Other short-term borrowings
Short-term borrowings:
Short-term borrowings	$ 1,392	$ 2,646
Short-term borrowings, weighted average interest rate	0.00%	0.00%

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Variable Interest Entities (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Variable Interest Entities
Federal tax credits recognized in tax expense	$ 1,290	$ 1,150	$ 1,030
Investment tax credits	10,450	18,160	$ 2,910
Unconsolidated investment carrying amount	15,083	23,759
Unconsolidated unfunded capital and other investments	6,449	15,712
Unconsolidated maximum exposure to loss	40,705	29,926
Consolidated investment carrying amount	8,380	0
Consolidated unfunded capital and other commitments	$ 6,700	$ 0

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Variable Interest Entities (Details 2) $ in Thousands		12 Months Ended
		Dec. 31, 2018 USD ($) trust	Dec. 31, 2017 USD ($)
Variable Interest Entities
Number of trusts sponsored | trust		1
Percentage of ownership interest		100.00%
Subordinated notes
Amount of subordinated notes		$ 58,764	$ 58,764
June 2007 issuance
Subordinated notes
Amount of subordinated notes		$ 41,238
Interest Rate (as a percent)	[1]	7.22%
Maturity date of subordinated notes		Jun. 15, 2037
August 2007 issuance
Subordinated notes
Amount of subordinated notes		$ 17,526
Interest Rate (as a percent)	[2]	4.27%
Maturity date of subordinated notes		Sep. 15, 2037
London Interbank Offered Rate (LIBOR) | August 2007 issuance
Subordinated notes
Basis Spread on Variable Rate (as a percent)	[2]	1.48%

[1] Fixed rate through life of debt.

[2] 3-Month LIBOR +1.48% through remaining life of debt.

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Earnings Per Share (Details) - shares	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Stock options
Earnings Per Share
Antidilutive securities (in shares)	0	0	0

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Earnings Per Share (Details 2) - USD ($) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Earnings Per Share [Abstract]
Distributed earnings allocated to common stock	$ 24,894	$ 19,701	$ 18,707
Undistributed earnings allocated to common stock	56,975	47,830	38,670
Net earnings allocated to common stock	81,869	67,531	57,377
Net earnings allocated to participating securities	545	520	409
Net income available to common shareholders	$ 82,414	$ 68,051	$ 57,786
Weighted average shares outstanding for basic earnings per common share	25,937,599	25,925,820	25,879,397
Dilutive effect of stock compensation (in shares)	0	0	0
Weighted average shares outstanding for diluted earnings per common share	25,937,599	25,925,820	25,879,397
Basic earnings per common share (in dollars per share)	$ 3.16	$ 2.60	$ 2.22
Diluted earnings per common share (in dollars per share)	$ 3.16	$ 2.60	$ 2.22

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Accumulated Other Comprehensive Income (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
(Losses) gains on investment securities available-for-sale	$ (345)
(Losses) gains on investment securities available-for-sale (including equity securities)		$ 4,340	$ 1,796
Income before income taxes	105,027	101,360	89,126
Income tax expense	(22,613)	(33,309)	(31,340)
Net income	82,414	68,051	$ 57,786
Unrealized gains and losses on available-for-sale securities | Amount reclassified from Accumulated Other Comprehensive Income
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
(Losses) gains on investment securities available-for-sale	(345)
(Losses) gains on investment securities available-for-sale (including equity securities)		4,340
Income before income taxes	(345)	4,340
Income tax expense	83	(1,629)
Net income	$ (262)	$ 2,711

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Employee Benefit Plans (Details)	12 Months Ended
	Dec. 31, 2018 USD ($) h shares	Dec. 31, 2017 USD ($) shares	Dec. 31, 2016 USD ($)
Life insurance plan | Maximum | Retiree
Employee benefit plans
Benefits payable	$ 3,000
Medical plan | Maximum | Retiree
Employee benefit plans
Benefits payable	$ 15,000
Post retirement plan
Employee benefit plans
Minimum age required prior to amendment	55 years
Term of credited service before becoming eligible for retirement benefits before plan amendment	20 years
Net periodic post retirement benefit cost (recovery) recognized	$ (10,000)	$ (10,000)	$ (10,000)
Employee Stock Ownership and Profit Sharing Plan
Employee benefit plans
Minimum service period required to participate in Plan	90 days
Percentage of employee's deferred compensation up to which the employer matches (as a percent)	4.00%
Employer's matching contribution on the next 2% of employee contribution (as a percent)	50.00%
Employee contribution after matching contribution of employer (as a percent)	2.00%
Employee's eligible compensation on which employer pays fixed contribution (as a percent)	2.00%
Common stock held in relation to employee benefit plans (in shares) | shares	1,007,611	1,126,939
Minimum service period required to be eligible to get employer's contribution	5 years
Minimum working hours required per year to be eligible to get employer's contribution | h	1,000
Employee deferral that is always vested (as a percent)	100.00%
Contribution expense	$ 4,870,000	$ 4,880,000	$ 4,710,000

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Employee Stock Benefit Plans (Details)	12 Months Ended
	Dec. 31, 2018 USD ($) plan $ / shares shares	Dec. 31, 2017 USD ($) $ / shares shares	Dec. 31, 2016 USD ($) $ / shares shares	Nov. 09, 2016 shares	Nov. 08, 2016 shares
Stock-based compensation
Number of stock-based employee compensation plans | plan	4
Number of executive stock award plans | plan	3
Total fair value of share awards vested | $	$ 3,530,000	$ 2,370,000	$ 4,530,000
Shares Available for Grant
Balance at the beginning of the period (in shares)	676,444	714,005	2,450,799
Granted (in shares)	(74,981)	(98,625)	(79,118)
Forfeited (in shares)	3,135	2,000	3,543
Canceled (in shares)			(1,950,000)
Balance at the end of the period (in shares)	675,059	676,444	714,005
2011 Stock Option Plan
Shares Available for Grant
Shares authorized	250,000				2,200,000
Stock award plans
Additional disclosures
Stock-based compensation expense | $	$ 3,550,000	$ 2,960,000	$ 2,880,000
Income tax benefit due to stock-based compensation expenses | $	860,000	$ 1,110,000	$ 1,070,000
Unrecognized stock-based compensation expense | $	$ 5,130,000
Weighted-average period for unrecognized compensation cost to recognize	3 years
Executive Incentive Plan
Shares Available for Grant
Shares authorized	70,461	59,064	59,342
Additional disclosures
Vesting period	5 years
1982 Restricted Stock Plan
Shares Available for Grant
Shares authorized			229,439	250,000
1982 Restricted Stock Plan | Minimum
Additional disclosures
Vesting period	2 years
1982 Restricted Stock Plan | Maximum
Additional disclosures
Vesting period	10 years
Strategic Deployment Incentive Plan
Additional disclosures
Vesting period	5 years
Stock options
Additional disclosures
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	0	0	0
Stock-based compensation expense | $	$ 0	$ 0	$ 0
Stock options | Maximum
Additional disclosures
Contractual life	10 years
Non-vested stock awards outstanding
Number of Shares
Stock awards outstanding at the beginning of the period (in shares)	295,926	276,615	358,861
Granted (in shares)	74,981	98,625	79,118
Vested (in shares)	(106,513)	(76,858)	(155,981)
Forfeited (in shares)	(10,575)	(2,456)	(5,383)
Stock awards outstanding at the end of the period (in shares)	253,819	295,926	276,615
Weighted-Average Grant-Date Fair Value
Stock awards outstanding at the beginning of the period (in dollars per share) | $ / shares	$ 27.41	$ 23.94	$ 21.93
Granted (in dollars per share) | $ / shares	29.11	33.54	26.19
Vested (in dollars per share) | $ / shares	25.79	22.71	20.47
Forfeited (in dollars per share) | $ / shares	27.51	29.93	23.39
Stock awards outstanding at the end of the period (in dollars per share) | $ / shares	$ 28.59	27.41	23.94
Employee Stock Purchase Plan
Additional disclosures
Required period of service	2 years
Maximum base rate of employee basic pay to purchase any dollar amount of stock (as a percent)	25.00%
Maximum stock which can be purchased by employee per year | $	$ 25,000
Purchases price (in dollars per share) | $ / shares	$ 53.84	$ 46.18	$ 33.87
Percentage of the discount fair market value of common stock as on the offering date or the market value as on the purchase date (as a percent)	(0.09%)	(1.32%)	(0.29%)
ESPP offering through June 2020
Additional disclosures
Value of shares to be purchased | $	$ 206,402
Stock value of most recent offering (in dollars per share ) | $ / shares	$ 53.84

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Income Taxes (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Current:
Federal	$ 20,167	$ 26,012	$ 25,479
State	2,996	4,530	3,005
Total current	23,163	30,542	28,484
Deferred:
Federal	(875)	5,869	2,530
State	1,200	(488)	326
Deferred tax liability remeasurement	(875)	(2,614)	0
Total deferred	(550)	2,767	2,856
Total provision	$ 22,613	$ 33,309	$ 31,340

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Income Taxes (Details 2) - USD ($)		12 Months Ended
	Dec. 22, 2017	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Reasons for the difference between income tax expense and statutory federal income tax
Statutory federal income tax		$ 22,056,000	$ 35,476,000	$ 31,194,000
Tax-exempt interest income		(650,000)	(1,197,000)	(1,235,000)
State taxes, net of federal income tax benefit		3,315,000	2,627,000	2,165,000
Deferred tax liability remeasurement		(875,000)	(2,614,000)	0
Other		(1,233,000)	(983,000)	(784,000)
Total provision		$ 22,613,000	$ 33,309,000	$ 31,340,000
Reasons for the difference between income tax expense rate and statutory federal income tax rate
Statutory federal income tax (as a percent)	21.00%	21.00%	35.00%	35.00%
Tax-exempt interest income (as a percent)		(0.60%)	(1.20%)	(1.40%)
State taxes, net of federal income tax benefit (as a percent)		3.20%	2.60%	2.40%
Deferred tax liability remeasurement (as a percent)		(0.80%)	(2.60%)	0.00%
Other (as a percent)		(1.30%)	(0.90%)	(0.80%)
Total income tax expense (benefit) (as a percent)		21.50%	32.90%	35.20%
Deferred tax assets:
Reserve for loan and lease losses		$ 25,386,000	$ 23,791,000
Accruals for employee benefits		2,974,000	2,369,000
Net unrealized losses on securities available-for-sale		3,386,000	1,285,000
Other		127,000	622,000
Total deferred tax assets		31,873,000	28,067,000
Deferred tax liabilities:
Differing depreciable bases in premises and leased equipment		21,184,000	22,641,000
Differing bases in assets related to acquisitions		4,021,000	3,954,000
Tax advantaged partnerships		4,354,000	1,921,000
Mortgage servicing		586,000	745,000
Capitalized loan costs		1,110,000	867,000
Prepaid expenses		273,000	387,000
Other		364,000	222,000
Total deferred tax liabilities		31,892,000	30,737,000
Net deferred tax liability		(19,000)	(2,670,000)
Reconciliation of the beginning and ending amounts of unrecognized tax benefits
Balance, at beginning of the period		1,112,000	762,000	$ 380,000
Additions based on tax positions related to the current year		0	350,000	382,000
Additions for tax positions of prior years		0	0	0
Reductions for tax positions of prior years		0	0	0
Reductions due to lapse in statute of limitations		0	0	0
Settlements		(1,112,000)	0	0
Balance at end of the period		0	1,112,000	762,000
Valuation allowance for deferred tax assets		0	0
Unrecognized tax benefits that would affect the effective tax rate if recognized		0	720,000	500,000
Interest and penalties net of tax recognized		(90,000)	50,000	40,000
Accrued interest and penalties		0	90,000	40,000
Investment securities available-for-sale
Reasons for the difference between income tax expense and statutory federal income tax
Total provision		$ (83,000)	$ 1,629,000	$ 674,000

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Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Commitments and Contingencies Disclosure [Abstract]
Liability for repurchases	$ 290	$ 390
Future minimum rental commitments for all noncancellable operating leases
2019	3,450
2020	3,260
2021	2,070
2022	810
2023	420
Thereafter	1,710
Rental expense of office premises and equipment and rental income from owned premises
Gross rental expense	3,727	4,183	$ 3,995
Gross rental income	(873)	(856)	(921)
Net rental expense	$ 2,854	$ 3,327	$ 3,074

XML

Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk (Details 2) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Commitments to extend credit
Fair Value, Off-balance Sheet Risks, Disclosure Information
Off-balance-sheet instruments	$ 1,095,053	$ 1,030,334
Standby letters of credit
Fair Value, Off-balance Sheet Risks, Disclosure Information
Off-balance-sheet instruments	31,133	29,961
Commercial and similar letters of credit
Fair Value, Off-balance Sheet Risks, Disclosure Information
Off-balance-sheet instruments	$ 2,500	$ 1,837
Minimum | Standby letters of credit
Fair Value, Off-balance Sheet Risks, Disclosure Information
Letter of Credit Term	6 months
Minimum | Commercial and similar letters of credit
Fair Value, Off-balance Sheet Risks, Disclosure Information
Letter of Credit Term	3 months
Maximum | Standby letters of credit
Fair Value, Off-balance Sheet Risks, Disclosure Information
Letter of Credit Term	1 year
Maximum | Commercial and similar letters of credit
Fair Value, Off-balance Sheet Risks, Disclosure Information
Letter of Credit Term	6 months

XML

Derivative Financial Instruments (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Non-hedging derivative financial instruments
Derivative Financial Instruments
Notional or contractual amount	$ 875,806	$ 784,444
Asset derivatives, Fair value	7,236	5,233
Liability derivatives, Fair value	7,385	5,272
Interest rate swap contracts
Derivative Financial Instruments
Asset derivatives, Fair value	7,128	5,194
Interest rate swap contracts | Non-hedging derivative financial instruments
Derivative Financial Instruments
Notional or contractual amount	855,848	756,550
Asset derivatives, Fair value	7,124	5,167
Liability derivatives, Fair value	7,250	5,262
Loan commitments | Non-hedging derivative financial instruments
Derivative Financial Instruments
Notional or contractual amount	5,871	8,504
Asset derivatives, Fair value	112	66
Liability derivatives, Fair value	0	0
Forward contracts - mortgage loan | Non-hedging derivative financial instruments
Derivative Financial Instruments
Notional or contractual amount	14,087	19,390
Asset derivatives, Fair value	0	0
Liability derivatives, Fair value	$ 135	$ 10

XML

Derivative Financial Instruments (Details 2) - Non-hedging derivative financial instruments - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Derivative Financial Instruments
Gain (loss)	$ 919	$ 1,402	$ 999
Interest rate swap contracts | Other expense
Derivative Financial Instruments
Gain (loss)	(30)	26	64
Interest rate swap contracts | Other income
Derivative Financial Instruments
Gain (loss)	1,028	1,585	730
Loan commitments | Mortgage banking income
Derivative Financial Instruments
Gain (loss)	46	23	(4)
Forward contracts - mortgage loan | Mortgage banking income
Derivative Financial Instruments
Gain (loss)	$ (125)	$ (232)	$ 209

XML

Derivative Financial Instruments (Details 3) - Interest rate swap contracts - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Offsetting Assets
Gross Amounts of Recognized Assets	$ 7,128	$ 5,194
Gross Amounts Offset in the Statement of Financial Condition	4	27
Net Amounts of Assets Presented in the Statement of Financial Condition	7,124	5,167
Gross Amounts Not Offset in the Statement of Financial Condition
Financial instruments	177	0
Cash collateral received	610	0
Net Amount	$ 6,337	$ 5,167

XML

Derivative Financial Instruments (Details 4) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Offsetting Liabilities
Gross Amounts of Recognized Liabilities	$ 110,881	$ 155,124
Gross Amounts Offset in the Statement of Financial Condition	4	27
Net Amounts Offset in the Statement of Financial Condition	110,877	155,097
Gross Amounts Not Offset in the Statement of Financial Condition
Financial instruments	105,327	149,835
Cash Collateral Pledged	0	2,705
Net Amount	5,550	2,557
Interest rate swap contracts
Offsetting Liabilities
Gross Amounts of Recognized Liabilities	7,254	5,289
Gross Amounts Offset in the Statement of Financial Condition	4	27
Net Amounts Offset in the Statement of Financial Condition	7,250	5,262
Gross Amounts Not Offset in the Statement of Financial Condition
Financial instruments	1,700	0
Cash Collateral Pledged	0	2,705
Net Amount	5,550	2,557
Repurchase agreements
Offsetting Liabilities
Gross Amounts of Recognized Liabilities	103,627	149,835
Gross Amounts Offset in the Statement of Financial Condition	0	0
Net Amounts Offset in the Statement of Financial Condition	103,627	149,835
Gross Amounts Not Offset in the Statement of Financial Condition
Financial instruments	103,627	149,835
Net Amount	0	0
Repurchase agreements
Gross Amounts Not Offset in the Statement of Financial Condition
Cash Collateral Pledged	$ 0	$ 0

XML

Derivative Financial Instruments (Details 5) - U.S. Treasury and Federal agencies securities - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Overnight and Continuous
Transfer of Certain Financial Assets Accounted for as Secured Borrowings [Line Items]
Repurchase agreements	$ 102,340	$ 148,220
Up to 30 Days
Transfer of Certain Financial Assets Accounted for as Secured Borrowings [Line Items]
Repurchase agreements	1,290	1,320
Greater than 90 Days
Transfer of Certain Financial Assets Accounted for as Secured Borrowings [Line Items]
Repurchase agreements	$ 0	$ 300

XML

Regulatory Matters (Details) - USD ($) $ in Thousands		Dec. 31, 2018	Dec. 31, 2017
Total Capital (to Risk-Weighted Assets):
Actual Amount		$ 821,975	$ 764,853
Actual Ratio (as a percent)		14.68%	14.70%
Minimum Capital Adequacy Amount		$ 447,909	$ 416,174
Minimum Capital Adequacy Ratio (as a percent)		8.00%	8.00%
Capital Required For Capital Adequacy With Capital Buffer		$ 552,888	$ 481,201
Capital Required for Capital Adequacy with Capital Buffer to Risk Weighted Assets	[1]	9.875%	9.25%
Capital Required for Capital Adequacy with Capital Buffer to Risk Weighted Assets Fully Phased In		10.50%
To Be Well Capitalized Under Prompt Corrective Action Provisions Amount		$ 559,887	$ 520,218
To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio (as a percent)		10.00%	10.00%
Tier I Capital (to Risk-Weighted Assets):
Actual Amount		$ 751,575	$ 699,420
Actual Ratio (as a percent)		13.42%	13.44%
Minimum Capital Adequacy Amount		$ 335,932	$ 312,131
Minimum Capital Adequacy Ratio (as a percent)		6.00%	6.00%
Tier One Risk Based Capital Required for Capital Adequacy with Capital Buffer		$ 440,911	$ 377,158
Tier One Risk Based Capital Required for Capital Adequacy with Capital Buffer to Risk Weighted Assets	[1]	7.875%	7.25%
Tier One Risk Based Capital Required For Capital Adequacy With Capital Buffer To Risk Weighted Assets Fully Phased In		8.50%
To Be Well Capitalized Under Prompt Corrective Action Provisions Amount		$ 447,909	$ 416,174
To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio (as a percent)		8.00%	8.00%
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
Actual Amount		$ 693,067	$ 642,420
Actual Ratio (as a percent)		12.38%	12.35%
Minimum Capital Adequacy Amount		$ 251,949	$ 234,098
Minimum Capital Adequacy Ratio (as a percent)		4.50%	4.50%
Common Equity Tier 1 Capita Required Form Minimum Capital Adequacy With Capital Buffer		$ 356,928	$ 299,125
Common Equity Tier 1 Capital Required For Capital Adequacy With Capital Buffer to Risk Weighted Assets	[1]	6.375%	5.75%
Common Equity Tier 1 Capital Required For Capital Adequacy With Capital Buffer to Risk Weighted Assets Fully Phased In		7.00%
To Be Well Capitalized Under Prompt Corrective Action Provisions Amount		$ 363,926	$ 338,142
To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio (as a percent)		6.50%	6.50%
Tier I Capital (to Average Assets):
Actual Amount		$ 751,575	$ 699,420
Actual Ratio (as a percent)		12.06%	12.17%
Minimum Capital Adequacy Amount		$ 249,185	$ 229,890
Minimum Capital Adequacy Ratio (as a percent)		4.00%	4.00%
To Be Well Capitalized Under Prompt Corrective Action Provisions Amount		$ 311,481	$ 287,362
To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio (as a percent)		5.00%	5.00%
1st Source Bank
Total Capital (to Risk-Weighted Assets):
Actual Amount		$ 744,326	$ 696,248
Actual Ratio (as a percent)		13.29%	13.36%
Minimum Capital Adequacy Amount		$ 448,152	$ 416,902
Minimum Capital Adequacy Ratio (as a percent)		8.00%	8.00%
Capital Required For Capital Adequacy With Capital Buffer		$ 553,188	$ 482,043
Capital Required for Capital Adequacy with Capital Buffer to Risk Weighted Assets	[1]	9.875%	9.25%
To Be Well Capitalized Under Prompt Corrective Action Provisions Amount		$ 560,190	$ 521,127
To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio (as a percent)		10.00%	10.00%
Tier I Capital (to Risk-Weighted Assets):
Actual Amount		$ 673,888	$ 630,702
Actual Ratio (as a percent)		12.03%	12.10%
Minimum Capital Adequacy Amount		$ 336,114	$ 312,676
Minimum Capital Adequacy Ratio (as a percent)		6.00%	6.00%
Tier One Risk Based Capital Required for Capital Adequacy with Capital Buffer		$ 441,150	$ 377,817
Tier One Risk Based Capital Required for Capital Adequacy with Capital Buffer to Risk Weighted Assets	[1]	7.875%	7.25%
To Be Well Capitalized Under Prompt Corrective Action Provisions Amount		$ 448,152	$ 416,902
To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio (as a percent)		8.00%	8.00%
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
Actual Amount		$ 672,380	$ 630,702
Actual Ratio (as a percent)		12.00%	12.10%
Minimum Capital Adequacy Amount		$ 252,086	$ 234,507
Minimum Capital Adequacy Ratio (as a percent)		4.50%	4.50%
Common Equity Tier 1 Capita Required Form Minimum Capital Adequacy With Capital Buffer		$ 357,121	$ 299,648
Common Equity Tier 1 Capital Required For Capital Adequacy With Capital Buffer to Risk Weighted Assets	[1]	6.375%	5.75%
To Be Well Capitalized Under Prompt Corrective Action Provisions Amount		$ 364,124	$ 338,733
To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio (as a percent)		6.50%	6.50%
Tier I Capital (to Average Assets):
Actual Amount		$ 673,888	$ 630,702
Actual Ratio (as a percent)		10.82%	10.98%
Minimum Capital Adequacy Amount		$ 249,052	$ 229,789
Minimum Capital Adequacy Ratio (as a percent)		4.00%	4.00%
To Be Well Capitalized Under Prompt Corrective Action Provisions Amount		$ 311,315	$ 287,236
To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio (as a percent)		5.00%	5.00%

[1] (1) The capital conservation buffer requirement will be phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis.

XML

Fair Value Measurements (Details) - USD ($) $ in Thousands		Dec. 31, 2018	Dec. 31, 2017
Fair value measurements
Fair value carrying amount		$ 11,290	$ 13,123
Mortgages held for sale reported at fair value
Fair value measurements
Fair value carrying amount		11,290	13,123
Aggregate unpaid principal		11,076	12,967
Excess of fair value carrying amount over (under) unpaid principal	[1]	$ 214	$ 156

[1] The excess of fair value carrying amount over (under) unpaid principal is included in mortgage banking income and includes changes in fair value at and subsequent to funding and gains and losses on the related loan commitment prior to funding.

XML

Fair Value Measurements (Details 2) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Fair value measurements
Investment securities available-for-sale	$ 990,129	$ 904,033
Assets:
Mortgages held for sale	11,290	13,123
U.S. Treasury and Federal agencies securities
Fair value measurements
Investment securities available-for-sale	531,223	468,119
U.S. States and political subdivisions securities
Fair value measurements
Investment securities available-for-sale	94,582	116,000
Mortgage-backed securities - Federal agencies
Fair value measurements
Investment securities available-for-sale	318,233	287,910
Corporate debt securities
Fair value measurements
Investment securities available-for-sale	45,392	31,294
Foreign government and other securities
Fair value measurements
Investment securities available-for-sale	699	710
Total
Fair value measurements
Investment securities available-for-sale	990,129	904,033
Assets:
Mortgages held for sale	11,290	13,123
Level 1
Fair value measurements
Investment securities available-for-sale	33,746	27,971
Assets:
Mortgages held for sale	0	0
Level 2
Fair value measurements
Investment securities available-for-sale	955,358	873,197
Assets:
Mortgages held for sale	11,290	13,123
Level 3
Fair value measurements
Investment securities available-for-sale	1,025	2,865
Assets:
Mortgages held for sale	0	0
Recurring | Total
Fair value measurements
Investment securities available-for-sale	990,129	904,033
Assets:
Mortgages held for sale	11,290	13,123
Total	1,008,543	922,323
Liabilities:
Total	7,250	5,262
Recurring | Total | Interest rate swap contracts
Assets:
Accrued income and other assets	7,124	5,167
Liabilities:
Accrued expenses and other liabilities	7,250	5,262
Recurring | Total | U.S. Treasury and Federal agencies securities
Fair value measurements
Investment securities available-for-sale	531,223	468,119
Recurring | Total | U.S. States and political subdivisions securities
Fair value measurements
Investment securities available-for-sale	94,582	116,000
Recurring | Total | Mortgage-backed securities - Federal agencies
Fair value measurements
Investment securities available-for-sale	318,233	287,910
Recurring | Total | Corporate debt securities
Fair value measurements
Investment securities available-for-sale	45,392	31,294
Recurring | Total | Foreign government and other securities
Fair value measurements
Investment securities available-for-sale	699	710
Recurring | Level 1
Fair value measurements
Investment securities available-for-sale	33,746	27,971
Assets:
Mortgages held for sale	0	0
Total	33,746	27,971
Liabilities:
Total	0	0
Recurring | Level 1 | Interest rate swap contracts
Assets:
Accrued income and other assets	0	0
Liabilities:
Accrued expenses and other liabilities	0	0
Recurring | Level 1 | U.S. Treasury and Federal agencies securities
Fair value measurements
Investment securities available-for-sale	33,746	27,971
Recurring | Level 1 | U.S. States and political subdivisions securities
Fair value measurements
Investment securities available-for-sale	0	0
Recurring | Level 1 | Mortgage-backed securities - Federal agencies
Fair value measurements
Investment securities available-for-sale	0	0
Recurring | Level 1 | Corporate debt securities
Fair value measurements
Investment securities available-for-sale	0	0
Recurring | Level 1 | Foreign government and other securities
Fair value measurements
Investment securities available-for-sale	0	0
Recurring | Level 2
Fair value measurements
Investment securities available-for-sale	955,358	873,197
Assets:
Mortgages held for sale	11,290	13,123
Total	973,772	891,487
Liabilities:
Total	7,250	5,262
Recurring | Level 2 | Interest rate swap contracts
Assets:
Accrued income and other assets	7,124	5,167
Liabilities:
Accrued expenses and other liabilities	7,250	5,262
Recurring | Level 2 | U.S. Treasury and Federal agencies securities
Fair value measurements
Investment securities available-for-sale	497,477	440,148
Recurring | Level 2 | U.S. States and political subdivisions securities
Fair value measurements
Investment securities available-for-sale	93,557	113,845
Recurring | Level 2 | Mortgage-backed securities - Federal agencies
Fair value measurements
Investment securities available-for-sale	318,233	287,910
Recurring | Level 2 | Corporate debt securities
Fair value measurements
Investment securities available-for-sale	45,392	31,294
Recurring | Level 2 | Foreign government and other securities
Fair value measurements
Investment securities available-for-sale	699	0
Recurring | Level 3
Fair value measurements
Investment securities available-for-sale	1,025	2,865
Assets:
Mortgages held for sale	0	0
Total	1,025	2,865
Liabilities:
Total	0	0
Recurring | Level 3 | Interest rate swap contracts
Assets:
Accrued income and other assets	0	0
Liabilities:
Accrued expenses and other liabilities	0	0
Recurring | Level 3 | U.S. Treasury and Federal agencies securities
Fair value measurements
Investment securities available-for-sale	0	0
Recurring | Level 3 | U.S. States and political subdivisions securities
Fair value measurements
Investment securities available-for-sale	1,025	2,155
Recurring | Level 3 | Mortgage-backed securities - Federal agencies
Fair value measurements
Investment securities available-for-sale	0	0
Recurring | Level 3 | Corporate debt securities
Fair value measurements
Investment securities available-for-sale	0	0
Recurring | Level 3 | Foreign government and other securities
Fair value measurements
Investment securities available-for-sale	$ 0	$ 710

XML

Fair Value Measurements (Details 3)	12 Months Ended
	Dec. 31, 2018 USD ($) item	Dec. 31, 2017 USD ($) item
Changes in the fair value of Level 3 assets measured on a recurring basis
Total gains or losses (unrealized): included in earnings	$ 0	$ 0
Number of transfers between Level 1 and Level 2 | item	0	0
Number of transfers between Level 2 and Level 3 | item	1	0
U.S. States and political subdivisions securities
Changes in the fair value of Level 3 assets measured on a recurring basis
Balance at the beginning of the period	$ 2,155,000	$ 2,699,000
Total gains or losses (realized/unrealized): included in earnings	0	0
Total gains or losses (realized/unrealized): included in other comprehensive income	6,000	31,000
Purchases	0	1,437,000
Issuances	0	0
Sales	0	0
Settlements	0	0
Maturities	(1,136,000)	(2,012,000)
Transfers into Level 3	0	0
Transfers out of Level 3	0	0
Balance at the end of the period	1,025,000	2,155,000
Foreign government and other securities
Changes in the fair value of Level 3 assets measured on a recurring basis
Balance at the beginning of the period	710,000	807,000
Total gains or losses (realized/unrealized): included in earnings	0	0
Total gains or losses (realized/unrealized): included in other comprehensive income	(11,000)	3,000
Purchases	200,000	500,000
Issuances	0	0
Sales	0	0
Settlements	0	0
Maturities	(200,000)	(600,000)
Transfers into Level 3	0	0
Transfers out of Level 3	(699,000)	0
Balance at the end of the period	0	710,000
Investment securities available-for-sale
Changes in the fair value of Level 3 assets measured on a recurring basis
Balance at the beginning of the period	2,865,000	3,506,000
Total gains or losses (realized/unrealized): included in earnings	0	0
Total gains or losses (realized/unrealized): included in other comprehensive income	(5,000)	34,000
Purchases	200,000	1,937,000
Issuances	0	0
Sales	0	0
Settlements	0	0
Maturities	(1,336,000)	(2,612,000)
Transfers into Level 3	0	0
Transfers out of Level 3	(699,000)	0
Balance at the end of the period	$ 1,025,000	$ 2,865,000

XML

Fair Value Measurements (Details 4) $ in Thousands	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)
Valuation Methodology
Investment securities, available-for-sale	$ 990,129	$ 904,033
Level 3
Valuation Methodology
Investment securities, available-for-sale	1,025	2,865
Recurring | Level 3
Valuation Methodology
Investment securities, available-for-sale	1,025	2,865
Recurring | Level 3 | Discounted cash flows | Direct placement municipal securities
Valuation Methodology
Investment securities, available-for-sale	$ 1,025	2,155
Recurring | Level 3 | Discounted cash flows | Foreign government
Valuation Methodology
Investment securities, available-for-sale		$ 710
Discount for lack of marketability | Non-recurring | Level 3 | Trade publications | Aircraft
Unobservable Inputs
Discount rate (as a percent)	0.10
Discount for lack of marketability | Non-recurring | Level 3 | Auction values | Autos
Unobservable Inputs
Discount rate (as a percent)	0.10
Discount for lack of marketability | Non-recurring | Level 3 | Trade publications and auction values | Medium and heavy duty trucks
Unobservable Inputs
Discount rate (as a percent)	0.15
Discount for lack of marketability | Non-recurring | Level 3 | Trade publications and auction values | Construction equipment
Unobservable Inputs
Discount rate (as a percent)	0.20
Discount for lack of marketability | Non-recurring | Level 3 | Appraisals | Real estate
Unobservable Inputs
Discount rate (as a percent)	0.20
Credit spread assumption | Recurring | Level 3 | Discounted cash flows | Direct placement municipal securities | Minimum
Unobservable Inputs
Debt securities available-for-sale unobservable inputs (as a percent)	0.0017	0.0221
Credit spread assumption | Recurring | Level 3 | Discounted cash flows | Direct placement municipal securities | Maximum
Unobservable Inputs
Debt securities available-for-sale unobservable inputs (as a percent)	0.0302	0.0293
Market yield assumption | Recurring | Level 3 | Discounted cash flows | Foreign government | Minimum
Unobservable Inputs
Debt securities available-for-sale unobservable inputs (as a percent)		0.0035
Market yield assumption | Recurring | Level 3 | Discounted cash flows | Foreign government | Maximum
Unobservable Inputs
Debt securities available-for-sale unobservable inputs (as a percent)		0.0123
Receivables | Discount for lack of marketability | Non-recurring | Level 3 | Commercial loans
Unobservable Inputs
Discount rate (as a percent)	0.20
Inventory | Discount for lack of marketability | Non-recurring | Level 3 | Minimum | Commercial loans
Unobservable Inputs
Discount rate (as a percent)	0.40
Inventory | Discount for lack of marketability | Non-recurring | Level 3 | Maximum | Commercial loans
Unobservable Inputs
Discount rate (as a percent)	0.75

XML

Fair Value Measurements (Details 5) - Non-recurring - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Impaired loans
Fair value measurements
Impairment charges (recoveries)	$ 12,460	$ 500
Partnership investments
Fair value measurements
Impairment charges (recoveries)	0	0
Mortgage servicing rights
Fair value measurements
Impairment charges (recoveries)	0	0
Repossessions
Fair value measurements
Impairment charges (recoveries)	1,920	790
Other real estate
Fair value measurements
Impairment charges (recoveries)	0	50
Total
Fair value measurements
Impaired loans - collateral based	7,306	7,994
Assets measured at fair value	18,554	24,769
Total | Partnership investments
Fair value measurements
Accrued income and other assets		1,000
Total | Mortgage servicing rights
Fair value measurements
Accrued income and other assets	4,283	4,349
Total | Repossessions
Fair value measurements
Accrued income and other assets	6,666	10,114
Total | Other real estate
Fair value measurements
Accrued income and other assets	299	1,312
Level 3
Fair value measurements
Impaired loans - collateral based	7,306	7,994
Assets measured at fair value	18,554	24,769
Level 3 | Partnership investments
Fair value measurements
Accrued income and other assets		1,000
Level 3 | Mortgage servicing rights
Fair value measurements
Accrued income and other assets	4,283	4,349
Level 3 | Repossessions
Fair value measurements
Accrued income and other assets	6,666	10,114
Level 3 | Other real estate
Fair value measurements
Accrued income and other assets	$ 299	$ 1,312

XML

Fair Value Measurements (Details 6) - Non-recurring $ in Thousands	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)
Level 3
Valuation Methodology
Assets measured at fair value	$ 18,554	$ 24,769
Carrying Value | Level 3 | Collateral based measurements | Impaired loans
Valuation Methodology
Assets measured at fair value	7,306	7,994
Carrying Value | Level 3 | Discounted cash flows | Mortgage servicing rights
Valuation Methodology
Assets measured at fair value	4,283	4,349
Carrying Value | Level 3 | Appraisals trade publications and auction values | Repossessions
Valuation Methodology
Assets measured at fair value	6,666	10,114
Carrying Value | Level 3 | Appraisals | Other real estate
Valuation Methodology
Assets measured at fair value	299	1,312
Fair Value
Valuation Methodology
Assets measured at fair value	18,554	24,769
Fair Value | Level 3 | Collateral based measurements | Impaired loans
Valuation Methodology
Assets measured at fair value	7,306	7,994
Fair Value | Level 3 | Discounted cash flows | Mortgage servicing rights
Valuation Methodology
Assets measured at fair value	7,238	7,187
Fair Value | Level 3 | Appraisals trade publications and auction values | Repossessions
Valuation Methodology
Assets measured at fair value	6,991	10,493
Fair Value | Level 3 | Appraisals | Other real estate
Valuation Methodology
Assets measured at fair value	$ 305	$ 1,441
Discount for lack of marketability and current conditions | Level 3 | Collateral based measurements | Impaired loans | Minimum
Unobservable Inputs
Impaired loans unobservable inputs (as a percent)	0.20	0.03
Discount for lack of marketability and current conditions | Level 3 | Collateral based measurements | Impaired loans | Maximum
Unobservable Inputs
Impaired loans unobservable inputs (as a percent)	0.35	0.20
Constant prepayment rate (CPR) | Level 3 | Discounted cash flows | Mortgage servicing rights | Minimum
Unobservable Inputs
Mortgage servicing rights unobservable inputs (as a percent)	0.0720	0.0860
Constant prepayment rate (CPR) | Level 3 | Discounted cash flows | Mortgage servicing rights | Maximum
Unobservable Inputs
Mortgage servicing rights unobservable inputs (as a percent)	0.2480	0.2070
Discount rate | Level 3 | Discounted cash flows | Mortgage servicing rights | Minimum
Unobservable Inputs
Mortgage servicing rights unobservable inputs (as a percent)	0.1030	0.0960
Discount rate | Level 3 | Discounted cash flows | Mortgage servicing rights | Maximum
Unobservable Inputs
Mortgage servicing rights unobservable inputs (as a percent)	0.1310	0.1250
Discount for lack of marketability | Level 3 | Appraisals trade publications and auction values | Repossessions | Minimum
Unobservable Inputs
Repossessions unobservable inputs (as a percent)	0.04	0.03
Discount for lack of marketability | Level 3 | Appraisals trade publications and auction values | Repossessions | Maximum
Unobservable Inputs
Repossessions unobservable inputs (as a percent)	0.06	0.10
Discount for lack of marketability | Level 3 | Appraisals | Other real estate | Minimum
Unobservable Inputs
Other real estate unobservable inputs (as a percent)	0.00	0.07
Discount for lack of marketability | Level 3 | Appraisals | Other real estate | Maximum
Unobservable Inputs
Other real estate unobservable inputs (as a percent)	0.10	0.09

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Fair Value Measurements (Details 7) - USD ($) $ in Thousands		Dec. 31, 2018	Dec. 31, 2017
Assets:
Cash and due from banks		$ 94,907	$ 73,635
Federal funds sold and interest bearing deposits with other banks		4,172	4,398
Investment securities available-for-sale		990,129	904,033
Federal Home Loan Bank Stock and Federal Reserve Bank Stock		28,404	25,953
Mortgages held for sale		11,290	13,123
Loans and leases, net of reserve for loan and lease losses		4,734,995	4,432,795
Liabilities:
Long-term debt and mandatorily redeemable securities		71,123	70,060
Subordinated notes		58,764	58,764
Carrying or Contract Value
Assets:
Cash and due from banks		94,907	73,635
Federal funds sold and interest bearing deposits with other banks		4,172	4,398
Investment securities available-for-sale		990,129	904,033
Federal Home Loan Bank Stock and Federal Reserve Bank Stock		28,404	25,953
Mortgages held for sale		11,290	13,123
Loans and leases, net of reserve for loan and lease losses		4,734,995	4,432,795
Mortgage servicing rights		4,283	4,349
Interest rate swaps		7,124	5,167
Liabilities:
Deposits		5,122,322	4,752,730
Short-term borrowings		199,344	214,595
Long-term debt and mandatorily redeemable securities		71,123	70,060
Subordinated notes		58,764	58,764
Interest rate swaps		7,250	5,262
Off-balance-sheet instruments	[1]	0	0
Fair Value
Assets:
Cash and due from banks		94,907	73,635
Federal funds sold and interest bearing deposits with other banks		4,172	4,398
Investment securities available-for-sale		990,129	904,033
Federal Home Loan Bank Stock and Federal Reserve Bank Stock		28,404	25,953
Mortgages held for sale		11,290	13,123
Loans and leases, net of reserve for loan and lease losses		4,689,267	4,428,848
Mortgage servicing rights		7,238	7,187
Interest rate swaps		7,124	5,167
Liabilities:
Deposits		5,111,711	4,745,111
Short-term borrowings		199,344	214,595
Long-term debt and mandatorily redeemable securities		68,751	67,857
Subordinated notes		45,874	57,103
Interest rate swaps		7,250	5,262
Off-balance-sheet instruments	[1]	259	286
Level 1
Assets:
Cash and due from banks		94,907	73,635
Federal funds sold and interest bearing deposits with other banks		4,172	4,398
Investment securities available-for-sale		33,746	27,971
Federal Home Loan Bank Stock and Federal Reserve Bank Stock		28,404	25,953
Mortgages held for sale		0	0
Loans and leases, net of reserve for loan and lease losses		0	0
Mortgage servicing rights		0	0
Interest rate swaps		0	0
Liabilities:
Deposits		3,654,556	3,482,757
Short-term borrowings		113,734	206,862
Long-term debt and mandatorily redeemable securities		0	0
Subordinated notes		0	0
Interest rate swaps		0	0
Off-balance-sheet instruments	[1]	0	0
Level 2
Assets:
Cash and due from banks		0	0
Federal funds sold and interest bearing deposits with other banks		0	0
Investment securities available-for-sale		955,358	873,197
Federal Home Loan Bank Stock and Federal Reserve Bank Stock		0	0
Mortgages held for sale		11,290	13,123
Loans and leases, net of reserve for loan and lease losses		0	0
Mortgage servicing rights		0	0
Interest rate swaps		7,124	5,167
Liabilities:
Deposits		1,457,155	1,262,354
Short-term borrowings		85,610	7,733
Long-term debt and mandatorily redeemable securities		68,751	67,857
Subordinated notes		45,874	57,103
Interest rate swaps		7,250	5,262
Off-balance-sheet instruments	[1]	259	286
Level 3
Assets:
Cash and due from banks		0	0
Federal funds sold and interest bearing deposits with other banks		0	0
Investment securities available-for-sale		1,025	2,865
Federal Home Loan Bank Stock and Federal Reserve Bank Stock		0	0
Mortgages held for sale		0	0
Loans and leases, net of reserve for loan and lease losses		4,689,267	4,428,848
Mortgage servicing rights		7,238	7,187
Interest rate swaps		0	0
Liabilities:
Deposits		0	0
Short-term borrowings		0	0
Long-term debt and mandatorily redeemable securities		0	0
Subordinated notes		0	0
Interest rate swaps		0	0
Off-balance-sheet instruments	[1]	$ 0	$ 0

[1] Represents estimated cash outflows required to currently settle the obligations at current market rates.

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1st Source Corporation (Parent Company Only) Financial Information (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
ASSETS
Cash and cash equivalents	$ 99,079	$ 78,033	$ 108,304	$ 79,721
Other assets	159,271	155,412
Total assets	6,293,745	5,887,284
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt and mandatorily redeemable securities	71,123	70,060
Subordinated notes	58,764	58,764
Other liabilities	78,602	72,598
Total liabilities	5,530,155	5,168,747
Total shareholders’ equity	762,082	718,537
Total liabilities and shareholders’ equity	6,293,745	5,887,284
Parent
ASSETS
Cash and cash equivalents	106,647	100,155	$ 73,324	$ 60,429
Other assets	4,191	2,696
Total assets	852,036	809,471
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper	4,325	6,115
Long-term debt and mandatorily redeemable securities	24,676	22,942
Subordinated notes	58,764	58,764
Other liabilities	2,189	3,113
Total liabilities	89,954	90,934
Total shareholders’ equity	762,082	718,537
Total liabilities and shareholders’ equity	852,036	809,471
Parent | Bank subsidiaries
ASSETS
Short-term investments with bank subsidiary	500	500
Investments in subsidiary	740,697	706,119
Parent | Non-bank subsidiaries
ASSETS
Investments in subsidiary	$ 1	$ 1

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1st Source Corporation (Parent Company Only) Financial Information (Details 2) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Income:
Rental income from subsidiaries	$ 31,793	$ 30,381	$ 25,863
Other	10,362	9,922	11,122
Expenses:
Interest on subordinated notes	3,625	4,002	4,220
Interest on long-term debt and mandatorily redeemable securities	2,316	2,435	2,089
Interest on commercial paper and other short-term borrowings	2,838	1,115	525
Other	6,478	5,574	5,856
Income before income taxes	105,027	101,360	89,126
Income tax benefit	(22,613)	(33,309)	(31,340)
Comprehensive income	75,788	63,375	52,575
Parent
Income:
Rental income from subsidiaries	2,613	2,354	2,363
Other	367	422	444
Investment securities and other investment (losses) gains	(180)	6,431	3,901
Total income	47,880	48,482	42,772
Expenses:
Interest on subordinated notes	3,625	4,002	4,220
Interest on long-term debt and mandatorily redeemable securities	1,624	1,685	1,454
Interest on commercial paper and other short-term borrowings	14	17	20
Rent	1,774	2,070	1,739
Other	642	1,733	1,179
Total expenses	7,679	9,507	8,612
Income before income taxes	40,201	38,975	34,160
Income tax benefit	1,009	204	741
Income before equity in undistributed income of subsidiaries	41,210	39,179	34,901
Equity in undistributed income of subsidiaries	41,204	28,872	22,885
Net income	82,414	68,051	57,786
Comprehensive income	75,788	63,375	52,575
Parent | Bank subsidiaries
Income:
Dividends from bank subsidiary	45,080	38,317	36,064
Expenses:
Equity in undistributed income of subsidiaries	41,204	28,872	22,569
Parent | Non-bank subsidiaries
Income:
Dividends from bank subsidiary	0	958	0
Expenses:
Equity in undistributed income of subsidiaries	$ 0	$ 0	$ 316

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1st Source Corporation (Parent Company Only) Financial Information (Details 3) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment	$ 5,620	$ 5,658	$ 5,245
Stock-based compensation	3,553	2,963	2,884
Other	1,028	4,550	450
Net change in operating activities	144,374	117,261	98,060
Investing activities:
Net change in investing activities	(442,630)	(462,206)	(309,847)
Financing activities:
Proceeds from issuance of long-term debt and mandatorily redeemable securities	0	19,999	20,837
Payments on long-term debt and mandatorily redeemable securities	(1,735)	(26,628)	(6,429)
Stock issued under stock purchase plans	145	153	120
Acquisition of treasury stock	(9,271)	(41)	(8,030)
Cash dividends paid on common stock	(25,686)	(20,431)	(19,416)
Net change in financing activities	319,302	314,674	240,370
Net change in cash and cash equivalents	21,046	(30,271)	28,583
Cash and cash equivalents, beginning of year	78,033	108,304	79,721
Cash and cash equivalents, end of year	99,079	78,033	108,304
Parent Company
Operating activities:
Net income	82,414	68,051	57,786
Adjustments to reconcile net income to net cash provided by operating activities:
Equity (undistributed) distributed in excess of income of subsidiaries	(41,204)	(28,872)	(22,885)
Depreciation of premises and equipment	2	2	4
Stock-based compensation	71	48	52
Realized/unrealized investment securities and other investment losses (gains)	180	(6,431)	(3,901)
Other	45	4,122	3,132
Net change in operating activities	41,508	36,920	34,188
Investing activities:
Proceeds from sales and maturities of investment securities	0	6,327	1,795
Net change in partnership investments	(980)	(62)	2,903
Return of capital from subsidiaries	0	854	0
Net change in investing activities	(980)	7,119	4,698
Financing activities:
Net change in commercial paper	(1,790)	354	(2,281)
Proceeds from issuance of long-term debt and mandatorily redeemable securities	1,867	1,248	1,607
Payments on long-term debt and mandatorily redeemable securities	(1,064)	(667)	(627)
Stock issued under stock purchase plans	145	153	120
Net proceeds from issuance of treasury stock	1,763	2,176	2,636
Acquisition of treasury stock	(9,271)	(41)	(8,030)
Cash dividends paid on common stock	(25,686)	(20,431)	(19,416)
Net change in financing activities	(34,036)	(17,208)	(25,991)
Net change in cash and cash equivalents	6,492	26,831	12,895
Cash and cash equivalents, beginning of year	100,155	73,324	60,429
Cash and cash equivalents, end of year	$ 106,647	$ 100,155	$ 73,324