PERSONAL ASSET M ANAGEM ENT GROUP

OF 1ST SOURCE BANK

Investment Outlook

& Issues

—2016

S t r o n g S t a b l e L o c a l P e r s o n a l

2015, like most years in the investment

markets, had its challenges. The U.S.

equity markets experienced a first drop of 10%

since 2011, not so gently reminding investors

of the risks to investing. Additionally, many

investors became frustrated by the prolonged

indecision of the Federal Reserve whether or

not to raise short-term interest rates for the first

time since 2006. China experienced a decline

of one-third the value in their equity markets

during the summer of 2015, which contributed

to the drop in U.S. markets.

In this year’s publication of Investment Outlook

& Issues we review 2015 and project into

2016 and beyond. The Federal Reserve,

China and the political elections are each areas

of considerable interest in our collective mind.

We of the 1st Source Corporation Investment

Advisors thank you for trusting us to work

with you and your family.

PAUL GIFFORD, JR., CFA

Chief Investment Officer

INTRODUCTION

VOLATILITY RETURNS WITH FLAIR

The U.S. equity market, as measured

by the S&P 500® Index, produced

six straight years of positive returns through

October 31, 2015, including a gain of almost

200% from the lows recorded in March

of 2009. During the past four years, the

equity markets have experienced a period

of unprecedented low volatility. In fact,

this duration has been the third longest period

in nearly 90 years that U.S. equities did not

weather a 10% correction. In the third quarter

of 2015, equity markets succumbed to a

correction brought about by a host of concerns

including: the unwinding of the commodities

supercycle, slowing growth in China, a less

accommodative Federal Reserve (Fed) policy,

and slowing corporate earnings due to a strong

U.S. dollar. On Monday, August 24, the

Dow Jones Industrial Average, which contains

30 primarily industrial blue chip stocks,

opened down 1,100 points and rallied intraday

to down 135 points before finishing down

588 points. On this day, the market exhibited

a period of climax selling. The Chicago Board

Options Exchange (CBOE) Volatility Index

(VIX), a measure of market risk often referred

to as the “investor fear gauge,” rocketed to 55

— a level not seen since 2011 when the stock

market corrected 19%. When the VIX is over

40, it suggests that selling has been overdone

and that the markets are ripe for a rebound.

Historically, markets have generated positive

returns over a 12-month period after the VIX

exceeds a level of 40. We observed increased

volatility this year with 24% of trading days

showing a move of 1% or more compared

to 15% of trading days in 2014. The equity

markets will likely need some time to repair

the technical damage suffered in the third

quarter of 2015, as 85% of stocks were down

10% or more, and 39% of stocks were in bear

market territory (down at least 20%). Market

bottoms are typically not V-shaped and

require a period of sideways action to build

a base and retest the lows to see if they hold.

1

We believe lift off is less important than trajectory...

EQUITY

i

i Introduction

1 Equity 1 Volatility 2 Commodity Markets and China 3 Energy 4 Corporate Earnings

5 Fixed Income 5 Federal Reserve Rate 6 Fed Policy 7 Municipal Bonds 8 Alternative Bonds

10 Economic 10 Global Growth 11 Auto Sales 11 Housing 12 Labor Force Participation

14 Wrap Up: Elections, Federal Reserve and China

16 Our Investment Management Team

1 S T S O U RC E . C O M / PA M G

2 32017 2018

prices only to witness overproduction and

conservation, followed by secular periods of

declining prices. China’s impact on the global

commodity markets has been tremendous.

China is the world’s top consumer of

aluminum (54%), copper (48%), steel (45%),

and soybeans (28%). An illustration of China’s

worldwide consumption is on the next page.

China’s industrial growth and investment

spending to support infrastructure projects

(e.g., roads, bridges, and housing) drove

demand levels for several commodities.

Now, as the country transitions to a more

service-led economic model, we are

witnessing a decline in the demand for both

hard and soft commodities, as well as the

conclusion of the commodities supercycle

that spanned from 1998 through 2011.

2015

The Commodity Markets and Slowing Growth in China

China’s economic growth since 2009 has

been responsible for about 50% of overall

global economic growth. China’s slowdown

will reverberate throughout the commodities

markets. In the realm of commodity markets,

there are two competing visions: One perceives

China’s insatiable demand for commodities

to result in an era of higher prices and a

commodities supercycle. The other perspective

is to see a continuation of the “boom and bust”

cycles that have historically characterized the

commodity markets. 1st Source tends to be

in the latter camp. We believe the commodity

markets will act the same way they always have,

with secular periods (10 years or more) of rising

Energy

With regard to

energy, 1st Source

is among those who

believe that prices

will be “lower for

longer” as the rise of

shale production in

the U.S. increased

from about five

million barrels per

day in 2006 to

averaging slightly

over nine million

barrels nearing the

end of 2015.2016

5

FIXED INCOME

FEDERAL RESERVE RATE

The Federal Reserve (the “Fed”) continues to be at the epicenter of global markets as the

governors maintained a zero-interest rate policy through September 2015. Whether the Fed

decides to raise rates before the end of 2015 or during the first quarter of 2016, interest rates

will continue to be low across the curve. Federal Reserve Chair Janet Yellen has stated that the

Fed will be “broadly accommodative” even well after the first rate increase.

As the Fed raises rates — likely at a very slow pace — the front-end of the Treasury curve

(Treasury securities with maturities of two years or less) will experience a greater increase in yield

than the longer maturity bonds. The reason why longer-term bond (specifically U.S. Treasuries)

yields will remain lower is driven by the Fed’s decision to roll over maturing Treasury securities into

new issues at auction and reinvest principal payments from the Fed’s holdings of agency debt and

agency mortgage-backed securities (“MBS”). The yield curve should flatten out in 2016 as the yield

on shorter-maturity bonds increases and the yield on longer-term bonds increases less.

Bond portfolios should react in a tame manner to the expected, slow, periodic rate increases in the

Federal Funds Target Rate. As the target rate increases bond prices will move downward, which

will lower the overall return on bonds. 1st Source continues to stay invested primarily in intermediate

bonds where we have been able to obtain additional yield relative to short-term bonds, however we

also expect to be positioned to reinvest in bonds with higher yields relative to longer-term bonds.

4

best since 2007. Healthcare led all sectors

with deals worth $482 billion year-to-date

through September 30, 2015 — the highest

year on record, and the technology sector

followed with $382 billion. Two of the larger

deals of the year were Indianapolis-based

Anthem Inc.’s purchase of Cigna Corporation

for $54 billion, and Avago Technologies Ltd.’s

purchase of Broadcom Corporation for

$37 billion. We believe acquisition activity

will finish the year with an all-time record

based on low-cost available credit. An Ernst

& Young survey suggests that more than

50% of global company executives plan to

acquire a company in the next 12 months.

Developed international markets have

underperformed compared with U.S. markets

since the economic recession of 2008-2009

through October of 2015 with the MSCI

EAFE Index gaining 111% versus the S&P

500® Index’s return of 199%. In Europe,

economic conditions have improved at a

much slower pace than the U.S., however

many countries are finally showing positive

economic growth. We recently upgraded

our view on developed international markets

based on the improving economic conditions,

higher dividend yields, improving corporate

margins, and most importantly, the easy

money policy from the European Central

Bank versus the Fed (which is becoming

less accommodative).

Corporate Earnings

Lackluster economic growth and a strong U.S.

dollar pressured corporate earnings in the first

half of 2015. During the third quarter of 2015,

72% of companies in the S&P 500® reported

earnings above the mean estimate. Earnings

declined 3.1%. The last time the S&P 500®

components reported a year-over-year decrease

in earnings was in the third quarter of 2012

(-1.0%). The strong U.S. dollar (up 5% this

year) has pressured sales growth for many

multinational companies as 40% of revenue

for S&P 500® companies is garnered from

abroad. As an example, Dow Jones Industrials

component 3M missed analyst consensus

expectations for sales, reporting year-over-

year numbers down 5.2%. The year-over-

year decrease in sales was driven by the effect

of significant negative foreign currency

translations, which shaved off 6.4%. However,

the company achieved organic local-currency

sales growth of 1.2%. In 2015, corporations

have been aggressively pursuing acquisitions

as a way to boost top-line revenue growth.

Mergers and acquisitions are on pace to be the

curve and then be forced to compensate by

increasing rates in a series of moves that are

faster than what the markets expect.

We do not suspect this will be a likely

outcome, but we do acknowledge the risk.

More likely, the Fed’s interest rate policy

will move in a stair-step fashion with a hike

in interest rates followed by an extended

pause and then additional increases based on

economic data.

Fed Policy

Investors have been keenly tuned to

communications surrounding the Fed’s interest

rate policy, with particular attention to the

anticipated timeline when the Fed will start

raising interest rates. We believe lift-off is less

important than trajectory. Financial markets

move on unexpected events. The hazard to

the markets is that the Fed may fall behind the

6

First Fed Rate Hikes vs. Speed of Hikes

7

MUNICIPAL BONDS

The year of 2015 was fairly calm for

the municipal bond market, despite

peripheral news from Puerto Rico (a territory

of the United States) and Illinois, which are

both experiencing credit issues. The 1st Source

core strategy within municipal bonds is to

own general obligation municipal bonds and

essential-service revenue bonds that we consider

to be high quality. Amidst the aforementioned

issues, the 1st Source strategy helped us

move through the headline news without a

concern. To create additional value for our

municipal bond portfolios, we use managers

that we believe are the best within the high

yield municipal bond sector to add yield while

remaining diversified within that segment.

We expect to stay true to this strategy into the

future and believe that chasing additional yield

through increased credit risk is of little value

in this low interest rate environment.

In light of the political cycle — specifically

the presidential election in 2016 — there is

no prospect for a change in personal income

taxes over the near term, which is a benefit

to municipal bond buyers over the next year.

A decrease in individual income tax rates is

also unlikely given the absence of Congress

passing a bipartisan bill of that nature.

Lower personal income tax rates would not

be a direct benefit to municipalities or

municipal bond buyers. There is greater

pressure on the federal government to lower

corporate tax rates within the United States.

Given the expectation of low interest rates

in 2016 in addition to: a yield curve primarily

affected on the front-end, very low correlation

with global bond markets, and domestic

economic stability, we believe our municipal

bond strategy is positioned to continue to

perform well in 2016. As we see a slow

increase in interest rates and yields, we will

be positioned to invest at higher rates based

on our laddered municipal bond portfolios.

8

ALTERNATIVE BONDS

In an asset class built on income and

preservation of capital, alternative bonds

have been starved of the prior. Within fixed

income, we have used multiple asset classes

to gather additional yield and maintain

an approach that allows for preservation

of capital and additional income. We allocate

approximately 15% to 20% of our total fixed

income investments to four alternative

fixed income asset classes as noted below.

1. HIGH YIELD

High yield is an asset class that has been

under some pressure from the effect of

a weak energy sector and that same sector’s

contribution to high yield performance.

We expect the high yield asset class to

continue to perform well as developed

nations continue to grow at a slow and

steady pace.

2. GLOBAL BONDS

Emerging market debt (EMD) and other

non-USD sovereign bonds performed poorly

in 2015 as the strengthening U.S. dollar

affected their performance. Though the

yields on EMD and sovereign debt have

been attractive, the price decline from

weakening currencies caused them to

detract from performance in 2015.

1st Source continues to be invested in the

global bond market, but are well under-

weighted. We continue to diligently look

for opportunities to invest in global bonds.

3. PREFERRED STOCKS

Preferred Stocks is an asset class that provides

additional yield and much less volatility than

common stocks. We plan to continue to utilize

preferred stocks in 2016. We like the potential

for additional yield that preferred stocks

can provide. Preferred stocks are like debt

instruments, though with less interest rate

sensitivity, and they tend to be less volatile

than investments in common stocks.

By investing in preferred stocks, we seek

to avoid the much greater credit risk inherent

in comparable debt securities.

4. ALTERNATIVE FIXED INCOME

We use an outside manager for our alternative

fixed income allocation. We believe this

strategy gives our fixed income portfolios

a better opportunity to perform well

in all interest rate cycles and scenarios.

We believe our allocation to alternative

fixed income investments will allow us

to be defensive as interest rates slowly rise.

Visit us online: 1stsource.com/pamg

9

PROVIDING EXCEPTIONAL SERVICE FOR CLIENTS AND THEIR FAMILIES

Founded in 1863 in South Bend, Indiana, 1st Source Bank is honored to be a

top-rated bank, and continues to be recognized for integrity, outstanding

performance and exceptional service to clients. 1st Source is rated in the Top 50

of 2,600 U.S. Banks with trust services, and receives a 5 Star “Superior” Rating

from BauerFinancial – the highest rating possible, and based on capital ratio,

profitability/loss trend, credit quality and CRA ratings. FORBES recognized

1st Source Bank as one of the “100 Most Trustworthy Companies” from among

more than 12,000 public companies. The 1st Source Bank Annual Report may

be viewed through the annual report link on our webpage: 1stsource.com/pamg.

10 11

AUTO SALES

A particularly bright spot in the U.S. economy has been the resurgence of domestic auto sales.

Auto sales in the U.S. could reach 18 million in 2015 and 2016 is forecasted to have a similar

number of sales. Today, the average new car sales price is $35,000. Wages within the industry, while

stagnant the last several years, are still above the median household income. The steady climb of sales

back to levels last seen in 2006 have been attributed to low interest rates, lower unemployment and

modest wage growth. Low oil prices are helping sales of trucks and SUVs, the most profitable vehicles

manufactured. The factors supporting auto sales should remain in place for 2016 continuing to make

the auto industry a strong part of the U.S. economy.

HOUSING

The housing market has clearly benefited from the low interest rates available during the last

six years. Housing prices in many parts of the country have regained the value lost in the

Great Recession. While this is good news, home ownership is struggling to recover. The case for

renting versus buying has been

weighing on the minds of many

after seeing what happened

to housing in 2008-2009.

Residential rentals have been

doing well and rents are rising.

Housing starts have improved

but are nowhere near as robust

as in prior recoveries. The

average age of buying a first

home has increased to 33 from

29 over the last decade as, among

other things, college debt has

delayed home ownership for

many young people. We expect

housing to be positive for the

economy in 2016, but not as

much as it has been historically.

export opportunities. This action raised concerns

that other countries might also devalue their

currencies to remain competitive. If devaluations

did occur, in the long-run any benefits would be

fleeting, and therefore a wash or no-win result.

Central banks around the world are continuing

to lower interest rates or are buying bonds

(quantitative easing) to spur economic growth.

The European Central Bank recently expanded

its operations and the amount of bonds it can

purchase. These actions have resulted in some

improvement in the European economy and

a very slow drop in unemployment.

Slow and steady growth should characterize

the global economic picture in 2016.

The combination of low interest rates,

low inflation and low oil prices should help

consumers as they continue to gain employment.

ECONOMIC

GLOBAL GROWTH

Global growth has been hampered by

the slowdown in economic activity in

China and in major oil producing countries.

By many accounts, China has contributed to

almost half of global economic growth since

2009. The United States and India have been

the bright spots this year, while Europe has

been stabilizing and showing signs of growth.

China’s slowing growth effected significant

volatility in the equity markets this summer.

In response to slowing growth, China

devalued its currency in August to improve

13

LABOR FORCE PARTICIPATION

12

T he unemployment rate in the

U.S. has been steadily declining

since its peak of 10.8% in 2009.

As of October 2015, the

unemployment rate was 5.1%.

Slow but steady economic growth

has been observed in improving

employment numbers, and we also

have been observing improvement

in wages. Some national retailers,

including Walmart, T.J.Maxx and

McDonald’s, have made headline

news by raising the minimum pay

for employees.

Of particular interest to many economists

and investors is the number of eligible

participants in the job market who are not

engaged in obtaining a job. The chart on

the next page shows the steady decline in

the number of people participating in the

workforce. If an individual stops looking

for a job, he or she is considered to have

left the work force, even if able to

function in some role. Some of the

improvement in the unemployment data

is simply due to people leaving the

workforce who are no longer counted

in the calculation for unemployment.

As a result, the 5.0% unemployment rate

is not as positive as it might seem.

Contributing to the discussion of

the changing labor market are the

subjects of the lingering effects of the

“Great Recession” and the number

of retiring baby boomers. With some

people no longer looking for work

and others retiring, the long-term

impact of slower growth and a

marginalized (at least economically)

group of individuals is noteworthy.

While we have seen some pick up

in wages for entry level jobs and also

for specific skills, generally speaking

wages are following the economy,

growing at about 2 to 3% per year.

Source: Bloomberg L.P.

As a result, the 5.0%

unemployment rate is not as positive as it might seem...

Year

Age

1514

2016 WRAP-UP: ELECTIONS, FEDERAL RESERVE AND CHINA

As we look ahead to 2016, the financial

markets will be working through issues

related to the upcoming presidential election,

the Fed’s interest rate policy decisions and

China’s slowing growth. As discussed earlier,

the Fed and China have impacted the markets

in 2015 and will continue to do so in 2016.

The early start to the presidential cycle has already had some impact on the markets. For example,

Democratic candidate Hillary Clinton’s comments regarding health care profits sent biotechnology

stocks lower in September. As the large pool of candidates narrows to two, investors will learn

more about the candidates’ specific plans and will need to consider how these plans might affect

their investments and the markets. Wages, health care and regulation seem likely to be three of

the larger issues in the presidential race.

China is clearly going into a slower growth

phase as it transitions from an export-driven

economy to one more dependent on

consumer spending. China’s devaluation

of its currency this summer showed that

the country is experiencing a greater than

anticipated slow-down. The direct impact

to the U.S. is expected to be minimal and

not enough to push us into a recession.

The Fed’s recent actions have created much

uncertainty. A modest 0.25% increase in

interest rates seems likely by year-end or

in early 2016. The markets might actually

appreciate the action as confirmation

that the economy has improved enough

to move away from the days of the

zero interest rate policy.

Further delays by the Fed would serve

to confirm that the U.S. is still in a

fragile economic state.

1st Source has continued to maintain

equity exposure and have made small

changes to the mix of the investment

styles we use in our clients’ portfolios.

The equity markets should continue

to grow, even if at a slower rate than

the last several years, as corporations

generate more revenue and the economy

expands at an expected rate of 2% to 3%.

1st Source Corporation Investment Advisors, Inc. (Left to Right) Jackie Kronewitter; Erik Clapsaddle, CFA, CFP®; Rob Romano, CFA; Jason Cooper, MBA;

Noreen Kazi, MBA; Chris Davis, MBA; Jon Cisna; Tamara Simon, MBA, IACCP®;

Randy Thornton, MBA; Paul Gifford, CFA; Marie Alvarez

16

1ST SOURCE CORPORATION INVESTMENT ADVISORS, INC.

Understanding that each person and family have different financial goals, 1st Source

Corporation Investment Advisors design customized plans to suit each situation and with

the long-view in mind. As independent, unbiased advisors, we select from a wide variety

of investments, adding flexibility, using an open investment structure, and offering hands-on

investment advice and education if desired.

Some members of our investment team hold the investment industry’s highest professional

designation of Chartered Financial Analyst (CFA); some hold advanced business degrees;

all are fiercely dedicated to their clients. By focusing exclusively to keep each client’s best

interest in mind, the 1st Source Investment Advisors provide clients with deep peace of mind.

17

The 1st Source Corporation Investment Advisors, Inc. team has over 195 years of combined

professional industry experience, and an average of over 19 years experience per investment professional.

Three (3) of our investment staff members have the CFA (Chartered Financial Analyst) designation,

one (1) member has the CFP® (CERTIFIED FINANCIAL PLANNER) designation, and one (1) member

has the IACCP® (Investment Advisor Certified Compliance Professional) designation.

The core investment team is supplemented by more than 85 other 1st Source team members

who provide investment-related support and services.

ABSOLUTE INTEGRITY YEARS OF DEDICATION—

Member FDIC

Investment Outlook

& Issues

—2016

PERSONAL ASSET M ANAGEM ENT GROUP

(800) 882- 6935 — 1STSOURCE.COM/PA MG