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What changed in 1ST SOURCE CORP's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of 1ST SOURCE CORP's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+286 added−334 removedSource: 10-K (2024-02-20) vs 10-K (2023-02-16)

Top changes in 1ST SOURCE CORP's 2023 10-K

286 paragraphs added · 334 removed · 230 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

52 edited+5 added−24 removed28 unchanged
Biggest changeSPECIALTY 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, individual and group health insurance and life insurance. 1st Source Insurance, Inc. has ten offices. 1ST PORTFOLIO MANAGEMENT, INC. 1st Portfolio Management, Inc. is a wholly owned subsidiary of 1st Source Bank that owns and manages certain available-for-sale investment securities.
Biggest changeThe Specialty Finance Group operates through 1st Source Bank and its subsidiaries including: 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 our insurance agency subsidiary placing property and casualty, individual and group health, and life insurance for individuals and businesses. 1st Source Insurance, Inc. has ten offices.
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.
Sarbanes-Oxley Act of 2002 (SOA) — The 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.
We are also subject to various state laws, including the recently enacted California Consumer Privacy Act, that generally require us (directly or indirectly through our vendors) to protect the personal information of individual customers and notify them if confidentiality of their personal information is or may have been compromised as the result of a data security breach or failure.
We are also subject to various state laws, including the California Consumer Privacy Act, that generally require us (directly or indirectly through our vendors) to protect the personal information of individual customers and notify them if confidentiality of their personal information is or may have been compromised as the result of a data security breach or failure.
In March 2020, in response to the COVID-19 pandemic, the Federal Reserve set the reserve requirement ratio for all net transaction accounts to zero percent, and this requirement remained in place throughout 2022; therefore, all of the Bank’s net transaction accounts as of December 31, 2022 were exempt from reserve requirements.
In March 2020, in response to the COVID-19 pandemic, the Federal Reserve set the reserve requirement ratio for all net transaction accounts to zero percent, and this requirement remained in place throughout 2023; therefore, all of the Bank’s net transaction accounts as of December 31, 2023 were exempt from reserve requirements.
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 79 banking center locations in 18 counties in Indiana and Michigan and Sarasota County in Florida. 1st Source Bank’s Specialty Finance Group, with 19 locations nationwide, offers specialized financing services for construction equipment, new and pre-owned private and cargo aircraft, and various vehicle types (cars, trucks, vans) for fleet purposes.
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”, the “Company”, “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 78 banking center locations in 18 counties in Indiana and Michigan and Sarasota County in Florida. 1st Source Bank’s Specialty Finance Group, with 18 locations nationwide, offers specialized financing services for construction equipment, new and pre-owned private and cargo aircraft, and various vehicle types (cars, trucks, vans) for fleet purposes.
The Bank is also subject to numerous restrictions imposed by the Federal Reserve Act on extensions of credit to insiders of 1st Source and/or the Bank – executive officers, directors, principal shareholders, or any related interest of such persons. Reserve Requirements — The Federal Reserve’s regulations require depository institutions to maintain reserves against their transaction account deposits.
The Bank is also subject to numerous restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders of the Bank or 1st Source or any related interest of such persons. Reserve Requirements — Federal Reserve regulations require depository institutions to maintain reserves against their transaction account deposits.
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.
USA Patriot Act of 2001 — Regulations 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.
The SOA generally applies to all companies, including 1st Source, that file or are required to file periodic reports with the SEC under the Exchange Act. Among other things, the SOA also addresses functions and responsibilities of audit committees of public companies.
The SOA generally applies to all companies, including 1st Source, that file or are required to file periodic reports with the SEC under the Exchange Act. SOA also addresses functions and responsibilities of audit committees of public companies.
Such non-bank competitors may, as a result, have certain advantages over us in providing some services. 4 Table of Contents 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.
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.
The provision of the statute imposing these restrictions is commonly called the “Volcker Rule.” The regulations implementing the Volcker Rule 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.
This provision is commonly called the “Volcker Rule.” The regulations implementing the Volcker Rule 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.
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. As of December 31, 2022, we were in compliance with all applicable regulatory capital requirements and guidelines.
Regulatory capital requirements to which we are subject are disclosed in Part II, Item 8, Financial Statements and Supplementary Data — Note 20 of the Notes to Consolidated Financial Statements. As of December 31, 2023, we were in compliance with all applicable regulatory capital requirements and guidelines.
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.
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.
The auto and light truck finance receivables generally range from $50,000 to $38 million with fixed or variable interest rates and terms of one to eight years. The medium and heavy duty truck division provides fleet financing for highway tractors, medium duty trucks and trailers to the commercial trucking industry.
The auto and light truck finance receivables generally range from $100,000 to $45 million with fixed or variable interest rates and terms of one to eight years. The medium and heavy duty truck division provides new and pre-owned fleet financing for highway tractors, medium duty trucks and trailers to the trucking industry.
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.
Rules under GLBA limit the ability of banks 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.
OUR PEOPLE At December 31, 2022, we had approximately 1,150 colleagues on a full-time equivalent basis. As a service-driven business, our long-term success depends on our people. And as the Company grows, the importance of our talent strategy has only intensified. For these reasons, we are committed to taking a multi-dimensional approach to talent and culture.
OUR PEOPLE At December 31, 2023, we had approximately 1,170 colleagues on a full-time equivalent basis. As a service-driven business, our long-term success depends on our people. And as we have grown, the importance of our talent strategy has intensified. We are committed to a multi-dimensional approach to talent and culture.
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 a registered bank holding company under the Bank Holding Company Act of 1956, as amended (BHCA), 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 provide additional information as required.
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, 2022, we had consolidated total assets of $8.34 billion, total loans and leases of $6.01 billion, total deposits of $6.93 billion, and total shareholders’ equity of $864.07 million.
While our Specialty Finance 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, 2023, we had consolidated total assets of $8.73 billion, total loans and leases of $6.52 billion, total deposits of $7.04 billion, and total shareholders’ equity of $989.57 million.
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 have other subsidiaries that are not significant to the consolidated entity. 1ST SOURCE MASTER TRUST 1st Source Master Trust is an unconsolidated subsidiary created to issue $57.00 million of trust preferred securities and lending the proceeds to 1st Source.
At December 31, 2022, 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.
At December 31, 2023, 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. 1st Source and the Bank have elected not to utilize the community bank leverage ratio framework adopted by the Federal Reserve and the other federal banking agencies in 2020.
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).
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).
Our culture is what unifies our colleagues across our diverse business model, ensures we are best positioned to serve our diverse clients and propels our continuous evolution. • Since 2021, all employees have completed a series of facilitated training sessions on unconscious bias within six months of hire. • Diversity in leadership starts with our Board of Directors and we are proud to report that five of our twelve Board Members (42%) are women or minority. • For the sixth consecutive year, more than 21% of our new hires were diverse colleagues. • In 2022, Forbes Magazine recognized the Company again as one of America’s best employers for diversity and in 2021 as one of America’s best employers for veterans.
Our culture is what unifies our colleagues across our diverse business model, ensures we are best positioned to serve our diverse clients and propels our continuous evolution. • For the second consecutive year, all new employees completed a series of facilitated training sessions on unconscious bias within six months of hire. • Diversity in leadership starts with our Board of Directors and we are proud to report that five of our twelve Board Members (42%) are women or minority. 4 Table of Contents • For the seventh consecutive year, more than 21% of our new hires were diverse colleagues. • In 2023, the Company was recognized by Newsweek as a Greatest Workplace for Parents and Families and by Forbes as a Best Midsize Employer and Best-In-State 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.
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. 5 Table of Contents Capital Standards — The federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks.
Among other things, these provisions relax 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.
Dodd-Frank Wall Street Reform and Consumer Protection Act — The Dodd-Frank Act includes provisions that, among other things, relax rules on interstate branching, allow financial institutions to pay interest on business checking accounts, and impose heightened capital requirements on bank holding companies.
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. 6 Table of Contents Gramm-Leach-Bliley Act of 1999 — The GLBA 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.
Gramm-Leach-Bliley Act of 1999 (GLBA) — The GLBA provides for financial activities that 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 defined activities that are “financial in nature.” These activities include securities and insurance brokerage, securities underwriting, insurance underwriting, and merchant banking.
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.
Community Reinvestment Act of 1977 (CRA) — The CRA requires federal banking regulators to evaluate the record of the financial institutions they examined in meeting the credit needs of their local communities, including low and moderate income neighborhoods.
Diversity, Equity, and Inclusion — At 1st Source, we cultivate and advance diversity in all forms as part of building a strong culture, a culture in which inclusion and belonging are paramount, and where all of our colleagues strive to be open and inclusive leaders and teammates.
Diversity, Equity, and Inclusion — We cultivate diversity in all forms as part of building a strong culture in which inclusion and belonging are paramount.
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.
The Bank also competes with other financial service companies, such as credit unions. securities firms, insurance companies, finance or mortgage companies, real estate investment trusts, and some governmental agencies.
Management reviewed the CBLR framework and has determined that 1st Source and the Bank will not elect to use the CBLR framework. Securities and Exchange Commission (SEC) and The NASDAQ Stock Market (NASDAQ) — We are also subject to regulations promulgated by the SEC and certain state securities commissions for matters relating to the offering and sale of our securities.
Securities and Exchange Commission (SEC) and The NASDAQ Stock Market (NASDAQ) — We are subject to regulations promulgated by the SEC and certain states for matters relating to the offering and sale of our securities.
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.
The Dodd-Frank Act also established the CFPB as an independent entity within the Federal Reserve, and transferred to the CFPB primary responsibility for administering substantially all federal consumer compliance protection laws. The Dodd-Frank Act also authorizes the CFPB to promulgate consumer protection regulations that apply to all entities, including banks, that offer consumer financial services or products.
While we appreciate such recognition, our work here is never done and we are committed to continuous improvement in this area. Training and Talent Development — We believe a critical driver of our future growth is the ability to grow leaders.
Training and Talent Development — We believe a critical driver of our future growth is the ability to grow leaders.
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.
We also offer a variety of financial planning (through our network of financial advisors), financial literacy, and other consultative services. Trust and Wealth Advisory Services — 1st Source Bank provides a wide range of trust, investment, agency, and custodial services for individual, estate and trust, corporate, and not-for-profit clients, as well as employee benefit plans and charitable foundations.
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 subject to prudential supervision by the Indiana Department of Financial Institutions (DFI) and the Federal Reserve Bank of Chicago (FRB Chicago).
The Bank, as an Indiana state bank and member of the Federal Reserve System, is subject to prudential supervision by the Indiana Department of Financial Institutions (DFI) and the Federal Reserve Bank of Chicago (FRB Chicago). 1st Source Bank is regularly examined by and subject to regulations promulgated by the DFI and the Federal Reserve.
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 guarantee, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities. COMPETITION We compete with other banks, some of which are affiliated with large bank holding companies headquartered outside of our principal market.
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, credit cards, real estate mortgage loans and home equity lines of credit in any of our banking centers or on-line.
Consumers also have the ability to obtain consumer loans, credit cards, real estate mortgage loans and home equity lines of credit in any of our banking centers or on-line. 1st Source also offers insurance products through 1st Source Insurance offices or in our banking centers.
These educational experiences and resources include topics such as client relationships, technology, investments, compliance, leadership and management, and professional development. • In 2022, 1st Source colleagues completed over 38,000 training modules consisting of over 1,180 different courses covering topics such as regulations, leadership development, relationship building, cybersecurity, soft skills, and unconscious bias. • The 1st Source L.E.A.D. program is a set of immersive experiences and collaborative interactions, developing leadership capability over a fourteen-month period.
We provide developmental opportunities for our colleagues at all levels through a robust set of formal and informal programs. • 1st Source University enables colleagues to build skills and knowledge in multiple facets of our business. • In 2023, 1st Source colleagues completed over 40,000 training modules consisting of over 1,310 different courses covering topics such as regulations, leadership development, relationship building, cybersecurity, communication, and unconscious bias. • The 1st Source L.E.A.D. program is a set of immersive experiences and collaborative interactions, developing leadership capability over a twelve-month period.
The program is built around a series of best-in-class leadership principles and their application by participants as they lead their current teams. • The Commercial Banker Development Program is a rotational program for recent college graduates designed to expose participants to fundamentals of commercial banking, including the funding and pricing of commercial loans, credit analysis and relationship sales. • The Tuition Reimbursement Program reflects our philosophy of continuous learning and provides for reimbursement of tuition related expenses incurred through approved and accredited public and private not-for-profit institutions of higher education.
The program is built around a series of best-in-class leadership principles. • The Commercial Banker Development Program is a rotational program for recent college graduates designed to expose participants to fundamentals of commercial banking. • The Tuition Reimbursement Program reflects our culture of continuous learning.
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 subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. 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.
Laws and 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, and on investments in our securities and the use of our securities as collateral for loans to any borrowers.
The changes are designed to encourage banks to expand access to credit, investment and banking services in low- and moderate-income communities, adapt to industry changes including mobile and internet banking, provide greater clarity and consistency in the application of CRA regulations and tailor CRA evaluations and data collection to bank size and type. 6 Table of Contents Laws and Regulations Governing Extensions of Credit — The Bank is subject to restrictions imposed by the Federal Reserve Act on extensions of credit to 1st Source or our subsidiaries, and on investments in our securities and the use of our securities as collateral for loans to any borrowers.
The Volcker Rule — The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and from investing in and sponsoring hedge funds and private equity funds.
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 Volcker Rule — The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and from investing in and sponsoring hedge funds and private equity funds.
The amount of dividends the Bank may pay may also be limited by certain covenant agreements and by the principles of prudent bank management.
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.
Project sizes generally range from five megawatts to 20 megawatts. Consumer Services — 1st Source Bank provides a full range of consumer banking products and services through our banking centers and at 1stsource.com.
We provide construction and permanent loans, and tax equity investments for community solar, commercial and industrial, small utility scale, university, and municipal projects. Project sizes generally range from five megawatts to 20 megawatts. Consumer Services — 1st Source Bank provides a full range of consumer banking products and services through our banking centers, client service center, and on-line.
The auto and light truck division (including specialty vehicles such as step vans, vocational work trucks, motor coaches, shuttle buses 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.
Aircraft finance receivables generally range from $500,000 to $25 million with fixed or variable interest rates and terms of one to ten years. 3 Table of Contents We offer auto and light truck fleet financing for new and pre-owned vehicles to automobile and light truck rental companies, commercial leasing companies, and single unit fleet financing for users of specialty vehicles (step vans, vocational work trucks, motor coaches, shuttle buses and funeral cars).
CONSOLIDATED VARIABLE INTEREST SUBSIDIARIES 1st Source Bank is the managing general partner in the following subsidiaries that have interests in tax-advantaged investments with third parties: 1st Source Solar 2, LLC, 1st Source Solar 3, LLC, 1st Source Solar 4, LLC, 1st Source Solar 5, LLC, 1st Source Solar 6, LLC, 1st Source Solar 7, LLC and 1st Source Solar 8, LLC.
OTHER CONSOLIDATED SUBSIDIARIES 1st Portfolio Management, Inc. owns and manages certain available-for-sale investment securities. 1st Source Bank is the managing general partner in nine subsidiaries that have interests in tax-advantaged investments with third parties.
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 requires that audit committees be empowered to engage independent counsel and other advisors, and requires a public company to provide funding to pay the company’s auditors and any advisors the audit committee retains. 7 Table of Contents Consumer Financial Protection Laws — The Bank is subject to numerous federal and state consumer financial protection laws and regulations that extensively govern its transactions with consumers.
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 $25 million with fixed or variable interest rates and terms of one to ten years.
Construction equipment finance receivables generally range from $100,000 to $33 million with fixed or variable interest rates and terms of one to ten years.
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: construction equipment; new and pre-owned aircraft; auto and light trucks; and medium and heavy duty trucks.
Specialty Finance Group Services — Our Specialty Finance Group provides comprehensive commercial equipment loan and lease products in four areas: construction equipment; new and pre-owned aircraft; auto and light trucks; and medium and heavy duty trucks. Construction equipment financing includes financing of new and pre-owned equipment (i.e., bulldozers, excavators, cranes, loaders, and asphalt and concrete plants etc.).
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.
Federal banking regulators will consider our performance in these areas as they review any applications we may file to engage in mergers or acquisitions or to open a branch or facility. On October 24, 2023, federal banking agencies issued a final rule designed to strengthen and modernize the regulations implementing the CRA.
Our colleagues give their time, talent, and treasure to a wide variety of organizations in their local communities. 1st Source and our colleagues are proud to support our local schools, nonprofits, and faith groups while continuing to promote increased financial literacy through our straight talk and sound advice. • In 2022, our colleagues donated approximately 13,000 hours to a total of 900 different organizations. • In 2022, our colleagues contributed over $189,000 to local United Way organizations. 5 Table of Contents • In 2022, 1st Source contributed over $745,000 to over 450 deserving and successful community service organizations.
Community Engagement — Our organization is only as strong as the communities we serve. 1st Source and our colleagues are proud to support our local schools, nonprofits, and faith groups. • In 2023, our colleagues donated approximately 14,300 hours to a total of 600 different organizations. • In 2023, our colleagues contributed over $186,000 to local United Way organizations. • In 2023, 1st Source contributed over $700,000 to over 470 deserving and successful community service organizations.
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.
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 Business Services — 1st Source Bank provides commercial, small business, agricultural, and real estate loans primarily to privately owned businesses to finance industrial and commercial properties, equipment, inventories and accounts receivable, acquisitions and for general corporate purposes.
Construction equipment finance receivables generally range from $50,000 to $25 million with fixed or variable interest rates and terms of one to ten years. 3 Table of Contents Aircraft financing consists of financings for new and pre-owned 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.
Aircraft financing consists of financings for new and pre-owned general aviation aircraft (including helicopters) for private and corporate users, aircraft distributors and dealers, charter operators, cargo carriers, and other aircraft operators. 1st Source Bank provides selective international aircraft financing, primarily in Mexico and Brazil.
Renewable Energy Financing — 1st Source Bank provides financing for commercial solar projects across the contiguous United States, with a focus in the Northeast and Midwest states. 1st Source Bank’s approach provides solar developers with one-stop shop financing including construction loans, permanent loans, and tax equity investments for community solar, commercial and industrial, small utility scale, university, and municipal projects.
Other business services include commercial leasing, treasury management services, payment services, including digital and real time/immediate payments, Fedwires, ACH and merchant services and retirement planning services. Renewable Energy Financing — 1st Source Bank provides financing for commercial solar projects across the contiguous United States, with a focus in the Northeast and Midwest.
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 on-line and mobile account opening, person-to-person payments, mobile deposit, outside account aggregation, money management budgeting solution and bill payment.
Traditional banking services include checking and savings accounts, certificates of deposits, Health Savings Accounts and Individual Retirement Accounts as well as loans, credit cards, mortgages and home equity lines of credit. 1st Source also offers a full line of on-line and mobile banking products. Our Automated Teller Machine network supports our debit and credit card program.
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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, and acquisition financing.
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In 2023, we reimbursed over $163,000 to colleagues for tuition at 16 different Colleges and Universities with an average of approximately $3,600 per colleague who used the benefit. • To encourage our colleagues to build careers delivering the highest levels of outstanding client service at 1st Source Bank, we developed mastery career paths for critical roles including personal and commercial banking, management and pre-management, and customer service.
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Other services include commercial leasing, treasury management services and retirement planning services.
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In 2023, 56 career paths were tracked in our new Learning Management System. 897 career paths were accessed by our colleagues, 411 were completed, and more than 6,700 skills were developed. • The Business of Banking series, facilitated internally, helps colleagues learn more about the banking industry as well as different areas of 1st Source Bank.
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In a number of our markets, 1st Source also offers insurance products through 1st Source Insurance offices or in our banking centers. Finally, 1st Source offers a variety of financial planning, financial literacy and other consultative services to our customers.
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Monetary Policy and Economic Control — The commercial banking business also is affected by the monetary policies of the Federal Reserve.
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Construction equipment financing includes financing of equipment (i.e., asphalt and concrete plants, bulldozers, excavators, cranes and loaders, etc.) to the construction industry.
Added
In March 2023, the Federal Reserve created a Bank Term Funding Program (BTFP) to provide funding to eligible depository institutions in addition to the funding provided through its “discount window.” The BTFP offers loans up to one year in length that can be prepaid without penalty.
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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.
Added
The amount that can be borrowed under the BTFP is based upon the par value of the securities pledged as collateral to the Federal Reserve. Advances can be requested under the BTFP until March 11, 2024. At December 31, 2023, the Bank had $100 million of BTFP borrowings.
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We are committed to identifying and developing talent to help our colleagues accelerate their growth and achieve their career goals. We provide developmental opportunities for our colleagues at all levels through a robust set of formal and informal programs. • 1st Source University focuses on enabling colleagues to build skills and knowledge in specific facets of our business.
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In 2022, we reimbursed over $137,000 to colleagues for tuition reimbursement with an average of $3,600 per colleague who used the benefit. • The Ivy Tech Bank Cohort Education Program was developed and made available through a partnership between 1st Source and Ivy Tech Community College to provide opportunities for obtaining a college degree among colleagues in the hourly and lower-level salaried workforce.
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The program was an important investment in education which then jumpstarted colleague interest in returning to school at Ivy Tech and other universities. We have moved from a low of 16 colleagues attending eight colleges and universities in the year prior to the program creation, to now almost 50 colleagues who are attending 22 different schools.
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Many in our first cohort of students have gone on to obtain their bachelor’s degree and found success in new growth opportunities at 1st Source. Community Engagement — Our organization is only as strong as the communities we serve.
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Any change in applicable laws or regulations may have a material effect on our existing and prospective business and operations. We are unable to predict the nature or the extent of the effects on our business, operations and earnings that fiscal or monetary policies, economic controls, or new federal or state legislation or regulation may have in the future.
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We are also subject to capital requirements applied on a consolidated basis in a form substantially similar to those required of the Bank.
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Capital Standards — The federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks.
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In September 2019, the Federal Reserve and other federal banking agencies adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio (“CBLR”) for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria. The CBLR provides for a simple measure of capital adequacy for qualifying institutions.
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Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies’ capital rules and to have met the well-capitalized ratio requirements.
Removed
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.
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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. 7 Table of Contents 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.
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Consumer Financial Protection Laws — The Bank is subject to numerous federal and state consumer financial protection laws and regulations that extensively govern its transactions with consumers.
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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.
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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.
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These include provisions mandating certain disclosures regarding executive compensation and provisions addressing proxy access by shareholders. The Dodd-Frank Act also establishes the CFPB as an independent entity within the Federal Reserve, and the Act transferred to the CFPB primary responsibility for administering substantially all of the consumer compliance protection laws formerly administered by other federal agencies.
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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. 8 Table of Contents 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.
Removed
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.
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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.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThe 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.
Biggest changeThe duration and severity of the current inflationary period and the resulting impact on us cannot be predicted with precision. 10 Table of Contents Liquidity Risks We could experience an unexpected inability to obtain needed liquidity which could adversely affect our business, profitability, and viability as a going concern — 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.
If these events occur, we may experience a decrease in the value of our loan and lease portfolio and our revenue, and may incur additional operational expenses, each of which could have a material adverse effect on our financial condition and results of operations. 10 Table of Contents 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.
If these events occur, we may experience a decrease in the value of our loan and lease portfolio and our revenue, and may incur additional operational expenses, each of which could have a material adverse effect on our financial condition and results of operations. 9 Table of Contents 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.
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.
Many of these senior officers have primary contact with our clients and are important in maintaining personal 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.
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.
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 mitigate these risks through our underwriting standards.
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.
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, data security failures, compliance deficiencies, and questionable or fraudulent activities of our customers.
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.
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 Group provides financing. Our aircraft portfolio has foreign exposure, particularly in Mexico and Brazil.
We rely on security systems to provide the protection and authentication necessary to secure transmission of data against damage by theft, fire, power loss, telecommunications failure or similar catastrophic event, as well as from security breaches, ransomware, denial of service attacks, viruses, worms, and other disruptive problems caused by hackers.
We rely on security systems to provide the protection and authentication necessary to secure transmission of data against damage by theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, ransomware, denial of service attacks, viruses, worms, use of artificial intelligence and other disruptive problems caused by hackers.
We maintain a cyber insurance policy that is designed to cover a majority of loss resulting from cyber security breaches, but there is no assurance such coverage will be adequate to address all potential material adverse impacts.
We maintain a cyber insurance policy that is designed to cover a majority of loss resulting from cyber security breaches, but there is no assurance such coverage or other protective measures we employ will be adequate to address all potential material adverse impacts.
Our allowance for credit losses may prove to be insufficient to absorb losses in our loan and lease portfolio — In the financial services industry, there is always a risk that certain borrowers may not repay borrowings.
Our allowance for credit losses may prove to be insufficient to absorb losses in our loan and lease portfolio — There is always a risk that borrowers may not repay borrowings.
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.
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.
Our inability to receive dividends from our subsidiaries could have a material adverse effect on our business, financial condition and results of operations. 12 Table of Contents Operational Risks Our risk management framework could prove ineffective which 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.
Operational Risks Our risk management framework could prove ineffective which 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.
Any such losses could have a material adverse effect on our financial condition and results of operations. We may be adversely affected by climate change and related legislative and regulatory initiatives — Political and social attention to the issue of climate change has increased.
Any such losses could have a material adverse effect on our financial condition and results of operations. We may be adversely affected by climate change and related legislative and regulatory initiatives — Federal and state legislatures and regulatory agencies continue to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change.
Continued elevated levels of inflation could adversely impact our business and results of operations — The U.S. has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 7% in 2022. Continued elevated levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse.
Continued elevated levels of inflation could adversely impact our business and results of operations — The U.S. has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 7% in 2022 and increased at a more moderate rate in 2023.
The Federal Reserve has increased interest rates dramatically during 2022 in an effort to halt and reverse continued elevated inflation, which has negatively impacted the value of our available-for-sale investment securities portfolio. In addition, inflation-related increases in our interest expense is due to increased rates paid on deposits.
Continued elevated levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse. The Federal Reserve increased interest rates dramatically during 2022 and 2023 in an effort to halt and reverse continued elevated inflation, which has negatively impacted the value of our available-for-sale investment securities portfolio.
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. 13 Table of Contents 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.
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.
Elevated levels of inflation has also caused increased volatility and uncertainty in the business environment, which could adversely affect loan demand and our clients’ ability to repay indebtedness. Governmental responses to the current inflationary environment could adversely affect our business, such as severe changes to monetary and fiscal policy, or the imposition or threatened imposition of price controls.
Governmental responses to the current inflationary environment, such as severe changes to monetary and fiscal policy, or the imposition or threatened imposition of price controls, could adversely affect our business.
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.
Our future success depends, in part, upon our ability to address the needs of our clients competitively 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.
Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans.
Credit Risks We are subject to credit risks relating to our loan and lease portfolios — Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans.
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.
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.
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.
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.
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.
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.
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.
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. 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.
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.
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.
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. 9 Table of Contents 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.
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.
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.
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. 12 Table of Contents 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.
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.
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. 11 Table of Contents 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.
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. 14 Table of Contents In addition, focus among investors, customers, and regulators on environmental, social and governance (“ESG”) issues has continued to increase in recent years.
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.
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.
Competition for senior personnel is intense, and we may not be successful in attracting and retaining such personnel.
Adverse publicity regarding such assessments of our ESG performance could damage our reputation or prospects. Item 1B. Unresolved Staff Comments. None
Such persons may believe that our practices, including our lending practices, are not sufficiently robust from an ESG perspective and may publish their views. Adverse publicity regarding such assessments of our ESG performance could damage our reputation or prospects. Adverse market perception can adversely affect the trading price of our shares. Item 1B. Unresolved Staff Comments. None
Customers, prospective customers, investors or third parties evaluate us based on their assessment of our achievement of ESG objectives and may assign their ESG ratings to us. Such persons may believe that our practices, including our lending practices, are not sufficiently robust from an ESG perspective and may publish their views.
In addition, focus among investors, customers, and regulators on environmental, social and governance (“ESG”) issues has continued to increase in recent years. Customers, prospective customers, investors or third parties evaluate us based on their assessment of our achievement of ESG objectives and may assign their ESG ratings to us.
Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operation.
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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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.
Added
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. 8 Table of Contents Our construction and transportation related businesses could be adversely affected by slowdowns in the economy.
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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.
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In addition, inflation-related increases in our interest expense is due to increased rates paid on deposits. Elevated levels of inflation has also caused increased volatility and uncertainty in the business environment, which could adversely affect loan demand and our clients’ ability to repay indebtedness.
Removed
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.
Added
The bank failures in the Spring of 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors.
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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.
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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.
Removed
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.
Added
Any compromise of our security could impair our reputation and deter our clients from using our banking services. Information security breaches can also disrupt the operation of information systems on which we depend, adversely affecting our business operations.
Removed
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.
Added
Such events can result in costly remediation measures and litigation or governmental investigation and responding to security breaches can place unanticipated demands on the time and attention of management.
Removed
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.
Added
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.
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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.
Added
In addition, our implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively.
Removed
Federal and state legislatures and regulatory agencies continue to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change.
Removed
We may be adversely impacted by the transition away from LIBOR as a reference interest rate — The London Interbank Offered Rate (“LIBOR”) is a short-term interest rate used as a pricing reference for loans, derivatives and other financial instruments.
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In July 2017, the United Kingdom Financial Conduct Authority, which regulates the process for establishing LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021.
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In November 2020, the Federal Reserve, FDIC and OCC issued a joint statement confirming that the lesser used one-week and two-month USD LIBOR settings would cease publication at the end of 2021, but the remaining USD LIBOR settings would continue publication until June 30, 2023 to better facilitate an orderly transition.
Removed
The agencies also stated that the act of entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks. The transition is progressing, but the exact impact it will have on financial markets and their individual participants is not currently known.
Removed
Several substitute benchmarks are developing in the marketplace, with various permutations of the Secured Overnight Financing Rate (SOFR) emerging as primary market alternatives, but at this time it is not feasible to predict exactly which benchmarks will emerge as enduring substitutes for LIBOR. We convened a transition committee in 2019 to monitor market developments and implement a transition plan.
Removed
Existing loans impacted by the transition have been actively tracked, appropriate legal fallback language has been created and incorporated into documentation where appropriate and we are an adhering party to the ISDA IBOR Fallbacks Protocol.
Removed
In 2021, we began to utilize other interest rate benchmarks and took necessary steps to comply with the regulatory prohibitions of originating LIBOR-denominated loans starting in 2022.
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We continue with our transition efforts with the expectation of completing all necessary steps prior to the June 30, 2023 deadline. 11 Table of Contents As of December 31, 2022, we have approximately $719 million of loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR that are scheduled to mature after June 30, 2023.
Removed
The impact of the transition away from LIBOR may adversely affect revenues, expenses and the value of those financial instruments. Federal legislation governing the transition was adopted in 2022, although the transition could result in litigation with counterparties impacted by the transition as well as increased regulatory scrutiny and other adverse consequences.
Removed
Any replacement benchmark ultimately adopted as a substitute for LIBOR may behave differently than LIBOR in a manner detrimental to our financial performance.
Removed
The duration and severity of the current inflationary period and the resulting impact on us cannot be predicted with precision. 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.
Removed
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.
Removed
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.
Removed
We have policies and procedures in place that seek to protect our reputation and promote ethical conduct.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 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 September 2019, we extended the lease on this property through September 2027. As of December 31, 2022, 1st Source leases approximately 71% of the office space in this complex.
Biggest changeItem 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. Our lease on this property runs through September 2027. As of December 31, 2023, 1st Source leases approximately 71% of the office space in this complex.
At December 31, 2022, we owned or leased property and/or buildings where 1st Source Bank’s 79 banking centers were located. Our facilities are located in Allen, DeKalb, Elkhart, Fulton, Huntington, Kosciusko, LaPorte, Marshall, Porter, Pulaski, St.
At December 31, 2023, we owned or leased properties where our 78 banking centers were located. Our facilities are located in Allen, DeKalb, Elkhart, Fulton, Huntington, Kosciusko, LaPorte, Marshall, Porter, Pulaski, St.
The Bank leases additional property and/or buildings to and from third parties under lease agreements negotiated at arms-length.
The Bank leases additional properties to and from third parties under arms-length agreements.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeFederal 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.
Biggest changeFor 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. [Reserved] 15 Table of Contents
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, 2017, 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.
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, 2018, 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.
The following table shows our share repurchase activity during the three months ended December 31, 2022.
The following table shows our share repurchase activity during the three months ended December 31, 2023.
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 10, 2023, there were 1,647 holders of record of 1st Source common stock.
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 16, 2024, there were 1,593 holders of record of 1st Source common stock.
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, 2022 — $ — — 1,576,265 November 01 - 30, 2022 — — — 1,576,265 December 01 - 31, 2022 — — — 1,576,265 *1st Source maintains a stock repurchase plan that was authorized by the Board of Directors on July 22, 2021.
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, 2023 — $ — — 1,000,000 November 01 - 30, 2023 — — — 1,000,000 December 01 - 31, 2023 — — — 1,000,000 *1st Source maintains a stock repurchase plan that was authorized by the Board of Directors on October 19, 2023.
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 423,735 shares.
Under the terms of the plan, 1st Source may repurchase up to 1,000,000 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. 1st Source has not yet repurchased any shares under this Plan.
Added
Payment of dividends by 1st Source is discussed under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Earnings Summary. Federal laws and regulations contain restrictions on the ability of 1st Source and the Bank to pay dividends.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeFinancial Statements and Supplementary Data 40 Reports of Independent Registered Public Accounting Firm 41 Consolidated Statements of Financial Condition 44 Consolidated Statements of Income 45 Consolidated Statements of Comprehensive Income 46 Consolidated Statements of Shareholders’ Equity 46 Consolidated Statements of Cash Flow s 47 Notes to Consolidated Financial Statements 48
Biggest changeFinancial Statements and Supplementary Data 38 Reports of Independent Registered Public Accounting Firm 39 Consolidated Statements of Financial Condition 42 Consolidated Statements of Income 43 Consolidated Statements of Comprehensive Income 44 Consolidated Statements of Shareholders’ Equity 44 Consolidated Statements of Cash Flow s 45 Notes to Consolidated Financial Statements 46
Item 6. [Reserved] 16 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 39 Item 8.
Item 6. [Reserved] 15 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38 Item 8.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

136 edited+42 added−57 removed57 unchanged
Biggest changeNonaccrual loans and leases are included in the average loan and lease balance outstanding. 2022 2021 2020 (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 $ 1,805,041 $ 26,294 1.46 % $ 1,410,797 $ 17,767 1.26 % $ 1,009,794 $ 18,080 1.79 % Tax-exempt (1) 40,310 1,311 3.25 % 32,583 741 2.27 % 48,266 1,105 2.29 % Mortgages held for sale 5,178 217 4.19 % 17,026 448 2.63 % 20,628 600 2.91 % Loans and leases, net of unearned discount (1) 5,566,701 264,043 4.74 % 5,437,817 234,902 4.32 % 5,463,436 242,505 4.44 % Other investments 243,938 2,579 1.06 % 440,416 1,373 0.31 % 142,122 1,284 0.90 % Total earning assets (1) 7,661,168 294,444 3.84 % 7,338,639 255,231 3.48 % 6,684,246 263,574 3.94 % Cash and due from banks 75,836 77,275 71,626 Allowance for loan and lease losses (133,028) (139,141) (130,776) Other assets 469,135 454,374 494,913 Total assets $ 8,073,111 $ 7,731,147 $ 7,120,009 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing deposits $ 4,673,494 $ 25,231 0.54 % $ 4,460,359 $ 12,276 0.28 % $ 4,205,904 $ 30,459 0.72 % Short-term borrowings: Securities sold under agreements to repurchase 166,254 85 0.05 % 180,610 112 0.06 % 173,398 317 0.18 % Other short-term borrowings 48,716 1,412 2.90 % 6,119 3 0.05 % 27,767 200 0.72 % Subordinated notes 58,764 3,550 6.04 % 58,764 3,267 5.56 % 58,764 3,367 5.73 % Long-term debt and mandatorily redeemable securities 54,940 69 0.13 % 78,845 2,476 3.14 % 80,715 2,868 3.55 % Total interest-bearing liabilities 5,002,168 30,347 0.61 % 4,784,697 18,134 0.38 % 4,546,548 37,211 0.82 % Noninterest-bearing deposits 2,037,882 1,882,168 1,530,698 Other liabilities 103,740 112,291 145,807 Shareholders’ equity 872,721 906,951 865,278 Noncontrolling interests 56,600 45,040 31,678 Total liabilities and equity $ 8,073,111 $ 7,731,147 $ 7,120,009 Less: Fully tax-equivalent adjustments (628) (459) (543) Net interest income/margin (GAAP-derived) (1) $ 263,469 3.44 % $ 236,638 3.22 % $ 225,820 3.38 % Fully tax-equivalent adjustments 628 459 543 Net interest income/margin - FTE (1) $ 264,097 3.45 % $ 237,097 3.23 % $ 226,363 3.39 % (1) See “Reconciliation of Non-GAAP Financial Measures” for more information on this performance measure/ratio. 21 Table of Contents 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.
Biggest changeNonaccrual loans and leases are included in the average loan and lease balance outstanding. 2023 2022 2021 (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 $ 1,632,567 $ 24,501 1.50 % $ 1,805,041 $ 26,294 1.46 % $ 1,410,797 $ 17,767 1.26 % Tax-exempt (1) 44,083 1,805 4.09 % 40,310 1,311 3.25 % 32,583 741 2.27 % Mortgages held for sale 2,368 155 6.55 % 5,178 217 4.19 % 17,026 448 2.63 % Loans and leases, net of unearned discount (1) 6,203,857 387,524 6.25 % 5,566,701 264,043 4.74 % 5,437,817 234,902 4.32 % Other investments 73,729 3,663 4.97 % 243,938 2,579 1.06 % 440,416 1,373 0.31 % Total earning assets (1) 7,956,604 417,648 5.25 % 7,661,168 294,444 3.84 % 7,338,639 255,231 3.48 % Cash and due from banks 70,304 75,836 77,275 Allowance for loan and lease losses (144,183) (133,028) (139,141) Other assets 532,072 469,135 454,374 Total assets $ 8,414,797 $ 8,073,111 $ 7,731,147 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing deposits $ 5,204,095 $ 123,162 2.37 % $ 4,673,494 $ 25,231 0.54 % $ 4,460,359 $ 12,276 0.28 % Short-term borrowings: Securities sold under agreements to repurchase 78,928 136 0.17 % 166,254 85 0.05 % 180,610 112 0.06 % Other short-term borrowings 134,683 6,896 5.12 % 48,716 1,412 2.90 % 6,119 3 0.05 % Subordinated notes 58,764 4,174 7.10 % 58,764 3,550 6.04 % 58,764 3,267 5.56 % Long-term debt and mandatorily redeemable securities 46,323 3,892 8.40 % 54,940 69 0.13 % 78,845 2,476 3.14 % Total interest-bearing liabilities 5,522,793 138,260 2.50 % 5,002,168 30,347 0.61 % 4,784,697 18,134 0.38 % Noninterest-bearing deposits 1,753,149 2,037,882 1,882,168 Other liabilities 151,659 103,740 112,291 Shareholders’ equity 926,935 872,721 906,951 Noncontrolling interests 60,261 56,600 45,040 Total liabilities and equity $ 8,414,797 $ 8,073,111 $ 7,731,147 Less: Fully tax-equivalent adjustments (741) (628) (459) Net interest income/margin (GAAP-derived) (1) $ 278,647 3.50 % $ 263,469 3.44 % $ 236,638 3.22 % Fully tax-equivalent adjustments 741 628 459 Net interest income/margin - FTE (1) $ 279,388 3.51 % $ 264,097 3.45 % $ 237,097 3.23 % (1) See “Reconciliation of Non-GAAP Financial Measures” for more information on this performance measure/ratio. 20 Table of Contents 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.
Our management evaluates the allowance quarterly, reviewing all loans and leases over a fixed-dollar amount ($250,000) 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.
Our management evaluates the allowance quarterly, reviewing all loans and leases over a fixed-dollar amount ($250,000) where the internal credit quality grade is at or below a predetermined classification, considering actual and anticipated loss experience, current economic events in specific industries, and other pertinent factors including general economic conditions.
Net income in 2022, as compared to 2021, was positively impacted by a $26.83 million or 11.34% increase in net interest income and a $1.45 million or 0.78% decrease in noninterest expense which was offset by a $17.55 million or 407.81% increase in the provision for credit losses and a $8.83 million or 8.82% decrease in noninterest income.
Net income in 2022, as compared to 2021, was positively impacted by a $26.83 million or 11.34% increase in net interest income and a $1.45 million or 0.78% decrease in noninterest expense which was offset by a $17.55 million or 407.81% increase in the provision for credit losses and an $8.83 million or 8.82% decrease in noninterest income.
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, 2022, we were in compliance with the foregoing internal policies and regulatory guidelines.
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, 2023, we were in compliance with the foregoing internal policies and regulatory guidelines.
Mandatorily redeemable shares are issued under the terms of one of our executive incentive compensation plans and are settled based on book value per share with changes from the previous reporting date recorded as interest expense. 20 Table of Contents 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.
Mandatorily redeemable shares are issued under the terms of one of our executive incentive compensation plans and are settled based on book value per share with changes from the previous reporting date recorded as interest expense. 19 Table of Contents 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.
At December 31, 2022 and 2021, 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.
At December 31, 2023 and 2022, 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.
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. • 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. • The spread of infectious diseases or pandemics. • 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. • The impact of climate change. • 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, insurance, and climate change) with which we and our subsidiaries must comply. • The effect of changes in accounting policies and practices and auditing requirements, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters. 17 Table of Contents • 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.
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. • 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, including substantial changes in the cost of fuel. • Political instability, acts of war or terrorism, or cybersecurity threats. • The spread of infectious diseases or pandemics. • 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. • The impact of climate change. • 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. • The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, insurance, and climate change) with which we and our subsidiaries must comply. • The effect of changes in accounting policies and practices and auditing requirements, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters. • 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. 16 Table of Contents • 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.
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 $1.15 billion. 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.
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 $1.23 billion. 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.
We perform a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency in order to review portfolio trends, including specific industry risks and economic conditions, which may have an impact on the allowance and allowance ratios applied to various portfolios.
We perform a thorough analysis of charge-offs, non-performing asset levels, special attention outstandings and delinquency to review portfolio trends, including specific industry risks and economic conditions, which may have an impact on the allowance and allowance ratios applied to various portfolios.
During 2022, 2021 and 2020, we determined that no permanent write-down was necessary for previously recorded impairment on MSRs. During 2022, mortgage banking income decreased primarily due to reduced mortgage origination volumes resulting in lower income on loans sold in the secondary market.
During 2023, 2022 and 2021, we determined that no permanent write-down was necessary for previously recorded impairment on MSRs. During 2023 and 2022, mortgage banking income decreased primarily due to reduced mortgage origination volumes resulting in lower income on loans sold in the secondary market.
Further discussion of commitments and contractual obligations is included in Part II, Item 8, Financial Statements and Supplementary Data — Notes 10, 11, 12 and 18 of the Notes to Consolidated Financial Statements. 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.
Further discussion of commitments and contractual obligations is included in Part II, Item 8, Financial Statements and Supplementary Data — Notes 10, 11, 12 and 18 of the Notes to Consolidated Financial Statements. 37 Table of Contents 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.
The following table shows the maturities of securities available-for-sale at December 31, 2022, at the amortized costs and weighted average yields of such securities. (Dollars in thousands) Amount Yield U.S.
The following table shows the maturities of securities available-for-sale at December 31, 2023, at the amortized costs and weighted average yields of such securities. (Dollars in thousands) Amount Yield U.S.
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 3.45% in 2022, compared to 3.23% in 2021 and 3.39% in 2020.
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 3.51% in 2023, compared to 3.45% in 2022 and 3.23% in 2021.
Our (recovery) expense for repurchase losses, included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $(0.05) million in 2022 compared to $(0.09) million in 2021 and $0.03 million in 2020. The mortgage repurchase liability represents our best estimate of the loss that we may incur.
Our recovery for repurchase losses, included in Loan and Lease Collection and Repossession expense on the Statements of Income, was $0.07 million in 2023 compared to $0.05 million in 2022 and $0.09 million in 2021. The mortgage repurchase liability represents our best estimate of the loss that we may incur.
Determination of the allowance is inherently subjective as it requires significant estimates and adjustments to historical loss rates to capture differences that may exist between the current and historical conditions, including consideration of environmental factors, principally economic risk which is generally reflected in forecast adjustments, specific industry risk and concentration risk, all of which may be susceptible to significant and unforeseen changes.
Determination of the allowance is inherently subjective as it requires significant estimates and adjustments to historical loss rates to capture differences that may exist between current and historical conditions, including consideration of economic risk which is generally reflected in a forecast adjustment, specific industry risk and concentration risk, all of which may be susceptible to significant and unforeseen changes.
Mortgage loans held for sale were $3.91 million at December 31, 2022 and were $13.28 million at December 31, 2021. 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.
Mortgage loans held for sale were $1.44 million at December 31, 2023 and were $3.91 million at December 31, 2022. 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.
Our accounting policies related to the allowance for credit losses is disclosed in Note 1 under the heading “Allowance for Credit Losses.” Fair Value Measurements — We use fair value measurements to record certain financial instruments and to determine fair value disclosures.
Our accounting policies related to the allowance for credit losses is disclosed in Note 1 under the heading “Allowance for Credit Losses.” 17 Table of Contents Fair Value Measurements — We use fair value measurements to record certain financial instruments and to determine fair value disclosures.
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, 2022 and 2021 was $4.84 billion and $5.33 billion, respectively.
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, 2023 and 2022 was $5.46 billion and $4.84 billion, respectively.
We believe the loans we have underwritten and sold to these entities have met or exceeded applicable transaction parameters. 28 Table of Contents Our liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was $0.17 million and $0.22 million as of December 31, 2022 and 2021, respectively.
We believe the loans we have underwritten and sold to these entities have met or exceeded applicable transaction parameters. 27 Table of Contents Our liability for repurchases, included in Accrued Expenses and Other Liabilities on the Statements of Financial Condition, was $0.15 million and $0.17 million as of December 31, 2023 and 2022, respectively.
Management monitors these loans closely and reviews their performance on a regular basis. As of December 31, 2022 and 2021, we had $7.83 million and $1.23 million, respectively, in loans of this type which are not included in either of the non-accrual or 90 days past due loan categories.
Management monitors these loans closely and reviews their performance on a regular basis. As of December 31, 2023 and 2022, we had $34.04 million and $7.83 million, respectively, in loans of this type which are not included in either of the non-accrual or 90 days past due loan categories.
It is our opinion that the allowance for loan and lease losses was appropriate to absorb current expected credit losses inherent in the loan and lease portfolio as of December 31, 2022. Charge-offs for loan and lease losses were $3.41 million for 2022, compared to $12.52 million for 2021 and $13.97 million for 2020.
It is our opinion that the allowance for loan and lease losses was appropriate to absorb current expected credit losses inherent in the loan and lease portfolio as of December 31, 2023. Charge-offs for loan and lease losses were $6.65 million for 2023, compared to $3.41 million for 2022 and $12.52 million for 2021.
The unrealized losses on available-for-sale securities, net of income taxes, were $147.69 million and $9.86 million at December 31, 2022 and 2021, respectively. The unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase.
The unrealized losses on available-for-sale securities, net of income taxes, were $106.32 million and $147.69 million at December 31, 2023 and 2022, respectively. The unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase.
Fair value is discussed further in Note 1 under the heading “Fair Value Measurements” and in Note 21, “Fair Value Measurements.” EARNINGS SUMMARY Net income available to common shareholders in 2022 was $120.51 million, up from $118.53 million in 2021 and up from $81.44 million in 2020.
Fair value is discussed further in Note 1 under the heading “Fair Value Measurements” and in Note 21, “Fair Value Measurements.” EARNINGS SUMMARY Net income available to common shareholders in 2023 was $124.93 million, up from $120.51 million in 2022 and up from $118.53 million in 2021.
The portfolio has been a relatively stable performer of late, but was among the sectors affected most by the sluggish economy following the Great Recession. Our portfolio loss history has been volatile, characterized by lengthy periods of minimal losses or modest recoveries followed by short intervals of higher losses.
The portfolio has been relatively stable lately, but was among the sectors affected most by the sluggish economy following the Great Recession. Our portfolio loss history has been volatile, characterized by lengthy periods of minimal losses or modest recoveries followed by short intervals of high losses.
The average equipment rental portfolio decreased 21.27% in 2022 over 2021 and decreased 29.16% in 2021 over 2020 as a result of reduced leasing volume primarily in the construction equipment and the auto and light truck portfolios due to changing customer preferences and competitive pricing pressures for new business.
The average equipment rental portfolio decreased 29.45% in 2023 over 2022 and decreased 21.27% in 2022 over 2021 as a result of reduced leasing volume primarily in the medium and heavy duty truck, construction equipment and the auto and light truck portfolios due to changing customer preferences and competitive pricing pressures for new business.
Nonperforming assets amounted to $26.93 million at December 31, 2022, compared to $41.33 million at December 31, 2021, and $64.53 million at December 31, 2020. During 2022, interest income on nonaccrual loans and leases would have increased by approximately $2.68 million compared to $2.62 million in 2021 if these loans and leases had earned interest at their full contractual rate.
Nonperforming assets amounted to $24.24 million at December 31, 2023, compared to $26.93 million at December 31, 2022, and $41.33 million at December 31, 2021. During 2023, interest income on nonaccrual loans and leases would have increased by approximately $1.47 million compared to $2.68 million in 2022 if these loans and leases had earned interest at their full contractual rate.
The following table shows noninterest income for the most recent three years ended December 31.
The following table shows the components of our noninterest income for the most recent three years ended December 31.
We use a two-year reasonable and supportable period across all loan and lease segments to forecast economic conditions. We believe the two-year time horizon aligns with available industry guidance and various forecasting sources.
We use a two-year reasonable and supportable period across all loan and lease segments to forecast economic conditions. We believe the two-year time horizon aligns with available industry guidance and various forecasting sources. Following this two-year forecasting period, we use a two-year reversion period to revert forecast rates to historical loss rates.
Dividends paid on common stock in 2022 amounted to $1.26 per share, compared to $1.21 per share in 2021, and $1.13 per share in 2020.
Dividends paid on common stock in 2023 amounted to $1.30 per share, compared to $1.26 per share in 2022, and $1.21 per share in 2021.
In 2022 and 2021, the decline in rental income was offset by a similar decline in depreciation on equipment owned under operating leases. 24 Table of Contents Losses on the sale of investment securities available-for-sale were $0.18 million and $0.68 million in 2022 and 2021, respectively.
In 2023 and 2022, the decline in rental income was offset by a similar decline in depreciation on equipment owned under operating leases. Losses on the sale of investment securities available-for-sale were $2.93 million in 2023 compared to losses of $0.18 million and $0.68 million in 2022 and 2021, respectively.
Actual losses may differ from estimated amounts due to model inefficiencies or management’s inability to adequately determine appropriate model adjustment factors. The accounting standard further requires management to use forecasts about future economic conditions to determine the expected credit losses over the remaining life of the asset.
Actual losses may differ from estimated amounts due to model inefficiencies or management’s inability to adequately determine appropriate model adjustment factors. Additionally, we are required to use forecasts about future economic conditions to determine the expected credit losses over the remaining life of the asset.
The allowance for loan and lease losses at December 31, 2022, totaled $139.27 million and was 2.32% of loans and leases, compared to $127.49 million or 2.38% of loans and leases at December 31, 2021 and $140.65 million or 2.56% of loans and leases at December 31, 2020.
The allowance for loan and lease losses at December 31, 2023, totaled $147.55 million and was 2.26% of loans and leases, compared to $139.27 million or 2.32% of loans and leases at December 31, 2022 and $127.49 million or 2.38% of loans and leases at December 31, 2021.
Percentage Change in Net Interest Income December 31, 2022 December 31, 2021 Basis Point Interest Rate Change 12 Months 24 Months 12 Months 24 Months Up 200 (2.32)% 2.99% 0.34% 7.00% Up 100 (1.15)% 1.52% (0.51)% 2.86% Down 100 (2.39)% (5.10)% (3.22)% (8.00)% The earnings simulation model excludes the earnings dynamics related to how fee income and noninterest expense may be affected by changes in interest rates.
Percentage Change in Net Interest Income December 31, 2023 December 31, 2022 Basis Point Interest Rate Change 12 Months 24 Months 12 Months 24 Months Up 200 (1.40)% 3.01% (2.32)% 2.99% Up 100 (0.66)% 1.52% (1.15)% 1.52% Down 100 (0.18)% (2.42)% (2.39)% (5.10)% The earnings simulation model excludes the earnings dynamics related to how fee income and noninterest expense may be affected by changes in interest rates.
At December 31, 2022, the vintage (years originated) of the underlying loans comprising our securities are: 14% in the year 2022; 45% in the year 2021; 28% in the years 2019 and 2020; 7% in the years 2017 and 2018; 2% in the years 2015 and 2016; 4% in the years 2014 prior.
At December 31, 2023, the vintage (years originated) of the underlying loans comprising our securities are: 5% in the year 2023; 12% in the year 2022; 67% in the years 2020 and 2021; 7% in the years 2018 and 2019; 5% in the years 2016 and 2017; 4% in the years 2015 prior.
Forecast adjustments are fundamentally difficult to establish and the current environment presents challenges with persistent inflation, markedly higher interest rates, and heightened geopolitical uncertainty. We endeavor to apply a forecast adjustment that is directionally consistent, reasonable, supportable, and reflective of current expectations and conditions.
Forecast adjustments are fundamentally difficult to establish and the current environment presents challenges with increasing geopolitical uncertainty, elevated inflation, high interest rates, and persistently inverted yield curve. We endeavor to apply a forecast adjustment that is directionally consistent, reasonable, supportable, and reflective of current expectations and conditions.
Diluted net income per common share was $4.84 in 2022, $4.70 in 2021, and $3.17 in 2020. Return on average total assets was 1.49% in 2022 compared to 1.53% in 2021, and 1.14% in 2020. Return on average common shareholders’ equity was 13.81% in 2022 versus 13.07% in 2021, and 9.41% in 2020.
Diluted net income per common share was $5.03 in 2023, $4.84 in 2022, and $4.70 in 2021. Return on average total assets was 1.48% in 2023 compared to 1.49% in 2022, and 1.53% in 2021. Return on average common shareholders’ equity was 13.48% in 2023 versus 13.81% in 2022, and 13.07% in 2021.
Our allowance for unfunded credit commitments is included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Position and is provided by direct charges to the provision for unfunded credit commitments located in Other Noninterest Expense on the Consolidated Statements of Income.
We utilize similar processes to estimate our liability for credit losses on unfunded loan commitments which is included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Position and is provided for by direct charges to the provision for unfunded credit commitments located in Other Noninterest Expense on the Consolidated Statements of Income.
Net interest income was $263.47 million for 2022, compared to $236.64 million for 2021 and $225.82 million for 2020. Tax-equivalent net interest income totaled $264.10 million for 2022, up $27.00 million from the $237.10 million reported in 2021.
Net interest income was $278.65 million for 2023, compared to $263.47 million for 2022 and $236.64 million for 2021. Tax-equivalent net interest income totaled $279.39 million for 2023, up $15.29 million from the $264.10 million reported in 2022. Tax-equivalent net interest income for 2022 was up $27.00 million from the $237.10 million reported for 2021.
FDIC and other insurance expense grew $0.95 million or 35.41% in 2022 from 2021 and increased $0.07 million or 2.72% in 2021 from 2020. The increase in 2022 was mainly the result of higher assessments for FDIC premiums from a larger asset base and a one-time $0.38 million recovery of an incurred but not reported insurance reserve in 2021.
The increase in 2022 was mainly the result of higher assessments for FDIC premiums from a larger asset base and a one-time $0.38 million recovery of an incurred but not reported insurance reserve in 2021.
At December 31, 2022, these trust assets were comprised of $3.21 billion of personal and agency trusts and estate administration assets, $1.03 billion of employee benefit plan assets, $0.49 million of individual retirement accounts, and $0.11 million of custody assets.
At December 31, 2023, these trust assets were comprised of $3.66 billion of personal and agency trusts and estate administration assets, $1.10 billion of employee benefit plan assets, $0.53 million of individual retirement accounts, and $0.17 million of custody assets.
(Dollars in thousands) 2022 2021 2020 Calculation of Net Interest Margin (A) Interest income (GAAP) $ 293,816 $ 254,772 $ 263,031 Fully tax-equivalent adjustments: (B) - Loans and leases 366 319 333 (C) - Tax-exempt investment securities 262 140 210 (D) Interest income - FTE (A+B+C) 294,444 255,231 263,574 (E) Interest expense (GAAP) 30,347 18,134 37,211 (F) Net interest income (GAAP) (A-E) 263,469 236,638 225,820 (G) Net interest income - FTE (D-E) 264,097 237,097 226,363 (H) Total earning assets $ 7,661,168 $ 7,338,639 $ 6,684,246 Net interest margin (GAAP-derived) (F/H) 3.44 % 3.22 % 3.38 % Net interest margin - FTE (G/H) 3.45 % 3.23 % 3.39 % 22 Table of Contents The change in interest due to both rate and volume illustrated in the following table has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
(Dollars in thousands) 2023 2022 2021 Calculation of Net Interest Margin (A) Interest income (GAAP) $ 416,907 $ 293,816 $ 254,772 Fully tax-equivalent adjustments: (B) - Loans and leases 381 366 319 (C) - Tax-exempt investment securities 360 262 140 (D) Interest income - FTE (A+B+C) 417,648 294,444 255,231 (E) Interest expense (GAAP) 138,260 30,347 18,134 (F) Net interest income (GAAP) (A-E) 278,647 263,469 236,638 (G) Net interest income - FTE (D-E) 279,388 264,097 237,097 (H) Total earning assets $ 7,956,604 $ 7,661,168 $ 7,338,639 Net interest margin (GAAP-derived) (F/H) 3.50 % 3.44 % 3.22 % Net interest margin - FTE (G/H) 3.51 % 3.45 % 3.23 % 21 Table of Contents The change in interest due to both rate and volume illustrated in the following table has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Service charges on deposit accounts increased by $1.56 million or 14.70% in 2022 from 2021 compared to an increase of $1.10 million or 11.64% in 2021 from 2020. The growth in service charges on deposit accounts in 2022 was primarily due to increased consumer and business nonsufficient fund transactions.
Service charges on deposit accounts increased by $0.60 million or 4.96% in 2023 from 2022 compared to an increase of $1.56 million or 14.70% in 2022 from 2021. The growth in service charges on deposit accounts in 2023 was primarily due to increased consumer and business overdraft transactions.
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.
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.
Furniture and equipment expense, including depreciation, declined by $0.53 million or 8.85% in 2022 from 2021 compared to a decrease of $0.56 million or 8.62% in 2021 from 2020. The lower expense in 2022 was primarily due to a reduction in equipment rental and depreciation expenses.
Furniture and equipment expense, including depreciation, increased by $0.21 million or 3.76% in 2023 from 2022 compared to a decrease of $0.53 million or 8.85% in 2022 from 2021. The higher expense in 2023 was primarily due to increased equipment replacement costs. The lower expense in 2022 was primarily due to a reduction in equipment rental and depreciation expenses.
States and political subdivisions securities 130,670 95,700 Mortgage-backed securities — Federal agencies 730,672 663,441 Corporate debt securities 16,486 22,510 Foreign government securities 600 600 Total investment securities available-for-sale $ 1,969,171 $ 1,876,031 35 Table of Contents Yields on tax-exempt obligations are calculated on a fully tax-equivalent basis assuming a 21% tax rate.
States and political subdivisions securities 97,522 130,670 Mortgage-backed securities — Federal agencies 676,257 730,672 Corporate debt securities 8,448 16,486 Foreign government securities 600 600 Total investment securities available-for-sale $ 1,762,357 $ 1,969,171 33 Table of Contents Yields on tax-exempt obligations are calculated on a fully tax-equivalent basis assuming a 21% tax rate.
During 2022, our reliance on purchased funds decreased to 6.19% of average total assets from 6.41% in 2021. 37 Table of Contents Shareholders’ Equity — Average shareholders’ equity equated to 10.81% of average total assets in 2022, compared to 11.73% in 2021. Shareholders’ equity was 10.36% of total assets at year-end 2022, compared to 11.32% at year-end 2021.
During 2023, our reliance on purchased funds increased to 11.45% of average total assets from 6.19% in 2022. 35 Table of Contents Shareholders’ Equity — Average shareholders’ equity equated to 11.02% of average total assets in 2023, compared to 10.81% in 2022. Shareholders’ equity was 11.34% of total assets at year-end 2023, compared to 10.36% at year-end 2022.
DEPOSITS The following table shows the average daily amounts of deposits and rates paid on such deposits. 2022 2021 2020 (Dollars in thousands) Amount Rate Amount Rate Amount Rate Noninterest bearing demand $ 2,037,882 — % $ 1,882,168 — % $ 1,530,698 — % Interest bearing demand 2,554,945 0.69 2,278,498 0.13 1,827,673 0.24 Savings 1,283,143 0.08 1,172,411 0.07 926,585 0.11 Time 835,406 0.79 1,009,450 0.84 1,451,646 1.73 Total deposits $ 6,711,376 $ 6,342,527 $ 5,736,602 36 Table of Contents The following table shows the estimated scheduled maturities of the portion of time deposits in U.S. offices in excess of the FDIC insurance limit and time deposits that are otherwise uninsured.
DEPOSITS The following table shows the average daily amounts of deposits and rates paid on such deposits. 2023 2022 2021 (Dollars in thousands) Amount Rate Amount Rate Amount Rate Noninterest bearing demand $ 1,753,149 — % $ 2,037,882 — % $ 1,882,168 — % Interest bearing demand 2,481,362 2.33 2,554,945 0.69 2,278,498 0.13 Savings 1,181,314 0.68 1,283,143 0.08 1,172,411 0.07 Time 1,541,419 3.73 835,406 0.79 1,009,450 0.84 Total deposits $ 6,957,244 $ 6,711,376 $ 6,342,527 34 Table of Contents The following table shows the estimated scheduled maturities of the portion of time deposits in U.S. offices in excess of the FDIC insurance limit and time deposits that are otherwise uninsured.
In 2022, average core deposits equaled 79.60% of average total assets, compared to 78.04% in 2021 and 73.64% in 2020. The effective rate of core deposits in 2022 was 0.32%, compared to 0.12% in 2021 and 0.39% in 2020. Average noninterest bearing core deposits increased 8.27% in 2022 compared to an increase of 22.96% in 2021.
In 2023, average core deposits equaled 73.77% of average total assets, compared to 79.60% in 2022 and 78.04% in 2021. The effective rate of core deposits in 2023 was 1.45%, compared to 0.32% in 2022 and 0.12% in 2021. Average noninterest bearing core deposits decreased 13.97% in 2023 compared to an increase of 8.27% in 2022.
The following table shows the amount of such components of the allowance for loan and lease losses at December 31 and the ratio of such loan and lease categories to total outstanding loan and lease balances. 2022 2021 (Dollars in thousands) Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases Commercial and agricultural $ 14,635 13.51 % $ 15,409 17.18 % Solar 7,217 6.34 6,585 6.51 Auto and light truck 18,634 13.44 19,624 11.30 Medium and heavy duty truck 7,566 5.22 6,015 4.87 Aircraft 41,093 17.93 33,628 16.80 Construction equipment 24,039 15.61 19,673 14.11 Commercial real estate 17,431 15.70 19,691 17.38 Residential real estate and home equity 6,478 9.73 5,084 9.36 Consumer 2,175 2.52 1,783 2.49 Total $ 139,268 100.00 % $ 127,492 100.00 % 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.
The following table shows the amount of such components of the allowance for loan and lease losses at December 31 and the ratio of such loan and lease categories to total outstanding loan and lease balances. 2023 2022 (Dollars in thousands) Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases Allowance Amount Percentage of Loans and Leases in Each Category to Total Loans and Leases Commercial and agricultural $ 17,385 11.76 % $ 14,635 13.51 % Renewable energy 6,610 6.13 7,217 6.34 Auto and light truck 16,858 14.83 18,634 13.44 Medium and heavy duty truck 8,965 4.79 7,566 5.22 Aircraft 37,653 16.54 41,093 17.93 Construction equipment 26,510 16.64 24,039 15.61 Commercial real estate 23,690 17.33 17,431 15.70 Residential real estate and home equity 7,698 9.79 6,478 9.73 Consumer 2,183 2.19 2,175 2.52 Total $ 147,552 100.00 % $ 139,268 100.00 % 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.
In order to accommodate net charge offs and strong loan and lease growth, we added $13.25 million to the provision for credit losses for 2022, compared to a recovery of provision of $(4.30) million for 2021 and a provision of $36.00 million for 2020. 32 Table of Contents The following table summarizes our loan and lease loss experience for each of the last three years ended December 31.
Reflective of our strong loan and lease growth, partially offset by a net recovery position, we added $5.87 million to the provision for credit losses for 2023, compared to a provision of $13.25 million for 2022 and a recovery of provision of $4.30 million for 2021. 30 Table of Contents The following table summarizes our loan and lease loss experience for each of the last three years ended December 31.
In determining an appropriate allowance, management makes numerous judgments, assumptions, and estimates which are inherently subjective, as they require material estimates that may be susceptible to significant change.
Determining the appropriateness of the allowance is complex and requires judgement by management about the effect of matters that are inherently uncertain. In determining an appropriate allowance, management makes numerous judgments, assumptions, and estimates which are inherently subjective, as they require material estimates that may be susceptible to significant change.
(Dollars in thousands) 2022 2021 2020 Noninterest income: Trust and wealth advisory $ 23,107 $ 23,782 $ 21,114 Service charges on deposit accounts 12,146 10,589 9,485 Debit card 18,052 18,125 14,983 Mortgage banking 4,122 11,822 15,674 Insurance commissions 6,703 7,247 7,025 Equipment rental 12,274 16,647 23,380 (Losses) gains on investment securities available-for-sale (184) (680) 279 Other 15,042 12,560 11,949 Total noninterest income $ 91,262 $ 100,092 $ 103,889 Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) decreased $0.68 million or 2.84% in 2022 from 2021 compared to a $2.67 million or 12.64% increase in 2021 over 2020.
(Dollars in thousands) 2023 2022 2021 Noninterest income: Trust and wealth advisory $ 23,706 $ 23,107 $ 23,782 Service charges on deposit accounts 12,749 12,146 10,589 Debit card 17,980 18,052 18,125 Mortgage banking 3,471 4,122 11,822 Insurance commissions 6,911 6,703 7,247 Equipment rental 8,837 12,274 16,647 Losses on investment securities available-for-sale (2,926) (184) (680) Other 19,895 15,042 12,560 Total noninterest income $ 90,623 $ 91,262 $ 100,092 Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased $0.60 million or 2.59% in 2023 from 2022 compared to a $0.68 million or 2.84% decrease in 2022 over 2021.
Employee salaries grew $0.62 million or 0.73% in 2022 from 2021 compared to an increase of $2.93 million or 3.54% in 2021 from 2020. The increase in 2022 was mainly a result of higher base salaries due to normal merit increases offset by a decrease in incentive compensation and commission compensation primarily in our residential mortgage area.
The increase in 2022 was mainly a result of higher base salaries due to normal merit increases offset by a decrease in incentive compensation and commission compensation primarily in our residential mortgage area. Employee benefits increased $3.33 million or 17.73% in 2023 from 2022, compared to a $1.32 million or 6.58% decrease in 2022 from 2021.
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.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This analysis is intended to assist you in understanding our results of operations for each of the past three years and financial condition for each of the past two years.
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. Our allowance for loan and lease losses is provided for by direct charges to the provision for credit losses.
We review the loan and lease portfolios to identify borrowers that might develop financial problems and to mitigate losses. Our allowance for loan and lease losses is provided for by direct charges to the provision for credit losses on the Consolidated Statements of Income.
(Dollars in thousands) 2022 2021 2020 Amounts of loans and leases outstanding at end of period $ 6,011,162 $ 5,346,214 $ 5,489,301 Average amount of net loans and leases outstanding during period $ 5,566,701 $ 5,437,817 $ 5,463,436 Balance of allowance for loan and lease losses at beginning of period $ 127,492 $ 140,654 $ 111,254 Impact from adoption of ASC 326 — — 2,584 Adjusted balance of allowance for loan and lease losses at beginning of period 127,492 140,654 113,838 Charge-offs: Commercial and agricultural 625 2,930 903 Solar — — — Auto and light truck 118 7,797 7,107 Medium and heavy duty truck — — 15 Aircraft — — 855 Construction equipment 1,114 856 4,090 Commercial real estate 538 — 37 Residential real estate and home equity 284 228 74 Consumer 730 712 893 Total charge-offs 3,409 12,523 13,974 Recoveries: Commercial and agricultural 56 812 663 Solar — — — Auto and light truck 417 1,316 499 Medium and heavy duty truck — — 18 Aircraft 785 687 1,800 Construction equipment 17 473 1,415 Commercial real estate 45 19 58 Residential real estate and home equity 160 16 33 Consumer 460 341 303 Total recoveries 1,940 3,664 4,789 Net charge-offs (recoveries) 1,469 8,859 9,185 Provision (recovery of provision) for loan and lease losses 13,245 (4,303) 36,001 Balance at end of period $ 139,268 $ 127,492 $ 140,654 Ratio of net charge-offs (recoveries) to average net loans and leases outstanding 0.03 % 0.16 % 0.17 % Ratio of allowance for loan and lease losses to net loans and leases outstanding end of period 2.32 % 2.38 % 2.56 % Coverage ratio of allowance for loan and lease losses to nonperforming loans and leases 526.06 % 327.28 % 232.47 % The following table shows net charge-offs (recoveries) as a percentage of average loans and leases by portfolio type: 2022 2021 2020 Commercial and agricultural 0.07 % 0.19 % 0.02 % Solar — — — Auto and light truck (0.04) 1.11 1.18 Medium and heavy duty truck — — — Aircraft (0.08) (0.08) (0.12) Construction equipment 0.13 0.05 0.37 Commercial real estate 0.05 — — Residential real estate and home equity 0.02 0.04 0.01 Consumer 0.19 0.28 0.43 Total net charge-offs (recoveries) to average portfolio loans and leases 0.03 % 0.16 % 0.17 % 33 Table of Contents The allowance for loan and lease losses has been allocated according to the amount deemed necessary to provide for the estimated current expected credit losses.
(Dollars in thousands) 2023 2022 2021 Amounts of loans and leases outstanding at end of period $ 6,518,505 $ 6,011,162 $ 5,346,214 Average amount of net loans and leases outstanding during period $ 6,203,857 $ 5,566,701 $ 5,437,817 Balance of allowance for loan and lease losses at beginning of period $ 139,268 $ 127,492 $ 140,654 Charge-offs: Commercial and agricultural 4,305 625 2,930 Renewable energy — — — Auto and light truck 729 118 7,797 Medium and heavy duty truck — — — Aircraft — — — Construction equipment 54 1,114 856 Commercial real estate 248 538 — Residential real estate and home equity 101 284 228 Consumer 1,211 730 712 Total charge-offs 6,648 3,409 12,523 Recoveries: Commercial and agricultural 243 56 812 Renewable energy — — — Auto and light truck 5,591 417 1,316 Medium and heavy duty truck 12 — — Aircraft 967 785 687 Construction equipment 1,656 17 473 Commercial real estate 11 45 19 Residential real estate and home equity 334 160 16 Consumer 252 460 341 Total recoveries 9,066 1,940 3,664 Net (recoveries) charge-offs (2,418) 1,469 8,859 Provision (recovery of provision) for loan and lease losses 5,866 13,245 (4,303) Balance at end of period $ 147,552 $ 139,268 $ 127,492 Ratio of net (recoveries) charge-offs to average net loans and leases outstanding (0.04) % 0.03 % 0.16 % Ratio of allowance for loan and lease losses to net loans and leases outstanding end of period 2.26 % 2.32 % 2.38 % Coverage ratio of allowance for loan and lease losses to nonperforming loans and leases 627.08 % 526.06 % 327.28 % The following table shows net (recoveries) charge-offs as a percentage of average loans and leases by portfolio type: 2023 2022 2021 Commercial and agricultural 0.52 % 0.07 % 0.19 % Renewable energy — — — Auto and light truck (0.55) (0.04) 1.11 Medium and heavy duty truck — — — Aircraft (0.09) (0.08) (0.08) Construction equipment (0.16) 0.13 0.05 Commercial real estate 0.02 0.05 — Residential real estate and home equity (0.04) 0.02 0.04 Consumer 0.66 0.19 0.28 Total net (recoveries) charge-offs to average portfolio loans and leases (0.04) % 0.03 % 0.16 % 31 Table of Contents The allowance for loan and lease losses has been allocated according to the amount deemed necessary to provide for the estimated current expected credit losses.
Loan and lease outstandings to borrowers in Brazil and Mexico were $129.98 million and $136.68 million as of December 31, 2022, respectively, compared to $65.24 million and $117.90 million as of December 31, 2021, respectively. Outstanding balances to other borrowers in other countries were insignificant. Construction equipment financing increased $184.23 million or 24.42% in 2022 compared to 2021.
Loan and lease outstandings to borrowers in Brazil and Mexico were $119.38 million and $147.61 million as of December 31, 2023, respectively, compared to $129.98 million and $136.68 million as of December 31, 2022, respectively. Outstanding balances to other borrowers in other countries were insignificant. Construction equipment financing increased $146.25 million or 15.58% in 2023 compared to 2022.
Other real estate consists of one residential real estate property. 34 Table of Contents Nonperforming assets at December 31 (Dollars in thousands) 2022 2021 Loans past due over 90 days $ 54 $ 249 Nonaccrual loans and leases: Commercial and agricultural 864 2,053 Solar — — Auto and light truck 14,153 24,170 Medium and heavy duty truck 15 273 Aircraft 571 649 Construction equipment 5,469 7,090 Commercial real estate 3,229 2,996 Residential real estate and home equity 1,785 1,225 Consumer 334 250 Total nonaccrual loans and leases 26,420 38,706 Total nonperforming loans and leases 26,474 38,955 Other real estate 104 — Repossessions: Commercial and agricultural — — Auto and light truck 311 75 Medium and heavy duty truck — — Aircraft — — Construction equipment — 757 Consumer 16 29 Total repossessions 327 861 Operating leases 22 1,518 Total nonperforming assets $ 26,927 $ 41,334 Nonperforming loans and leases to loans and leases, net of unearned discount 0.44 % 0.73 % Nonperforming assets to loans and leases and operating leases, net of unearned discount 0.45 % 0.77 % 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 borrowers’ potential operating or financial difficulties.
There were no properties held in other real estate. 32 Table of Contents Nonperforming assets at December 31 (Dollars in thousands) 2023 2022 Loans past due over 90 days $ 149 $ 54 Nonaccrual loans and leases: Commercial and agricultural 13,267 864 Renewable energy — — Auto and light truck 4,666 14,153 Medium and heavy duty truck — 15 Aircraft — 571 Construction equipment 176 5,469 Commercial real estate 2,970 3,229 Residential real estate and home equity 1,812 1,785 Consumer 490 334 Total nonaccrual loans and leases 23,381 26,420 Total nonperforming loans and leases 23,530 26,474 Other real estate — 104 Repossessions: Commercial and agricultural — — Auto and light truck 689 311 Medium and heavy duty truck — — Aircraft — — Construction equipment — — Consumer 16 16 Total repossessions 705 327 Operating leases — 22 Total nonperforming assets $ 24,235 $ 26,927 Nonperforming loans and leases to loans and leases, net of unearned discount 0.36 % 0.44 % Nonperforming assets to loans and leases and operating leases, net of unearned discount 0.37 % 0.45 % 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 potential operating or financial difficulties.
These represented 31.71% of total core deposits in 2022, compared to 31.20% in 2021, and 29.20% in 2020. 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 — 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 which includes Federal Home Loan Bank and Federal Reserve Bank borrowings.
The higher expense in 2022 was primarily the result of an increase in the provision for unfunded loan commitments, a rise in the provision for interest rate swaps with customers, and higher employee training expenses.
The higher expense in 2022 was primarily the result of an increase in the provision for unfunded loan commitments, a rise in the provision for interest rate swaps with customers, and higher employee training expenses. Income Taxes — 1st Source recognized income tax expense in 2023 of $36.75 million, compared to $36.26 million in 2022, and $36.33 million in 2021.
States and political subdivisions securities 130,670 3.07 Corporate debt securities Under 1 year 8,002 2.98 1 – 5 years 8,484 2.32 5 – 10 years — — Over 10 years — — Total Corporate debt securities 16,486 2.64 Foreign government securities Under 1 year — — 1 – 5 years 600 2.12 5 – 10 years — — Over 10 years — — Total Foreign government securities 600 2.12 Mortgage-backed securities — Federal agencies 730,672 1.85 Total investment securities available-for-sale $ 1,969,171 1.45 % At December 31, 2022, the residential mortgage-backed securities we held consisted of GNMA, FNMA and FHLMC pass-through certificates (Government Sponsored Enterprise, GSEs).
States and political subdivisions securities 97,522 2.74 Corporate debt securities Under 1 year 8,448 2.32 1 – 5 years — — 5 – 10 years — — Over 10 years — — Total Corporate debt securities 8,448 2.32 Foreign government securities Under 1 year 600 2.12 1 – 5 years — — 5 – 10 years — — Over 10 years — — Total Foreign government securities 600 2.12 Mortgage-backed securities — Federal agencies 676,257 1.97 Total investment securities available-for-sale $ 1,762,357 1.44 % At December 31, 2023, the residential mortgage-backed securities we held consisted of GNMA, FNMA and FHLMC pass-through certificates (Government Sponsored Enterprise, GSEs).
(Dollars in thousands) 2022 2021 2020 Noninterest expense: Salaries and employee benefits $ 105,110 $ 105,808 $ 101,556 Net occupancy 10,728 10,524 10,276 Furniture and equipment 5,448 5,977 6,541 Data Processing 22,375 19,877 19,147 Depreciation — leased equipment 10,023 13,694 20,203 Professional fees 7,280 8,676 6,317 FDIC and other insurance 3,625 2,677 2,606 Business development and marketing 5,823 8,013 4,157 Other 14,287 10,902 16,564 Total noninterest expense $ 184,699 $ 186,148 $ 187,367 Total salaries and employee benefits were relatively flat in 2022 from 2021, following a $4.25 million or 4.19% increase in 2021 from 2020.
(Dollars in thousands) 2023 2022 2021 Noninterest expense: Salaries and employee benefits $ 115,612 $ 105,110 $ 105,808 Net occupancy 11,090 10,728 10,524 Furniture and equipment 5,653 5,448 5,977 Data Processing 25,055 22,375 19,877 Depreciation — leased equipment 7,093 10,023 13,694 Professional fees 6,705 7,280 8,676 FDIC and other insurance 5,926 3,625 2,677 Business development and marketing 7,157 5,823 8,013 Other 17,433 14,287 10,902 Total noninterest expense $ 201,724 $ 184,699 $ 186,148 Total salaries and employee benefits increased $10.50 million or 9.99% in 2023 from 2022, following a slight decrease in 2022 from 2021.
Loans and leases, net of unearned discount, at December 31, 2022, were $6.01 billion and were 72.08% of total assets, compared to $5.35 billion and 66.03% of total assets at December 31, 2021. Average loans and leases, net of unearned discount, increased $128.88 million or 2.37% and decreased $25.62 million or 0.47% in 2022 and 2021, respectively.
Loans and leases, net of unearned discount, at December 31, 2023, were $6.52 billion and were 74.69% of total assets, compared to $6.01 billion and 72.08% of total assets at December 31, 2022. Average loans and leases, net of unearned discount, increased $637.16 million or 11.45% and increased $128.88 million or 2.37% in 2023 and 2022, respectively.
(Dollars in thousands) Under 3 Months $ 138,892 4 – 6 Months 70,383 7 – 12 Months 181,961 Over 12 Months 217,415 Total $ 608,651 See Part II, Item 8, Financial Statements and Supplementary Data — Note 10 of the Notes to Consolidated Financial Statements for additional information on deposits.
(Dollars in thousands) Under 3 Months $ 129,952 4 – 6 Months 82,534 7 – 12 Months 234,223 Over 12 Months 458,854 Total $ 905,563 See Part II, Item 8, Financial Statements and Supplementary Data — Note 10 of the Notes to Consolidated Financial Statements for additional information on deposits.
Construction equipment financing at December 31, 2022 had outstandings of $938.50 million, compared to outstandings of $754.27 million at December 31, 2021. The growth in this category was primarily due to significant new client relationships and continued growth with existing clients.
Construction equipment financing at December 31, 2023 had outstandings of $1.08 billion, compared to outstandings of $938.50 million at December 31, 2022. The growth in this category was primarily due to significant new client relationships and continued growth with existing clients. Commercial loans secured by real estate increased $186.12 million or 19.72% in 2023 over 2022.
Medium and heavy duty truck financing at December 31, 2022 and 2021 had outstandings of $313.86 million and $259.74 million, respectively. The increase at December 31, 2022 from December 31, 2021 can be mainly attributed to expanded relationships with existing clients while fleet availability continues to be constrained.
Medium and heavy duty truck financing at December 31, 2023 and 2022 had outstandings of $311.95 million and $313.86 million, respectively. The decrease at December 31, 2023 from December 31, 2022 can be mainly attributed to competitive factors and a selective credit approach to maintain yield with existing clients while fleet availability continues to improve.
Business development and marketing expenses declined $2.19 million or 27.33% in 2022 from 2021 and rose $3.86 million or 92.76% in 2021 from 2020. The decreased expense in 2022 was mainly the result of a one-time charitable contribution of $3.00 million made during 2021 offset by increased business development expense and marketing promotions.
Business development and marketing expenses increased $1.33 million or 22.91% in 2023 from 2022 following a decline of $2.19 million or 27.33% in 2022 from 2021. The increased expense in 2023 was mainly the result of a charitable contribution of $1.00 million made during 2023 and higher marketing promotions.
Nonperforming assets at December 31, 2022 decreased from December 31, 2021, mainly due to declines in nonaccrual loans and leases in the bus segment of the auto and light truck portfolio along with modestly lower nonaccrual loans in construction equipment. Repossessions consisted mainly of units in the bus and step van segments of the auto and light truck portfolio.
Nonperforming assets at December 31, 2023 decreased from December 31, 2022, mainly due to declines in nonaccrual loans and leases in the auto and light truck and construction equipment portfolios offset by an increase in the commercial and agricultural portfolio. Repossessions consisted mainly of units in the specialty finance segments of the auto and light truck portfolio.
During 2022, the tax-equivalent yield on investment securities available-for-sale increased 21 basis points to 1.50% while the average balance grew $401.97 million or 27.85% with the largest increases in U.S. treasury and federal agency securities and mortgage-backed securities. Average mortgages held for sale decreased $11.85 million or 69.59% during 2022 while the yield increased 156 basis points.
During 2023, the tax-equivalent yield on investment securities available-for-sale increased seven basis points to 1.57% while the average balance decreased $168.70 million or 9.14% with the largest decreases in U.S. treasury and federal agency securities and mortgage-backed securities. Average mortgages held for sale decreased $2.81 million or 54.27% during 2023 while the yield increased 236 basis points.
The negative performance of the stock and bond markets in 2022 resulted in a decline in the market value of trust assets under management compared to 2021.
The positive performance of the stock and bond markets primarily during the fourth quarter of 2023 resulted in an increase in the market value of trust assets under management compared to 2022.
Our foreign outstandings increased 53.88% year over year. Our foreign loan and lease outstandings, all denominated in U.S. dollars were $297.46 million and $193.31 million as of December 31, 2022 and 2021, respectively.
Our foreign outstandings, all denominated in U.S. dollars, increased 1.66% during 2023 and were $302.41 million and $297.46 million as of December 31, 2023 and 2022, respectively.
We are able to access loan data over a long-time horizon, generally back to the fourth quarter of 2007, thus capturing most of the economic business cycle which includes the Great Recession and the subsequent long slow recovery which supports full lifetime losses. The CECL methodology requires our loan portfolio to be segregated into pools based on similar risk characteristics.
To estimate expected loan and lease losses under the Current Expected Credit Losses (CECL) methodology, we use a broad range of data over a long time horizon, generally back to the fourth quarter of 2007, thus capturing most of the economic business cycle which includes the Great Recession and the subsequent long and slow recovery which supports full lifetime losses.
Commercial real estate – Similar to the commercial portfolio, our commercial real estate loans are concentrated in our local market with local customers. Approximately 57% of the Bank’s exposure in this portfolio is from owner occupied facilities where we are the primary relationship bank for our customers.
Approximately 55% of the Bank’s exposure in this portfolio is from owner occupied facilities where we are the primary relationship bank for our clients.
Increase (Decrease) due to (Dollars in thousands) Volume Rate Net 2022 compared to 2021 Interest earned on: Investment securities available-for-sale: Taxable $ 5,463 $ 3,064 $ 8,527 Tax-exempt 203 367 570 Mortgages held for sale (412) 181 (231) Loans and leases, net of unearned discount 5,674 23,467 29,141 Other investments (843) 2,049 1,206 Total earning assets $ 10,085 $ 29,128 $ 39,213 Interest paid on: Interest-bearing deposits $ 613 $ 12,342 $ 12,955 Short-term borrowings: Securities sold under agreements to repurchase (8) (19) (27) Other short-term borrowings 151 1,258 1,409 Subordinated notes — 283 283 Long-term debt and mandatorily redeemable securities (578) (1,829) (2,407) Total interest-bearing liabilities $ 178 $ 12,035 $ 12,213 Net interest income - FTE $ 9,907 $ 17,093 $ 27,000 2021 compared to 2020 Interest earned on: Investment securities available-for-sale: Taxable $ 5,961 $ (6,274) $ (313) Tax-exempt (357) (7) (364) Mortgages held for sale (98) (54) (152) Loans and leases, net of unearned discount (1,133) (6,470) (7,603) Other investments 1,350 (1,261) 89 Total earning assets $ 5,723 $ (14,066) $ (8,343) Interest paid on: Interest-bearing deposits $ 1,741 $ (19,924) $ (18,183) Short-term borrowings: Securities sold under agreements to repurchase 13 (218) (205) Other short-term borrowings (90) (107) (197) Subordinated notes — (100) (100) Long-term debt and mandatorily redeemable securities (65) (327) (392) Total interest-bearing liabilities $ 1,599 $ (20,676) $ (19,077) Net interest income - FTE $ 4,124 $ 6,610 $ 10,734 23 Table of Contents Noninterest Income — Noninterest income decreased $8.83 million or 8.82% in 2022 from 2021 following a $3.80 million or 3.65% decrease in 2021 from 2020.
Increase (Decrease) due to (Dollars in thousands) Volume Rate Net 2023 compared to 2022 Interest earned on: Investment securities available-for-sale: Taxable $ (2,570) $ 777 $ (1,793) Tax-exempt 131 363 494 Mortgages held for sale (150) 88 (62) Loans and leases, net of unearned discount 32,763 90,718 123,481 Other investments (2,856) 3,940 1,084 Total earning assets $ 27,318 $ 95,886 $ 123,204 Interest paid on: Interest-bearing deposits $ 3,179 $ 94,752 $ 97,931 Short-term borrowings: Securities sold under agreements to repurchase (64) 115 51 Other short-term borrowings 3,823 1,661 5,484 Subordinated notes — 624 624 Long-term debt and mandatorily redeemable securities (13) 3,836 3,823 Total interest-bearing liabilities $ 6,925 $ 100,988 $ 107,913 Net interest income - FTE $ 20,393 $ (5,102) $ 15,291 2022 compared to 2021 Interest earned on: Investment securities available-for-sale: Taxable $ 5,463 $ 3,064 $ 8,527 Tax-exempt 203 367 570 Mortgages held for sale (412) 181 (231) Loans and leases, net of unearned discount 5,674 23,467 29,141 Other investments (843) 2,049 1,206 Total earning assets $ 10,085 $ 29,128 $ 39,213 Interest paid on: Interest-bearing deposits $ 613 $ 12,342 $ 12,955 Short-term borrowings: Securities sold under agreements to repurchase (8) (19) (27) Other short-term borrowings 151 1,258 1,409 Subordinated notes — 283 283 Long-term debt and mandatorily redeemable securities (578) (1,829) (2,407) Total interest-bearing liabilities $ 178 $ 12,035 $ 12,213 Net interest income - FTE $ 9,907 $ 17,093 $ 27,000 22 Table of Contents Noninterest Income — Noninterest income decreased $0.64 million or 0.70% in 2023 from 2022 following a $8.83 million or 8.82% decrease in 2022 from 2021.
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.
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. 36 Table of Contents We maintain prudent strategies to support a strong liquidity position. The following table represents our sources of liquidity as of December 31, 2023.
The average balance decrease in other investments was primarily a result of lower balances held at the Federal Reserve Bank. Average interest-bearing deposits increased $213.14 million or 4.78% during 2022 while the effective rate paid on those deposits increased 26 basis points. The increased average balance was primarily due to increases in business, consumer and public fund deposits.
Average other investments decreased $170.21 million or 69.78% during 2023 while the yield increased 391 basis points. The average balance decrease in other investments was primarily a result of lower balances held at the Federal Reserve Bank. Average interest-bearing deposits increased $530.60 million or 11.35% during 2023 while the effective rate paid on those deposits increased 183 basis points.
Average long-term debt and mandatorily redeemable securities balances decreased $23.91 million or 30.32% during 2022 as the effective rate decreased 301 basis points primarily due to lower rates on mandatorily redeemable securities from a reduction in book value per share during 2022.
Average long-term debt and mandatorily redeemable securities balances decreased $8.62 million or 15.68% during 2023 while the effective rate increased 827 basis points primarily due to higher rates on mandatorily redeemable securities from an improvement in book value per share during 2023.
Residential real estate and home equity – Our residential real estate and home equity portfolio consists of loans to individuals in the communities we serve. Generally, residential mortgage loans are originated using standards that result in salable mortgages. Home equity loans are also advanced in compliance with regulatory guidelines and the Bank’s credit policy.
Generally, residential mortgage loans are originated using standards that result in salable mortgages. Home equity loans are also advanced in compliance with regulatory guidelines and the Bank’s credit policy. Losses in these portfolios have been immaterial since 2013.
(Dollars in thousands) 2022 2021 Commercial and agricultural $ 812,031 $ 918,712 Solar 381,163 348,302 Auto and light truck 808,117 603,775 Medium and heavy duty truck 313,862 259,740 Aircraft 1,077,722 898,401 Construction equipment 938,503 754,273 Commercial real estate 943,745 929,341 Residential real estate and home equity 584,737 500,590 Consumer 151,282 133,080 Total loans and leases $ 6,011,162 $ 5,346,214 At December 31, 2022, there were no concentrations within the loan portfolio of 10% or more of total loans and leases.
(Dollars in thousands) 2023 2022 Commercial and agricultural $ 766,223 $ 812,031 Renewable energy 399,708 381,163 Auto and light truck 966,912 808,117 Medium and heavy duty truck 311,947 313,862 Aircraft 1,078,172 1,077,722 Construction equipment 1,084,752 938,503 Commercial real estate 1,129,861 943,745 Residential real estate and home equity 637,973 584,737 Consumer 142,957 151,282 Total loans and leases $ 6,518,505 $ 6,011,162 At December 31, 2023, there were no concentrations within the loan portfolio of 10% or more of total loans and leases.
Depreciation on equipment owned under operating leases declined $3.67 million or 26.81% in 2022 from 2021, following a $6.51 million or 32.22% decrease in 2021 from 2020.
Depreciation on equipment owned under operating leases declined $2.93 million or 29.23% in 2023 from 2022, following a $3.67 million or 26.81% decrease in 2022 from 2021. In 2023 and 2022, depreciation on equipment owned under operating leases correlated with the change in equipment rental income.

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