1ST SOURCE CORP - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-6233
1st Source Corporation
(Exact name of registrant as specified in its charter)
Indiana | 35-1068133 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 100 North Michigan Street | |||||||||||
| South Bend, | IN | 46601 | |||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(574) 235-2000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock - without par value | SRCE | The NASDAQ Stock Market LLC | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
Number of shares of common stock outstanding as of April 15, 2022 — 24,732,545 shares
TABLE OF CONTENTS
| Page | ||||||||
| EXHIBITS | ||||||||
2
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited - Dollars in thousands)
| March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | 69,195 | $ | 54,420 | |||||||
| Federal funds sold and interest bearing deposits with other banks | 347,697 | 470,767 | |||||||||
| Investment securities available-for-sale | 1,857,431 | 1,863,041 | |||||||||
| Other investments | 25,538 | 27,189 | |||||||||
| Mortgages held for sale | 4,757 | 13,284 | |||||||||
| Loans and leases, net of unearned discount: | |||||||||||
| Commercial and agricultural | 869,093 | 918,712 | |||||||||
| Solar | 337,485 | 348,302 | |||||||||
| Auto and light truck | 629,780 | 603,775 | |||||||||
| Medium and heavy duty truck | 255,277 | 259,740 | |||||||||
| Aircraft | 957,040 | 898,401 | |||||||||
| Construction equipment | 775,972 | 754,273 | |||||||||
| Commercial real estate | 920,807 | 929,341 | |||||||||
| Residential real estate and home equity | 510,537 | 500,590 | |||||||||
| Consumer | 138,012 | 133,080 | |||||||||
| Total loans and leases | 5,394,003 | 5,346,214 | |||||||||
| Allowance for loan and lease losses | (129,959) | (127,492) | |||||||||
| Net loans and leases | 5,264,044 | 5,218,722 | |||||||||
| Equipment owned under operating leases, net | 41,792 | 48,433 | |||||||||
| Net premises and equipment | 45,960 | 47,038 | |||||||||
| Goodwill and intangible assets | 83,921 | 83,926 | |||||||||
| Accrued income and other assets | 272,128 | 269,469 | |||||||||
| Total assets | $ | 8,012,463 | $ | 8,096,289 | |||||||
| LIABILITIES | |||||||||||
| Deposits: | |||||||||||
| Noninterest-bearing demand | $ | 2,061,111 | $ | 2,052,981 | |||||||
| Interest-bearing deposits: | |||||||||||
| Interest-bearing demand | 2,430,979 | 2,455,580 | |||||||||
| Savings | 1,328,981 | 1,286,367 | |||||||||
| Time | 852,021 | 884,137 | |||||||||
| Total interest-bearing deposits | 4,611,981 | 4,626,084 | |||||||||
| Total deposits | 6,673,092 | 6,679,065 | |||||||||
| Short-term borrowings: | |||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 193,798 | 194,727 | |||||||||
| Other short-term borrowings | 5,360 | 5,300 | |||||||||
| Total short-term borrowings | 199,158 | 200,027 | |||||||||
| Long-term debt and mandatorily redeemable securities | 69,563 | 71,251 | |||||||||
| Subordinated notes | 58,764 | 58,764 | |||||||||
| Accrued expenses and other liabilities | 92,416 | 117,718 | |||||||||
| Total liabilities | 7,092,993 | 7,126,825 | |||||||||
| SHAREHOLDERS’ EQUITY | |||||||||||
Preferred stock; no par value | |||||||||||
Authorized 10,000,000 shares; none issued or outstanding | — | — | |||||||||
Common stock; no par value | |||||||||||
Authorized 40,000,000 shares; issued 28,205,674 at March 31, 2022 and December 31, 2021 | 436,538 | 436,538 | |||||||||
| Retained earnings | 624,503 | 603,787 | |||||||||
Cost of common stock in treasury (3,473,139 shares at March 31, 2022 and 3,466,162 shares at December 31, 2021) | (115,654) | (114,209) | |||||||||
| Accumulated other comprehensive loss | (80,537) | (9,861) | |||||||||
| Total shareholders’ equity | 864,850 | 916,255 | |||||||||
| Noncontrolling interests | 54,620 | $ | 53,209 | ||||||||
| Total equity | 919,470 | 969,464 | |||||||||
| Total liabilities and equity | $ | 8,012,463 | $ | 8,096,289 | |||||||
The accompanying notes are a part of the unaudited consolidated financial statements.
3
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Dollars in thousands, except per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Interest income: | |||||||||||
| Loans and leases | $ | 55,208 | $ | 57,864 | |||||||
| Investment securities, taxable | 6,344 | 3,988 | |||||||||
| Investment securities, tax-exempt | 134 | 174 | |||||||||
| Other | 363 | 266 | |||||||||
| Total interest income | 62,049 | 62,292 | |||||||||
| Interest expense: | |||||||||||
| Deposits | 2,376 | 3,526 | |||||||||
| Short-term borrowings | 24 | 36 | |||||||||
| Subordinated notes | 823 | 818 | |||||||||
| Long-term debt and mandatorily redeemable securities | (792) | 500 | |||||||||
| Total interest expense | 2,431 | 4,880 | |||||||||
| Net interest income | 59,618 | 57,412 | |||||||||
| Provision for credit losses | 2,233 | 2,398 | |||||||||
| Net interest income after provision for credit losses | 57,385 | 55,014 | |||||||||
| Noninterest income: | |||||||||||
| Trust and wealth advisory | 5,914 | 5,481 | |||||||||
| Service charges on deposit accounts | 2,792 | 2,447 | |||||||||
| Debit card | 4,194 | 4,182 | |||||||||
| Mortgage banking | 1,377 | 3,901 | |||||||||
| Insurance commissions | 1,905 | 2,152 | |||||||||
| Equipment rental | 3,662 | 4,629 | |||||||||
| Gains on investment securities available-for-sale | — | — | |||||||||
| Other | 3,301 | 3,077 | |||||||||
| Total noninterest income | 23,145 | 25,869 | |||||||||
| Noninterest expense: | |||||||||||
| Salaries and employee benefits | 25,467 | 25,196 | |||||||||
| Net occupancy | 2,811 | 2,719 | |||||||||
| Furniture and equipment | 1,295 | 1,474 | |||||||||
| Data processing | 5,208 | 4,984 | |||||||||
| Depreciation – leased equipment | 3,015 | 3,773 | |||||||||
| Professional fees | 1,608 | 1,613 | |||||||||
| FDIC and other insurance | 850 | 665 | |||||||||
| Business development and marketing | 1,268 | 997 | |||||||||
| Loan and lease collection and repossession | 134 | 129 | |||||||||
| Other | 3,680 | 2,590 | |||||||||
| Total noninterest expense | 45,336 | 44,140 | |||||||||
| Income before income taxes | 35,194 | 36,743 | |||||||||
| Income tax expense | 7,793 | 8,637 | |||||||||
| Net income | 27,401 | 28,106 | |||||||||
| Net (income) loss attributable to noncontrolling interests | (11) | (1) | |||||||||
| Net income available to common shareholders | $ | 27,390 | $ | 28,105 | |||||||
| Per common share: | |||||||||||
| Basic net income per common share | $ | 1.10 | $ | 1.10 | |||||||
| Diluted net income per common share | $ | 1.10 | $ | 1.10 | |||||||
| Cash dividends | $ | 0.31 | $ | 0.29 | |||||||
| Basic weighted average common shares outstanding | 24,743,790 | 25,320,930 | |||||||||
| Diluted weighted average common shares outstanding | 24,743,790 | 25,320,930 | |||||||||
The accompanying notes are a part of the unaudited consolidated financial statements.
4
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited - Dollars in thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income | $ | 27,401 | $ | 28,106 | |||||||
| Other comprehensive income (loss): | |||||||||||
| Unrealized depreciation of available-for-sale securities | (93,094) | (14,658) | |||||||||
| Reclassification adjustment for realized gains included in net income | — | — | |||||||||
| Income tax effect | 22,418 | 3,530 | |||||||||
| Other comprehensive loss, net of tax | (70,676) | (11,128) | |||||||||
| Comprehensive (loss) income | $ | (43,275) | $ | 16,978 | |||||||
| Comprehensive (income) loss attributable to noncontrolling interests | (11) | (1) | |||||||||
| Comprehensive (loss) income available to common shareholders | $ | (43,286) | $ | 16,977 | |||||||
The accompanying notes are a part of the unaudited consolidated financial statements.
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited - Dollars in thousands, except per share amounts)
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Retained Earnings | Cost of Common Stock in Treasury | Accumulated Other Comprehensive Income (Loss), Net | Total Shareholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | — | $ | 436,538 | $ | 514,176 | $ | (82,240) | $ | 18,371 | $ | 886,845 | $ | 43,825 | $ | 930,670 | |||||||||||||||||||||||||||||||
| Net income | — | — | 28,105 | — | — | 28,105 | 1 | 28,106 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (11,128) | (11,128) | — | (11,128) | |||||||||||||||||||||||||||||||||||||||
Issuance of 35,027 common shares under stock based compensation awards | — | — | 844 | 638 | — | 1,482 | — | 1,482 | |||||||||||||||||||||||||||||||||||||||
Cost of 155,457 shares of common stock acquired for treasury | — | — | — | (6,621) | — | (6,621) | — | (6,621) | |||||||||||||||||||||||||||||||||||||||
Common stock dividend ($0.29 per share) | — | — | (7,388) | — | — | (7,388) | — | (7,388) | |||||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | — | 887 | 887 | |||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (249) | (249) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | — | $ | 436,538 | $ | 535,737 | $ | (88,223) | $ | 7,243 | $ | 891,295 | $ | 44,464 | 935,759 | ||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | — | $ | 436,538 | $ | 603,787 | $ | (114,209) | $ | (9,861) | $ | 916,255 | $ | 53,209 | $ | 969,464 | |||||||||||||||||||||||||||||||
| Net income | — | — | 27,390 | — | — | 27,390 | 11 | 27,401 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (70,676) | (70,676) | — | (70,676) | |||||||||||||||||||||||||||||||||||||||
Issuance of 38,442 common shares under stock based compensation awards | — | — | 1,024 | 730 | — | 1,754 | — | 1,754 | |||||||||||||||||||||||||||||||||||||||
Cost of 45,419 shares of common stock acquired for treasury | — | — | — | (2,175) | — | (2,175) | — | (2,175) | |||||||||||||||||||||||||||||||||||||||
Common stock dividend ($0.31 per share) | — | — | (7,698) | — | — | (7,698) | — | (7,698) | |||||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | — | 1,627 | 1,627 | |||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (227) | (227) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | — | $ | 436,538 | $ | 624,503 | $ | (115,654) | $ | (80,537) | $ | 864,850 | $ | 54,620 | $ | 919,470 | |||||||||||||||||||||||||||||||
The accompanying notes are a part of the unaudited consolidated financial statements.
5
1st SOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Dollars in thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net income | $ | 27,401 | $ | 28,106 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Provision for credit losses | 2,233 | 2,398 | |||||||||
| Depreciation of premises and equipment | 1,177 | 1,361 | |||||||||
| Depreciation of equipment owned and leased to others | 3,015 | 3,773 | |||||||||
| Stock-based compensation | 732 | 885 | |||||||||
| Amortization of investment securities premiums and accretion of discounts, net | 967 | 1,734 | |||||||||
| Amortization of mortgage servicing rights | 381 | 590 | |||||||||
| Mortgage servicing rights impairment recoveries | — | (42) | |||||||||
| Amortization of right of use assets | 785 | 1,133 | |||||||||
| Deferred income taxes | 80 | 2,452 | |||||||||
| Gains on investment securities available-for-sale | — | — | |||||||||
| Originations of loans held for sale, net of principal collected | (32,314) | (85,663) | |||||||||
| Proceeds from the sales of loans held for sale | 41,456 | 91,858 | |||||||||
| Net gain on sale of loans held for sale | (615) | (2,661) | |||||||||
| Net gain on sale of other real estate and repossessions | (47) | (141) | |||||||||
| Change in interest receivable | (530) | (142) | |||||||||
| Change in interest payable | 199 | 265 | |||||||||
| Change in other assets | 9,099 | (7,843) | |||||||||
| Change in other liabilities | (10,882) | 4,519 | |||||||||
| Other | (1,334) | (93) | |||||||||
| Net change in operating activities | 41,803 | 42,489 | |||||||||
| Investing activities: | |||||||||||
| Proceeds from sales of investment securities available-for-sale | — | — | |||||||||
| Proceeds from maturities and paydowns of investment securities available-for-sale | 57,392 | 119,692 | |||||||||
| Purchases of investment securities available-for-sale | (145,843) | (229,957) | |||||||||
| Net change in partnership investments | (2,128) | (1,142) | |||||||||
| Net change in other investments | 1,651 | — | |||||||||
| Loans sold or participated to others | 7,987 | 3,813 | |||||||||
| Proceeds from principal payments on direct finance leases | 9,377 | 7,317 | |||||||||
| Net change in loans and leases | (66,069) | (49,255) | |||||||||
| Net change in equipment owned under operating leases | 3,626 | (128) | |||||||||
| Purchases of premises and equipment | (113) | (280) | |||||||||
| Proceeds from disposal of premises and equipment | 14 | 5 | |||||||||
| Proceeds from sales of other real estate and repossessions | 1,983 | 697 | |||||||||
| Net change in investing activities | (132,123) | (149,238) | |||||||||
| Financing activities: | |||||||||||
| Net change in demand deposits and savings accounts | 26,143 | 271,650 | |||||||||
| Net change in time deposits | (32,116) | (86,337) | |||||||||
| Net change in short-term borrowings | (869) | 29,960 | |||||||||
| Payments on long-term debt | (2,440) | (2,035) | |||||||||
| Acquisition of treasury stock | (2,175) | (6,621) | |||||||||
| Net contributions from (distributions to) noncontrolling interests | 1,400 | 639 | |||||||||
| Cash dividends paid on common stock | (7,918) | (7,600) | |||||||||
| Net change in financing activities | (17,975) | 199,656 | |||||||||
| Net change in cash and cash equivalents | (108,295) | 92,907 | |||||||||
| Cash and cash equivalents, beginning of year | 525,187 | 243,047 | |||||||||
| Cash and cash equivalents, end of period | $ | 416,892 | $ | 335,954 | |||||||
| Supplemental Information: | |||||||||||
| Non-cash transactions: | |||||||||||
| Loans transferred to other real estate and repossessed assets | $ | 1,150 | $ | 839 | |||||||
| Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan | 683 | 715 | |||||||||
| Right of use assets obtained in exchange for lease obligations | 116 | 46 | |||||||||
The accompanying notes are a part of the unaudited consolidated financial statements.
6
1ST SOURCE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Accounting Policies
1st Source Corporation is a bank holding company headquartered in South Bend, Indiana that provides, through its subsidiaries (collectively referred to as “1st Source” or “the Company”), a broad array of financial products and services.
Basis of Presentation – The accompanying unaudited consolidated financial statements reflect all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income (loss), changes in shareholders’ equity, and cash flows for the periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted.
The Notes to the Consolidated Financial Statements appearing in 1st Source Corporation’s Annual Report on Form 10-K (2021 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The Consolidated Statement of Financial Condition at December 31, 2021 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation.
Use of Estimates in the Preparation of Financial Statements – Financial statements prepared in accordance with GAAP require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.
Loans and Leases – Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. Interest income is accrued as earned based on unpaid principal balances. Origination fees and direct loan and lease origination costs are deferred, and the net amount amortized to interest income over the estimated life of the related loan or lease. Loan commitment fees are deferred and amortized into other income over the commitment period.
Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of unamortized deferred lease origination fees and costs and unearned income. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment. Costs incurred as a direct result of closing lease transactions are capitalized and amortized over the life of the lease while all other initial direct costs are expensed immediately.
Accrued interest is included in Accrued Income and Other Assets on the Consolidated Statements of Financial Condition and is excluded from the calculation of the allowance for credit losses. The accrual of interest on loans and leases is discontinued when a loan or lease becomes contractually delinquent for 90 days, or when an individual analysis of a borrower’s credit worthiness indicates a credit should be placed on nonperforming status, except for residential mortgage loans and consumer loans that are well secured and in the process of collection. Residential mortgage loans are placed on nonaccrual at the time the loan is placed in foreclosure. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the allowance for loan and lease losses. However, in some cases, the Company may elect to continue the accrual of interest when the net realizable value of collateral is sufficient to cover the principal and accrued interest. When a loan or lease is classified as nonaccrual and the future collectability of the recorded loan or lease balance is doubtful, collections on interest and principal are applied as a reduction to principal outstanding. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, which is typically evidenced by a sustained repayment performance of at least six months.
Loans and leases that have been modified and economic concessions have been granted to borrowers who have experienced financial difficulties are considered a troubled debt restructuring (TDR). These concessions typically result from the Company’s loss mitigation activities and may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.
8
When the Company modifies loans and leases in a TDR, it evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or uses the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance for loan and lease losses estimate or a charge-off to the allowance for loan and lease losses. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance for loan and lease losses.
Note 2 — Recent Accounting Pronouncements
Financial Instruments–Credit Losses: In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02 “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, these amendments require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. The guidance is effective for entities that have adopted ASU 2016-13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively. If an entity elects to early adopt ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is assessing ASU 2022-02 and its impact on its accounting and disclosures.
Reference Rate Reform: In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company continues to implement its transition plan toward cessation of LIBOR and the modification of its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company expects to utilize the LIBOR transition relief allowed under ASU 2020-04 and ASU 2021-01, as applicable, and does not expect such adoption to have a material impact on its accounting and disclosures. The Company will continue to assess the impact as the reference rate transition approaches June 30, 2023.
9
Note 3 — Investment Securities Available-For-Sale
The following table shows investment securities available-for-sale.
| (Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| U.S. Treasury and Federal agencies securities | $ | 1,137,278 | $ | 343 | $ | (56,676) | $ | 1,080,945 | ||||||||||||||||||
| U.S. States and political subdivisions securities | 102,459 | 145 | (4,251) | 98,353 | ||||||||||||||||||||||
| Mortgage-backed securities — Federal agencies | 700,666 | 394 | (46,050) | 655,010 | ||||||||||||||||||||||
| Corporate debt securities | 22,511 | 88 | (74) | 22,525 | ||||||||||||||||||||||
| Foreign government and other securities | 600 | — | (2) | 598 | ||||||||||||||||||||||
| Total debt securities available-for-sale | $ | 1,963,514 | $ | 970 | $ | (107,053) | $ | 1,857,431 | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| U.S. Treasury and Federal agencies securities | $ | 1,093,780 | $ | 3,244 | $ | (13,018) | $ | 1,084,006 | ||||||||||||||||||
| U.S. States and political subdivisions securities | 95,700 | 1,130 | (1,129) | 95,701 | ||||||||||||||||||||||
| Mortgage-backed securities — Federal agencies | 663,441 | 4,745 | (8,459) | 659,727 | ||||||||||||||||||||||
| Corporate debt securities | 22,510 | 499 | — | 23,009 | ||||||||||||||||||||||
| Foreign government and other securities | 600 | — | (2) | 598 | ||||||||||||||||||||||
| Total debt securities available-for-sale | $ | 1,876,031 | $ | 9,618 | $ | (22,608) | $ | 1,863,041 | ||||||||||||||||||
Amortized cost excludes accrued interest receivable which is included in Accrued Income and Other Assets on the Consolidated Statements of Financial Condition. At March 31, 2022 and December 31, 2021, accrued interest receivable on investment securities available-for-sale was $5.02 million and $4.80 million, respectively.
At March 31, 2022 and December 31, 2021, the residential mortgage-backed securities held by the Company consisted primarily of GNMA, FNMA and FHLMC pass-through certificates which are guaranteed by those respective agencies of the United States government (Government Sponsored Enterprise, GSEs).
The following table shows the contractual maturities of investments in debt securities available-for-sale at March 31, 2022. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| (Dollars in thousands) | Amortized Cost | Fair Value | ||||||||||||
| Due in one year or less | $ | 99,452 | $ | 99,754 | ||||||||||
| Due after one year through five years | 1,073,137 | 1,018,725 | ||||||||||||
| Due after five years through ten years | 89,899 | 83,636 | ||||||||||||
| Due after ten years | 360 | 306 | ||||||||||||
| Mortgage-backed securities | 700,666 | 655,010 | ||||||||||||
| Total debt securities available-for-sale | $ | 1,963,514 | $ | 1,857,431 | ||||||||||
10
The following table summarizes gross unrealized losses and fair value by investment category and age. At March 31, 2022, the Company’s available-for-sale securities portfolio consisted of 719 securities, 541 of which were in an unrealized loss position.
| Less than 12 Months | 12 months or Longer | Total | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| U.S. Treasury and Federal agencies securities | $ | 796,571 | $ | (40,683) | $ | 207,232 | $ | (15,993) | $ | 1,003,803 | $ | (56,676) | ||||||||||||||||||||||||||
| U.S. States and political subdivisions securities | 55,508 | (2,367) | 18,798 | (1,884) | 74,306 | (4,251) | ||||||||||||||||||||||||||||||||
| Mortgage-backed securities - Federal agencies | 486,975 | (32,284) | 133,048 | (13,766) | 620,023 | (46,050) | ||||||||||||||||||||||||||||||||
| Corporate debt securities | 8,109 | (74) | — | — | 8,109 | (74) | ||||||||||||||||||||||||||||||||
| Foreign government and other securities | 98 | (2) | — | — | 98 | (2) | ||||||||||||||||||||||||||||||||
| Total debt securities available-for-sale | $ | 1,347,261 | $ | (75,410) | $ | 359,078 | $ | (31,643) | $ | 1,706,339 | $ | (107,053) | ||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| U.S. Treasury and Federal agencies securities | $ | 789,536 | $ | (10,728) | $ | 84,191 | $ | (2,290) | $ | 873,727 | $ | (13,018) | ||||||||||||||||||||||||||
| U.S. States and political subdivisions securities | 39,585 | (980) | 4,875 | (149) | 44,460 | (1,129) | ||||||||||||||||||||||||||||||||
| Mortgage-backed securities - Federal agencies | 454,413 | (7,312) | 35,232 | (1,147) | 489,645 | (8,459) | ||||||||||||||||||||||||||||||||
| Corporate debt securities | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Foreign government and other securities | 598 | (2) | — | — | 598 | (2) | ||||||||||||||||||||||||||||||||
| Total debt securities available-for-sale | $ | 1,284,132 | $ | (19,022) | $ | 124,298 | $ | (3,586) | $ | 1,408,430 | $ | (22,608) | ||||||||||||||||||||||||||
The Company does not consider available-for-sale securities with unrealized losses at March 31, 2022 to be experiencing credit losses and recognized no resulting allowance for credit losses. The Company does not intend to sell these investments and it is more likely than not that the Company will not be required to sell these investments before recovery of the amortized cost basis, which may be the maturity dates of the securities. The unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase.
The following table shows the gross realized gains and losses from the available-for-sale debt securities portfolio. Realized gains and losses of all securities are computed using the specific identification cost basis.
| Three Months Ended March 31, | |||||||||||
| (Dollars in thousands) | 2022 | 2021 | |||||||||
| Gross realized gains | $ | — | $ | — | |||||||
| Gross realized losses | — | — | |||||||||
| Net realized gains (losses) | $ | — | $ | — | |||||||
At March 31, 2022 and December 31, 2021, investment securities available-for-sale with carrying values of $331.28 million and $351.13 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes.
Note 4 — Loan and Lease Financings
The Company evaluates loans and leases for credit quality at least annually but more frequently if certain circumstances occur (such as material new information which becomes available and indicates a potential change in credit risk). The Company uses two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.
11
All loans and leases, except residential real estate and home equity loans and consumer loans, are assigned credit quality grades on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Company’s safety and soundness. Loans or leases graded 7 or weaker are considered “special attention” credits and, as such, relationships in excess of $250,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the allowance for loan and lease losses. Grade 7 credits are defined as “watch” and contain greater than average credit risk and are monitored to limit the exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered “classified” and are graded 9 through 12 corresponding to the regulatory definitions of “substandard” (grades 9 and 10) and the more severe “doubtful” (grade 11) and “loss” (grade 12). For residential real estate and home equity and consumer loans, credit quality is based on the aging status of the loan and by payment activity. Nonperforming loans are those loans which are on nonaccrual status or are 90 days or more past due.
Below is a summary of the Company’s loan and lease portfolio segments and a discussion of the risk characteristics relevant to each portfolio segment.
Commercial and agricultural – loans are to entities within the Company’s local market communities. Loans are for business or agri-business purposes and include working capital lines of credit secured by accounts receivable and inventory that are generally renewable annually and term loans secured by equipment with amortizations based on the expected life of the underlying collateral, generally to seven years. These loans are typically further supported by personal guarantees. Commercial exposure is to a wide range of industries and services. Risks in this sector are also varied and are most impacted by general economic conditions. Risk mitigants include appropriate underwriting and monitoring and, when appropriate, government guarantees, including SBA and FSA. This portfolio sector also includes PPP loans, which are fully guaranteed by the SBA. As of March 31, 2022, PPP loan balances were $37.94 million which is net of unearned fees of $1.24 million.
Solar – loans are for the purpose of financing solar related projects and may include construction draw notes, operating loans, letters of credit and may entail a tax equity structure. Collateral in a multi-state area includes tangible assets of the borrower, assignment of intangible assets including power purchase agreements, and pledges of permits and licenses. Financing is provided to qualified borrowers throughout the continental United States with an emphasis on the region east of the Rocky Mountains.
Auto and light truck – loans are secured by vehicles and borrowers are nationwide. The portfolio consists of multiple industries: auto rental, auto leasing and specialty vehicle which includes bus, funeral car and step van. Borrowers in the auto rental segment are primarily independent auto rental entities with on-airport and off-airport locations, and some insurance replacement business. Loan amortizations are relatively short, generally eighteen months, but up to four years. Auto leasing customers lease to businesses and the Company takes assignment of the lease stream and places its lien on the vehicles. Terms are generally longer than the auto rental sector, to seven years and match the underlying leases. Risks in both these segments include economic risks and collateral risks, principally used vehicle values. The bus segment is secured primarily by shuttle buses and motor coaches, the step van segment is secured by step vans and the funeral car segment is secured by hearses and limousines. Risks include lack of well-established mechanisms for disposition of collateral, such as auctions that are key to disposition of autos. Loans in the portfolio generally carry personal guarantees.
Medium and heavy duty truck – loans and full-service truck leases are secured by heavy-duty trucks, commonly Class 8 trucks, and are generally personally guaranteed. In addition to economic risks, collateral risk is significant. Financing is generally at full cost, plus additional expenditures to get the vehicle operational, such as taxes, insurance and fees. It takes to four years of debt amortization to reach an equity position in the collateral.
Aircraft – loans are to domestic and foreign borrowers with the domestic segment further divided into two pools: 1) personal and business use, and 2) dealers and operators. The Company’s focus for the foreign sector is Latin America, principally Mexico and Brazil. Loans are primarily secured by new and used business jets and helicopters, with appropriate advances, amortizations of to fifteen years, and are generally guaranteed by individuals. The most significant risk in the Aircraft portfolio is collateral risk - volatility in underlying values and maintenance concerns. The portfolio is subject to national and global economic risks.
Construction equipment – loans are to borrowers throughout the country secured by specific equipment. The borrowers include highway and road builders, asphalt producers and pavers, suppliers of aggregate products, site developers, frac sand operations, general construction equipment dealers and operators, and crane rental entities. Generally, loans include personal guarantees. The construction equipment industry is heavily dependent on the U.S. economy and the global economy. Market growth is reliant on investments from public and private sectors into urbanization and infrastructure projects.
12
Commercial real estate – loans are generally to entities within the local market communities served by the Company with advances generally within regulatory guidelines. Historically, the Company’s exposure to commercial real estate had been primarily to the less risky owner-occupied segment although growth in recent years has been in the non-owner-occupied segment which now accounts for slightly less than half of the portfolio. The non-owner-occupied segment includes hotels, apartment complexes and warehousing facilities. There is limited exposure to construction loans. Many commercial real estate loans carry personal guarantees. Additional risks in the commercial real estate portfolio stem from geographical concentration in northern Indiana and southwest Michigan and general economic conditions.
Residential real estate and home equity – loans predominantly include one-to-four family mortgages to borrowers in the Company’s local market communities and are appropriately underwritten and secured by residential real estate.
Consumer – loans are to individuals in the Company’s local markets and auto loans are generally secured by personal vehicles and appropriately underwritten.
The following table shows the amortized cost of loans and leases, segregated by portfolio segment, credit quality rating and year of origination as of March 31, 2022.
| Term Loans and Leases by Origination Year | |||||||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total | ||||||||||||||||||||
| Commercial and agricultural | |||||||||||||||||||||||||||||
| Grades 1-6 | $ | 53,128 | $ | 190,821 | $ | 107,991 | $ | 50,957 | $ | 43,930 | $ | 32,145 | $ | 363,670 | $ | — | $ | 842,642 | |||||||||||
| Grades 7-12 | 830 | 2,186 | 166 | 3,338 | 2,242 | 2,218 | 15,471 | — | 26,451 | ||||||||||||||||||||
| Total commercial and agricultural | 53,958 | 193,007 | 108,157 | 54,295 | 46,172 | 34,363 | 379,141 | — | 869,093 | ||||||||||||||||||||
| Solar | |||||||||||||||||||||||||||||
| Grades 1-6 | 22,411 | 128,379 | 40,552 | 81,076 | 18,901 | 38,480 | — | — | 329,799 | ||||||||||||||||||||
| Grades 7-12 | — | — | 1,131 | 5,837 | 718 | — | — | — | 7,686 | ||||||||||||||||||||
| Total solar | 22,411 | 128,379 | 41,683 | 86,913 | 19,619 | 38,480 | — | — | 337,485 | ||||||||||||||||||||
| Auto and light truck | |||||||||||||||||||||||||||||
| Grades 1-6 | 113,310 | 284,748 | 108,645 | 62,013 | 20,163 | 10,471 | — | — | 599,350 | ||||||||||||||||||||
| Grades 7-12 | 447 | 7,635 | 9,350 | 4,580 | 3,393 | 5,025 | — | — | 30,430 | ||||||||||||||||||||
| Total auto and light truck | 113,757 | 292,383 | 117,995 | 66,593 | 23,556 | 15,496 | — | — | 629,780 | ||||||||||||||||||||
| Medium and heavy duty truck | |||||||||||||||||||||||||||||
| Grades 1-6 | 26,377 | 85,103 | 61,748 | 50,070 | 19,724 | 12,068 | — | — | 255,090 | ||||||||||||||||||||
| Grades 7-12 | — | — | — | — | — | 187 | — | — | 187 | ||||||||||||||||||||
| Total medium and heavy duty truck | 26,377 | 85,103 | 61,748 | 50,070 | 19,724 | 12,255 | — | — | 255,277 | ||||||||||||||||||||
| Aircraft | |||||||||||||||||||||||||||||
| Grades 1-6 | 142,120 | 344,528 | 273,403 | 73,079 | 42,434 | 65,511 | 6,861 | — | 947,936 | ||||||||||||||||||||
| Grades 7-12 | 1,894 | — | 633 | — | 4,342 | 2,235 | — | — | 9,104 | ||||||||||||||||||||
| Total aircraft | 144,014 | 344,528 | 274,036 | 73,079 | 46,776 | 67,746 | 6,861 | — | 957,040 | ||||||||||||||||||||
| Construction equipment | |||||||||||||||||||||||||||||
| Grades 1-6 | 113,680 | 287,695 | 166,178 | 90,462 | 37,171 | 13,924 | 22,965 | 3,387 | 735,462 | ||||||||||||||||||||
| Grades 7-12 | 22,419 | 9,659 | 2,424 | 3,158 | 765 | 48 | — | 2,037 | 40,510 | ||||||||||||||||||||
| Total construction equipment | 136,099 | 297,354 | 168,602 | 93,620 | 37,936 | 13,972 | 22,965 | 5,424 | 775,972 | ||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||
| Grades 1-6 | 59,945 | 192,722 | 145,247 | 140,328 | 136,562 | 221,961 | 314 | — | 897,079 | ||||||||||||||||||||
| Grades 7-12 | 1,118 | — | 8,011 | 7,481 | 49 | 7,069 | — | — | 23,728 | ||||||||||||||||||||
| Total commercial real estate | 61,063 | 192,722 | 153,258 | 147,809 | 136,611 | 229,030 | 314 | — | 920,807 | ||||||||||||||||||||
| Residential real estate and home equity | |||||||||||||||||||||||||||||
| Performing | 28,424 | 101,853 | 109,427 | 37,498 | 9,186 | 96,976 | 120,863 | 4,752 | 508,979 | ||||||||||||||||||||
| Nonperforming | — | — | — | — | 14 | 1,097 | 243 | 204 | 1,558 | ||||||||||||||||||||
| Total residential real estate and home equity | 28,424 | 101,853 | 109,427 | 37,498 | 9,200 | 98,073 | 121,106 | 4,956 | 510,537 | ||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||
| Performing | 19,637 | 52,972 | 20,840 | 13,816 | 6,521 | 2,073 | 21,987 | — | 137,846 | ||||||||||||||||||||
| Nonperforming | — | 11 | 55 | 37 | 28 | 35 | — | — | 166 | ||||||||||||||||||||
| Total consumer | $ | 19,637 | $ | 52,983 | $ | 20,895 | $ | 13,853 | $ | 6,549 | $ | 2,108 | $ | 21,987 | $ | — | $ | 138,012 | |||||||||||
13
The following table shows the amortized cost of loans and leases, segregated by portfolio segment, credit quality rating and year of origination as of December 31, 2021.
| Term Loans and Leases by Origination Year | |||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total | ||||||||||||||||||||
| Commercial and agricultural | |||||||||||||||||||||||||||||
| Grades 1-6 | $ | 233,512 | $ | 123,947 | $ | 60,744 | $ | 55,231 | $ | 32,545 | $ | 20,184 | $ | 364,460 | $ | — | $ | 890,623 | |||||||||||
| Grades 7-12 | 4,682 | 194 | 3,667 | 2,373 | 2,004 | 484 | 14,685 | — | 28,089 | ||||||||||||||||||||
| Total commercial and agricultural | 238,194 | 124,141 | 64,411 | 57,604 | 34,549 | 20,668 | 379,145 | — | 918,712 | ||||||||||||||||||||
| Solar | |||||||||||||||||||||||||||||
| Grades 1-6 | 159,244 | 42,073 | 81,593 | 18,979 | 34,889 | 3,780 | — | — | 340,558 | ||||||||||||||||||||
| Grades 7-12 | — | 1,138 | 5,882 | 724 | — | — | — | — | 7,744 | ||||||||||||||||||||
| Total solar | 159,244 | 43,211 | 87,475 | 19,703 | 34,889 | 3,780 | — | — | 348,302 | ||||||||||||||||||||
| Auto and light truck | |||||||||||||||||||||||||||||
| Grades 1-6 | 331,105 | 122,709 | 72,580 | 24,965 | 11,814 | 901 | — | — | 564,074 | ||||||||||||||||||||
| Grades 7-12 | 10,828 | 11,752 | 7,467 | 3,859 | 4,876 | 919 | — | — | 39,701 | ||||||||||||||||||||
| Total auto and light truck | 341,933 | 134,461 | 80,047 | 28,824 | 16,690 | 1,820 | — | — | 603,775 | ||||||||||||||||||||
| Medium and heavy duty truck | |||||||||||||||||||||||||||||
| Grades 1-6 | 92,252 | 68,354 | 57,967 | 23,210 | 12,419 | 5,265 | — | — | 259,467 | ||||||||||||||||||||
| Grades 7-12 | — | — | — | — | — | 273 | — | — | 273 | ||||||||||||||||||||
| Total medium and heavy duty truck | 92,252 | 68,354 | 57,967 | 23,210 | 12,419 | 5,538 | — | — | 259,740 | ||||||||||||||||||||
| Aircraft | |||||||||||||||||||||||||||||
| Grades 1-6 | 384,895 | 290,897 | 85,916 | 45,848 | 47,025 | 29,435 | 4,844 | — | 888,860 | ||||||||||||||||||||
| Grades 7-12 | 1,141 | 649 | — | 4,670 | 454 | 2,627 | — | — | 9,541 | ||||||||||||||||||||
| Total aircraft | 386,036 | 291,546 | 85,916 | 50,518 | 47,479 | 32,062 | 4,844 | — | 898,401 | ||||||||||||||||||||
| Construction equipment | |||||||||||||||||||||||||||||
| Grades 1-6 | 314,044 | 201,032 | 109,029 | 47,693 | 13,501 | 5,031 | 18,937 | 4,594 | 713,861 | ||||||||||||||||||||
| Grades 7-12 | 26,650 | 8,709 | 1,983 | 797 | 80 | — | — | 2,193 | 40,412 | ||||||||||||||||||||
| Total construction equipment | 340,694 | 209,741 | 111,012 | 48,490 | 13,581 | 5,031 | 18,937 | 6,787 | 754,273 | ||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||
| Grades 1-6 | 230,701 | 150,144 | 146,374 | 141,838 | 126,642 | 112,243 | 391 | — | 908,333 | ||||||||||||||||||||
| Grades 7-12 | 218 | 5,921 | 7,159 | 491 | 6,208 | 1,011 | — | — | 21,008 | ||||||||||||||||||||
| Total commercial real estate | 230,919 | 156,065 | 153,533 | 142,329 | 132,850 | 113,254 | 391 | — | 929,341 | ||||||||||||||||||||
| Residential real estate and home equity | |||||||||||||||||||||||||||||
| Performing | 105,345 | 114,682 | 41,185 | 9,706 | 11,720 | 89,646 | 122,281 | 4,555 | 499,120 | ||||||||||||||||||||
| Nonperforming | — | — | — | 13 | 421 | 655 | 293 | 88 | 1,470 | ||||||||||||||||||||
| Total residential real estate and home equity | 105,345 | 114,682 | 41,185 | 9,719 | 12,141 | 90,301 | 122,574 | 4,643 | 500,590 | ||||||||||||||||||||
| Consumer | |||||||||||||||||||||||||||||
| Performing | 58,866 | 24,307 | 17,031 | 8,284 | 2,263 | 697 | 21,378 | — | 132,826 | ||||||||||||||||||||
| Nonperforming | 37 | 107 | 43 | 30 | 33 | 4 | — | — | 254 | ||||||||||||||||||||
| Total consumer | $ | 58,903 | $ | 24,414 | $ | 17,074 | $ | 8,314 | $ | 2,296 | $ | 701 | $ | 21,378 | $ | — | $ | 133,080 | |||||||||||
14
The following table shows the amortized cost of loans and leases, segregated by portfolio segment, with delinquency aging and nonaccrual status.
| (Dollars in thousands) | Current | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due and Accruing | Total Accruing Loans | Nonaccrual | Total Financing Receivables | |||||||||||||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial and agricultural | $ | 867,023 | $ | 503 | $ | 201 | $ | — | $ | 867,727 | $ | 1,366 | $ | 869,093 | ||||||||||||||||||||||||||||||
| Solar | 337,485 | — | — | — | 337,485 | — | 337,485 | |||||||||||||||||||||||||||||||||||||
| Auto and light truck | 607,991 | 214 | — | — | 608,205 | 21,575 | 629,780 | |||||||||||||||||||||||||||||||||||||
| Medium and heavy duty truck | 254,896 | 194 | — | — | 255,090 | 187 | 255,277 | |||||||||||||||||||||||||||||||||||||
| Aircraft | 950,763 | 3,409 | 2,235 | — | 956,407 | 633 | 957,040 | |||||||||||||||||||||||||||||||||||||
| Construction equipment | 766,210 | 2,452 | — | — | 768,662 | 7,310 | 775,972 | |||||||||||||||||||||||||||||||||||||
| Commercial real estate | 917,893 | — | — | — | 917,893 | 2,914 | 920,807 | |||||||||||||||||||||||||||||||||||||
| Residential real estate and home equity | 508,270 | 556 | 153 | 274 | 509,253 | 1,284 | 510,537 | |||||||||||||||||||||||||||||||||||||
| Consumer | 137,581 | 222 | 43 | — | 137,846 | 166 | 138,012 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 5,348,112 | $ | 7,550 | $ | 2,632 | $ | 274 | $ | 5,358,568 | $ | 35,435 | $ | 5,394,003 | ||||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial and agricultural | $ | 916,659 | $ | — | $ | — | $ | — | $ | 916,659 | $ | 2,053 | $ | 918,712 | ||||||||||||||||||||||||||||||
| Solar | 348,302 | — | — | — | 348,302 | — | 348,302 | |||||||||||||||||||||||||||||||||||||
| Auto and light truck | 579,605 | — | — | — | 579,605 | 24,170 | 603,775 | |||||||||||||||||||||||||||||||||||||
| Medium and heavy duty truck | 259,467 | — | — | — | 259,467 | 273 | 259,740 | |||||||||||||||||||||||||||||||||||||
| Aircraft | 894,092 | 1,130 | 2,530 | — | 897,752 | 649 | 898,401 | |||||||||||||||||||||||||||||||||||||
| Construction equipment | 745,870 | 1,313 | — | — | 747,183 | 7,090 | 754,273 | |||||||||||||||||||||||||||||||||||||
| Commercial real estate | 926,345 | — | — | — | 926,345 | 2,996 | 929,341 | |||||||||||||||||||||||||||||||||||||
| Residential real estate and home equity | 498,854 | 212 | 54 | 245 | 499,365 | 1,225 | 500,590 | |||||||||||||||||||||||||||||||||||||
| Consumer | 132,464 | 332 | 30 | 4 | 132,830 | 250 | 133,080 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 5,301,658 | $ | 2,987 | $ | 2,614 | $ | 249 | $ | 5,307,508 | $ | 38,706 | $ | 5,346,214 | ||||||||||||||||||||||||||||||
Accrued interest receivable on loans and leases at March 31, 2022 and December 31, 2021 was $13.11 million and $12.94 million, respectively.
There were no loan and lease modifications classified as a troubled debt restructuring (TDR) during the three months ended March 31, 2022 and 2021. The classification between nonperforming and performing is determined at the time of modification. Modification programs focus on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. Modifications do not result in the contractual forgiveness of principal or interest. There were no modifications during the three months ended March 31, 2022 and 2021 that resulted in an interest rate below market rate.
There were no TDRs which had payment defaults within the twelve months following modification during the three months ended March 31, 2022 and 2021, respectively. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.
The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of March 31, 2022 and December 31, 2021.
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Performing TDRs | $ | — | $ | 319 | ||||||||||
| Nonperforming TDRs | 5,965 | 6,742 | ||||||||||||
| Total TDRs | $ | 5,965 | $ | 7,061 | ||||||||||
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Note 5 — Allowance for Credit Losses
Allowance for Loan and Lease Losses
The allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolios utilizing guidance in Accounting Standards Codification (ASC) Topic 326. The determination of the allowance requires significant judgment to estimate credit losses measured on a collective pool basis when similar risk characteristics exist, and for loans evaluated individually. In determining the allowance, the Company estimates expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate. The allowance estimate considers relevant available information, from internal and external sources relating to the historical loss experience, current conditions, and reasonable and supportable forecasts for the Company’s outstanding loan and lease balances. The allowance is an estimation that reflects management’s evaluation of expected losses related to the Company’s financial assets measured at amortized cost. To ensure that the allowance is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance.
The Company categorizes its loan portfolios into nine segments based on similar risk characteristics. Loans within each segment are collectively evaluated using either: 1) a cohort cumulative loss rate methodology (“cohort”) or, 2) the probability of default (“PD”)/loss given default (“LGD”) methodology (PD/LGD).
| (Dollars in thousands) | Commercial and agricultural | Solar | Auto and light truck | Medium and heavy duty truck | Aircraft | Construction equipment | Commercial real estate | Residential real estate and home equity | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 15,409 | $ | 6,585 | $ | 19,624 | $ | 6,015 | $ | 33,628 | $ | 19,673 | $ | 19,691 | $ | 5,084 | $ | 1,783 | $ | 127,492 | ||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | — | — | — | — | — | 48 | — | 4 | 165 | 217 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 4 | — | 65 | — | 316 | — | — | 1 | 65 | 451 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net charge-offs (recoveries) | (4) | — | (65) | — | (316) | 48 | — | 3 | 100 | (234) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision (recovery of provision) | 185 | (168) | (168) | 34 | 2,024 | 416 | (445) | 137 | 218 | 2,233 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ | 15,598 | $ | 6,417 | $ | 19,521 | $ | 6,049 | $ | 35,968 | $ | 20,041 | $ | 19,246 | $ | 5,218 | $ | 1,901 | $ | 129,959 | ||||||||||||||||||||||||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 16,680 | $ | 5,549 | $ | 28,926 | $ | 6,400 | $ | 34,053 | $ | 19,166 | $ | 22,758 | $ | 5,374 | $ | 1,748 | $ | 140,654 | ||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | 1 | — | 4,286 | — | — | 8 | — | 5 | 152 | 4,452 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 377 | — | 49 | — | 119 | 254 | 15 | 1 | 135 | 950 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net charge-offs (recoveries) | (376) | — | 4,237 | — | (119) | (246) | (15) | 4 | 17 | 3,502 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision (recovery of provision) | (1,605) | 209 | 4,654 | (129) | 1,047 | (3,103) | 1,561 | (207) | (29) | 2,398 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ | 15,451 | $ | 5,758 | $ | 29,343 | $ | 6,271 | $ | 35,219 | $ | 16,309 | $ | 24,334 | $ | 5,163 | $ | 1,702 | $ | 139,550 | ||||||||||||||||||||||||||||||||||||||||||
The allowance for credit losses increased during the first quarter in response to loan growth along with a forecast adjustment due to increased risk during the forecast period attributable to heightened geopolitical uncertainty, ongoing supply chain difficulties, and persistent inflation. Credit quality remains on an improving trend as evidenced by declining total special attention credit outstandings and net recoveries during the quarter. This quarter, increases in the allowance for various portfolios, particularly aircraft and construction equipment, were driven by loan growth and to a lesser extent, the forecast adjustment. Decreases in the auto and light truck portfolio was due to continued amortization of special attention credits in the highly reserved bus segment. Reduced reserves in the commercial real estate portfolio were due to a reduction in qualitative adjustments related to COVID-19 along with lower loan balances.
Commercial and agricultural – the decline in loan balances is attributable to PPP debt forgiveness coupled with a modest decline in loans in our core businesses. The small increase in the allowance was principally due to the impact of the forecast adjustment.
Solar – the allowance decreased due to lower loan outstandings. Credit quality is stable to improving.
Auto and light truck – the allowance decreased as a result of lower outstanding loan balances in the higher risk bus segment of the portfolio, which was significantly impacted by the pandemic. The decline in allowance attributable to the bus segment was substantially offset by loan growth in the auto rental and leasing segments, which carry lower loss ratios.
Medium and heavy duty truck – the allowance was minimally changed as a decrease in loan outstandings was offset by a slight increase in the forecast adjustment. Credit quality metrics continued to be relatively strong for this portfolio. Energy price volatility and driver availability remain a challenge.
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Aircraft – the allowance increased due to loan growth in both domestic and foreign segments. The portfolio is currently bolstered by strengthening collateral values somewhat offset by continuing economic concerns related primarily to Latin American-based foreign loans. The Company has historically carried a higher allowance in this portfolio due to risk volatility.
Construction equipment – the allowance increased due to loan growth.
Commercial real estate – the allowance decrease was a result of declines in outstanding loan balances as well as a minor decrease in COVID-19-related qualitative adjustment factors.
Residential real estate and home equity – the increased allowance was due to an increase in loan balances.
Consumer – segment saw a slight increase in allowance due principally to loan growth.
Economic Outlook
As of March 31, 2022, the most significant economic factors impacting our loan portfolios are the war in Ukraine and resultant increased uncertainty for the U.S. economy, and additional inflationary pressures, further aggravated by supply chain disruptions. We remain concerned about COVID-19 surges and new variants. The forecast considers global and domestic economic impacts from these factors as well as other key economic factors such as change in Gross Domestic Product and unemployment which may impact our clients. The Company’s assumption was that economic growth will slow in 2022 and 2023 and inflation will remain well above the 2% Federal Reserve target rate resulting in an adverse impact on the loan and lease portfolio over the next two years.
As a result of geopolitical risks and economic uncertainty, the Company’s future loss estimates may vary considerably from the March 31, 2022 assumptions.
Liability for Credit Losses on Unfunded Loan Commitments
The liability for credit losses inherent in unfunded loan commitments is included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition. The following table shows the changes in the liability for credit losses on unfunded loan commitments.
| Three Months Ended March 31, | |||||||||||
| (Dollars in thousands) | 2022 | 2021 | |||||||||
| Balance, beginning of period | $ | 4,196 | $ | 4,499 | |||||||
| Provision | 728 | 94 | |||||||||
| Balance, end of period | $ | 4,924 | $ | 4,593 | |||||||
Note 6 — Lease Investments
As a lessor, the Company’s loan and lease portfolio includes direct finance leases, which are included in Commercial and Agricultural, Solar, Auto and Light Truck, Medium and Heavy Duty Truck, Aircraft, and Construction Equipment on the Consolidated Statements of Financial Condition. The Company also finances various types of construction equipment, medium and heavy duty trucks, automobiles and other equipment under leases classified as operating leases, which are included in Equipment Owned Under Operating Leases, net, on the Consolidated Statements of Financial Condition.
The following table shows interest income recognized from direct finance lease payments and operating lease equipment rental income and related depreciation expense.
| Three Months Ended March 31, | |||||||||||
| (Dollars in thousands) | 2022 | 2021 | |||||||||
| Direct finance leases: | |||||||||||
| Interest income on lease receivable | $ | 1,781 | $ | 1,590 | |||||||
| Operating leases: | |||||||||||
| Income related to lease payments | $ | 3,662 | $ | 4,629 | |||||||
| Depreciation expense | 3,015 | 3,773 | |||||||||
Income related to reimbursements from lessees for personal property tax on operating leased equipment for the three months ended March 31, 2022 and 2021 was $0.20 million and $0.24 million, respectively. Expense related to personal property tax payments on operating leased equipment for the three months ended March 31, 2022 and 2021 was $0.20 million and $0.24 million, respectively.
17
Note 7 — Mortgage Servicing Rights
The Company recognizes the rights to service residential mortgage loans for others as separate assets, whether the servicing rights are acquired through a separate purchase or through the sale of originated loans with servicing rights retained. The Company allocates a portion of the total proceeds of a mortgage loan to servicing rights based on the relative fair value. The unpaid principal balance of residential mortgage loans serviced for third parties was $888.63 million and $883.90 million at March 31, 2022 and December 31, 2021, respectively.
Mortgage servicing rights (MSRs) are evaluated for impairment at each reporting date. For purposes of impairment measurement, MSRs are stratified based on the predominant risk characteristics of the underlying servicing, principally by loan type. If temporary impairment exists within a tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the fair value. If it is later determined all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced through a recovery of income.
The following table shows changes in the carrying value of MSRs and the associated valuation allowance.
| Three Months Ended March 31, | |||||||||||
| (Dollars in thousands) | 2022 | 2021 | |||||||||
| Mortgage servicing rights: | |||||||||||
| Balance at beginning of period | $ | 4,671 | $ | 4,616 | |||||||
| Additions | 335 | 761 | |||||||||
| Amortization | (381) | (590) | |||||||||
| Carrying value before valuation allowance at end of period | 4,625 | 4,787 | |||||||||
| Valuation allowance: | |||||||||||
| Balance at beginning of period | — | (812) | |||||||||
| Impairment recoveries | — | 42 | |||||||||
| Balance at end of period | $ | — | $ | (770) | |||||||
| Net carrying value of mortgage servicing rights at end of period | $ | 4,625 | $ | 4,017 | |||||||
| Fair value of mortgage servicing rights at end of period | $ | 6,363 | $ | 4,365 | |||||||
At March 31, 2022 and 2021, the fair value of MSRs exceeded the carrying value reported in the Consolidated Statements of Financial Condition by $1.74 million and $0.35 million, respectively. This difference represents increases in the fair value of certain MSRs that could not be recorded above cost basis.
Mortgage loan contractual servicing fees, including late fees and ancillary income, were $0.72 million and $0.81 million for the three months ended March 31, 2022 and 2021, respectively. Mortgage loan contractual servicing fees are included in Mortgage Banking on the Consolidated Statements of Income.
Note 8 — Commitments and Financial Instruments with Off-Balance-Sheet Risk
Financial Instruments with Off-Balance-Sheet Risk — 1st Source and its subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business. These off-balance-sheet financial instruments include commitments to originate and sell loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.
The following table shows financial instruments whose contract amounts represent credit risk.
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Amounts of commitments: | ||||||||||||||
| Loan commitments to extend credit | $ | 1,204,428 | $ | 1,148,984 | ||||||||||
| Standby letters of credit | $ | 22,765 | $ | 24,657 | ||||||||||
| Commercial and similar letters of credit | $ | 746 | $ | 8,531 | ||||||||||
The exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments and standby letters of credit is represented by the dollar amount of those instruments. The Company uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments.
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The Company grants mortgage loan commitments to borrowers, subject to normal loan underwriting standards. The interest rate risk associated with these loan commitments is managed by entering into contracts for future deliveries of loans. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments that guarantee the performance of a client to a third party. The credit risk involved in and collateral obtained when issuing standby letters of credit is essentially the same as that involved in extending loan commitments to clients. Standby letters of credit generally have terms ranging from two months to one year.
Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. Commercial letters of credit generally have terms ranging from two months to six months.
Note 9 — Derivative Financial Instruments
Commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments. See Note 8 for further information.
The Company has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Statements of Financial Condition and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s results of operations.
The following table shows the amounts of non-hedging derivative financial instruments.
| Asset derivatives | Liability derivatives | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Notional or contractual amount | Statement of Financial Condition classification | Fair value | Statement of Financial Condition classification | Fair value | |||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||
| Interest rate swap contracts | $ | 1,017,365 | Other assets | $ | 7,806 | Other liabilities | $ | 8,006 | ||||||||||||||||||||||||
| Loan commitments | 13,422 | Mortgages held for sale | 287 | N/A | — | |||||||||||||||||||||||||||
| Forward contracts - mortgage loan | 13,080 | Mortgages held for sale | 200 | N/A | — | |||||||||||||||||||||||||||
| Total | $ | 1,043,867 | $ | 8,293 | $ | 8,006 | ||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
| Interest rate swap contracts | $ | 1,064,721 | Other assets | $ | 20,735 | Other liabilities | $ | 21,172 | ||||||||||||||||||||||||
| Loan commitments | 15,086 | Mortgages held for sale | 452 | N/A | — | |||||||||||||||||||||||||||
| Forward contracts - mortgage loan | 22,000 | N/A | — | Mortgages held for sale | 11 | |||||||||||||||||||||||||||
| Total | $ | 1,101,807 | $ | 21,187 | $ | 21,183 | ||||||||||||||||||||||||||
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The following table shows the amounts included in the Consolidated Statements of Income for non-hedging derivative financial instruments.
| Gain (loss) | |||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||
| (Dollars in thousands) | Statement of Income classification | 2022 | 2021 | ||||||||||||||
| Interest rate swap contracts | Other expense | $ | 237 | $ | 333 | ||||||||||||
| Interest rate swap contracts | Other income | — | 86 | ||||||||||||||
| Loan commitments | Mortgage banking | (165) | (698) | ||||||||||||||
| Forward contracts - mortgage loan | Mortgage banking | 211 | 577 | ||||||||||||||
| Total | $ | 283 | $ | 298 | |||||||||||||
The following table shows the offsetting of financial assets and derivative assets.
| Gross Amounts Not Offset in the Statement of Financial Condition | ||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Statement of Financial Condition | Net Amounts of Assets Presented in the Statement of Financial Condition | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 10,324 | $ | 2,518 | $ | 7,806 | $ | — | $ | 3,040 | $ | 4,766 | ||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 24,436 | $ | 3,701 | $ | 20,735 | $ | — | $ | — | $ | 20,735 | ||||||||||||||||||||||||||
The following table shows the offsetting of financial liabilities and derivative liabilities.
| Gross Amounts Not Offset in the Statement of Financial Condition | ||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Statement of Financial Condition | Net Amounts of Liabilities Presented in the Statement of Financial Condition | Financial Instruments | Cash Collateral Pledged | Net Amount | ||||||||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 10,524 | $ | 2,518 | $ | 8,006 | $ | 299 | $ | — | $ | 7,707 | ||||||||||||||||||||||||||
| Repurchase agreements | 193,798 | — | 193,798 | 193,798 | — | — | ||||||||||||||||||||||||||||||||
| Total | $ | 204,322 | $ | 2,518 | $ | 201,804 | $ | 194,097 | $ | — | $ | 7,707 | ||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 24,873 | $ | 3,701 | $ | 21,172 | $ | 20,498 | $ | — | $ | 674 | ||||||||||||||||||||||||||
| Repurchase agreements | 194,727 | — | 194,727 | 194,727 | — | — | ||||||||||||||||||||||||||||||||
| Total | $ | 219,600 | $ | 3,701 | $ | 215,899 | $ | 215,225 | $ | — | $ | 674 | ||||||||||||||||||||||||||
If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions. At March 31, 2022 and December 31, 2021, repurchase agreements had a remaining contractual maturity of $190.67 million and $191.47 million in overnight and $3.13 million and $3.26 million in up to 30 days, respectively and were collateralized by U.S. Treasury and Federal agencies securities.
Note 10 — Variable Interest Entities
A variable interest entity (VIE) is a partnership, limited liability company, trust or other legal entity that meets any one of the following criteria:
•The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.
•The entity’s investors lack the power to direct the activities that most significantly affect the entity’s economic performance.
•The entity’s at-risk holders do not have the obligation to absorb the losses or the right to receive residual returns.
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•The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entity’s activities involve, or are conducted on behalf of, investors with disproportionately few voting rights.
The Company is involved in various entities that are considered to be VIEs. The Company’s investments in VIEs are primarily related to investments promoting affordable housing, community development and renewable energy sources. Some of these tax-advantaged investments support the Company’s regulatory compliance with the Community Reinvestment Act. The Company’s investments in these entities generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. Tax credits from affordable housing investments and community development investments are recognized as a reduction of tax expense. Investments in renewable energy sources qualify for investment tax credits which are recognized as a reduction to the related investment asset. The Company recognized federal income tax credits related to its affordable housing and community development tax-advantaged investments in tax expense of $0.50 million and $0.50 million for the three months ended March 31, 2022 and 2021, respectively. The Company also recognized $0.00 million and $1.92 million of investment tax credits for the three months ended March 31, 2022 and 2021, respectively.
The Company is not required to consolidate VIEs in which it has concluded it does not have a controlling financial interest, and thus is not the primary beneficiary. In such cases, the Company does not have both the power to direct the entities’ most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. As a limited partner in these operating partnerships, the Company is allocated credits and deductions associated with the underlying properties. The Company has determined that it is not the primary beneficiary of these investments because the general partners have the power to direct activities that most significantly influence the economic performance of their respective partnerships.
The Company’s investments in these unconsolidated VIEs are carried in Other Assets on the Consolidated Statements of Financial Condition. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are generally carried in Other Liabilities on the Consolidated Statements of Financial Condition. The Company’s maximum exposure to loss from these unconsolidated VIEs include the investment recorded on the Company’s Consolidated Statements of Financial Condition, net of unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the community-based business, housing projects and renewable energy projects completely fail and do not meet certain taxing authority compliance requirements resulting in recapture of the related tax credits.
The following table provides a summary of investments in affordable housing, community development and renewable energy VIEs that the Company has not consolidated.
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Investment carrying amount | $ | 26,391 | $ | 35,968 | |||||||
| Unfunded capital and other commitments | 19,668 | 29,670 | |||||||||
| Maximum exposure to loss | 48,044 | 50,319 | |||||||||
The Company is required to consolidate VIEs in which it has concluded it has significant involvement in and the ability to direct the activities that impact the entity’s economic performance. The Company is the managing general partner of entities to which it shares interest in tax-advantaged investments with third parties. At March 31, 2022 and December 31, 2021, approximately $67.85 million and $59.08 million of the Company’s assets and $7.23 million and $0.00 million of its liabilities included on the Consolidated Statements of Financial Condition were related to tax-advantaged investment VIEs which the Company has consolidated, respectively. The assets of the consolidated VIEs are reported in Other Assets, the liabilities are reported in Other Liabilities and the non-controlling interest is reported in Equity on the Consolidated Statements of Financial Condition. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIE do not have recourse to the general credit of the Company. The Company’s exposure to the consolidated VIE is generally limited to the carrying value of its variable interest plus any related tax credits previously recognized.
Additionally, the Company sponsors one trust, 1st Source Master Trust (Capital Trust) of which 100% of the common equity is owned by the Company. The Capital Trust was formed in 2007 for the purpose of issuing corporation-obligated mandatorily redeemable capital securities (the capital securities) to third-party investors and investing the proceeds from the sale of the capital securities solely in junior subordinated debenture securities of the Company (the subordinated notes). The subordinated notes held by the Capital Trust are the sole assets of the Capital Trust. The Capital Trust qualifies as a variable interest entity for which the Company is not the primary beneficiary and therefore reported in the financial statements as an unconsolidated subsidiary. The junior subordinated debentures are reflected as subordinated notes in the Statements of Financial Condition with the corresponding interest distributions reflected as Interest Expense in the Statements of Income. The common shares issued by the Capital Trust are included in Other Assets in the Statements of Financial Condition.
21
Distributions on the capital securities issued by the Capital Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Capital Trust on the subordinated notes held by the Capital Trust. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated notes. The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The capital securities held by the Capital Trust qualify as Tier 1 capital under Federal Reserve Board guidelines.
The following table shows subordinated notes at March 31, 2022.
| (Dollars in thousands) | Amount of Subordinated Notes | Interest Rate | Maturity Date | |||||||||||||||||
| June 2007 issuance (1) | $ | 41,238 | 7.22 | % | 6/15/2037 | |||||||||||||||
| August 2007 issuance (2) | 17,526 | 2.31 | % | 9/15/2037 | ||||||||||||||||
| Total | $ | 58,764 | ||||||||||||||||||
(1) Fixed rate through life of debt.
(2) 3-Month LIBOR +1.48% through remaining life of debt.
Note 11 — Earnings Per Share
Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards. Non-vested restricted stock awards are considered participating securities to the extent the holders of these securities receive non-forfeitable dividends at the same rate as holders of common stock. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.
Stock options, where the exercise price was greater than the average market price of the common shares, were excluded from the computation of diluted earnings per common share because the result would have been antidilutive. There were no stock options outstanding as of March 31, 2022 and 2021.
The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share.
| Three Months Ended March 31, | |||||||||||
| (Dollars in thousands - except per share amounts) | 2022 | 2021 | |||||||||
| Distributed earnings allocated to common stock | $ | 7,672 | $ | 7,364 | |||||||
| Undistributed earnings allocated to common stock | 19,516 | 20,531 | |||||||||
| Net earnings allocated to common stock | 27,188 | 27,895 | |||||||||
| Net earnings allocated to participating securities | 202 | 210 | |||||||||
| Net income allocated to common stock and participating securities | $ | 27,390 | $ | 28,105 | |||||||
| Weighted average shares outstanding for basic earnings per common share | 24,743,790 | 25,320,930 | |||||||||
| Dilutive effect of stock compensation | — | — | |||||||||
| Weighted average shares outstanding for diluted earnings per common share | 24,743,790 | 25,320,930 | |||||||||
| Basic earnings per common share | $ | 1.10 | $ | 1.10 | |||||||
| Diluted earnings per common share | $ | 1.10 | $ | 1.10 | |||||||
Note 12 — Stock Based Compensation
As of March 31, 2022, the Company had four active stock-based employee compensation plans, which are more fully described in Note 16 of the Consolidated Financial Statements in 1st Source’s Annual Report on Form 10-K for the year ended December 31, 2021. These plans include three executive stock award plans, the Executive Incentive Plan (EIP), the Restricted Stock Award Plan (RSAP), the Strategic Deployment Incentive Plan (SDP); and the Employee Stock Purchase Plan. The 2011 Stock Option Plan was approved by the shareholders on April 21, 2011 but the Company had not made any grants through March 31, 2022.
22
Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value. For all awards except stock option awards, the grant date fair value is either the fair market value per share or book value per share (corresponding to the type of stock awarded) as of the grant date. For stock option awards, the grant date fair value is estimated using the Black-Scholes option pricing model. For all awards, the Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, for which the Company uses the related vesting term.
Total fair value of options vested and expensed was zero for the three months ended March 31, 2022 and 2021. As of March 31, 2022 and 2021 there were no outstanding stock options. There were no stock options exercised during the three months ended March 31, 2022 and 2021. All shares issued in connection with stock option exercises are issued from available treasury stock.
As of March 31, 2022, there was $9.48 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 3.56 years.
Note 13 — Accumulated Other Comprehensive Income (Loss)
The following table presents reclassifications out of accumulated other comprehensive income (loss) related to unrealized gains and losses on available-for-sale securities.
| Three Months Ended March 31, | Affected Line Item in the Statements of Income | ||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | |||||||||||||||
| Realized gains included in net income | $ | — | $ | — | Gains on investment securities available-for-sale | ||||||||||||
| — | — | Income before income taxes | |||||||||||||||
| Tax effect | — | — | Income tax expense | ||||||||||||||
| Net of tax | $ | — | $ | — | Net income | ||||||||||||
Note 14 — Income Taxes
The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was zero at March 31, 2022 and December 31, 2021. Interest and penalties are recognized through the income tax provision. For the three months ended March 31, 2022 and 2021, the Company recognized no interest or penalties. There were no accrued interest and penalties at March 31, 2022 and December 31, 2021.
Tax years that remain open and subject to audit include the federal 2018-2021 years and the Indiana 2018-2021 years. The Company does not anticipate a significant change in the amount of uncertain tax positions within the next 12 months.
Note 15 — Fair Value Measurements
The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are also utilized to determine the initial value of certain assets and liabilities, to perform impairment assessments, and for disclosure purposes. The Company uses quoted market prices and observable inputs to the maximum extent possible when measuring fair value. In the absence of quoted market prices, various valuation techniques are utilized to measure fair value. When possible, observable market data for identical or similar financial instruments is used in the valuation. When market data is not available, fair value is determined using valuation models that incorporate management’s estimates of the assumptions a market participant would use in pricing the asset or liability.
Fair value measurements are classified within one of three levels based on the observability of the inputs used to determine fair value, as follows:
•Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
•Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
•Level 3 — The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.
23
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company elected fair value accounting for mortgages held for sale and for its best-efforts forward sales commitments. The Company economically hedges its mortgages held for sale at the time the interest rate locks are issued to the customers. The Company believes the election for mortgages held for sale will reduce certain timing differences and better match changes in the value of these assets with changes in the value of derivatives or best-best efforts forward sales commitments. At March 31, 2022 and December 31, 2021, all mortgages held for sale were carried at fair value.
The following table shows the differences between the fair value carrying amount of mortgages held for sale measured at fair value and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity.
| (Dollars in thousands) | Fair value carrying amount | Aggregate unpaid principal | Excess of fair value carrying amount over (under) unpaid principal | |||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Mortgages held for sale reported at fair value | $ | 4,757 | $ | 4,256 | $ | 501 | (1) | |||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Mortgages held for sale reported at fair value | $ | 13,284 | $ | 12,456 | $ | 828 | (1) | |||||||||||||||||||
(1)The excess of fair value carrying amount over (under) unpaid principal is included in mortgage banking income and includes changes in fair value at and subsequent to funding and gains and losses on the related loan commitment prior to funding.
Financial Instruments on Recurring Basis:
The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis:
Investment securities available-for-sale are valued primarily by a third party pricing agent. Prices supplied by the independent pricing agent, as well as their pricing methodologies and assumptions, are reviewed by the Company for reasonableness and to ensure such prices are aligned with market levels. In general, the Company’s investment securities do not possess a complex structure that could introduce greater valuation risk. The portfolio mainly consists of traditional investments including U.S. Treasury and Federal agencies securities, Federal agency mortgage pass-through securities, and general obligation and revenue municipal bonds. Pricing for such instruments is fairly generic and is easily obtained. On a quarterly basis, prices supplied by the pricing agent are validated by comparison to prices obtained from other third party sources for a material portion of the portfolio.
The valuation policy and procedures for Level 3 fair value measurements of available-for-sale debt securities are decided through collaboration between management of the Corporate Accounting and Funds Management departments. The changes in fair value measurement for Level 3 securities are analyzed on a periodic basis under a collaborative framework with the aforementioned departments. The methodology and variables used for input are derived from the combination of observable and unobservable inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external factors, such as market movement and credit rating adjustments.
Both the market and income valuation approaches are implemented using the following types of inputs:
•U.S. treasuries are priced using the market approach and utilizing live data feeds from active market exchanges for identical securities.
•Government-sponsored agency debt securities and corporate bonds are primarily priced using available market information through processes such as benchmark curves, market valuations of like securities, sector groupings and matrix pricing.
•Other government-sponsored agency securities, mortgage-backed securities and some of the actively traded REMICs and CMOs, are primarily priced using available market information including benchmark yields, prepayment speeds, spreads and volatility of similar securities.
24
•State and political subdivisions are largely grouped by characteristics, i.e., geographical data and source of revenue in trade dissemination systems. Since some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities. Local direct placement municipal securities, with very little market activity, are priced using an appropriate market yield curve, which includes a credit spread assumption.
Mortgages held for sale and the related loan commitments and forward contracts (hedges) are valued by a third party pricing agent. Prices supplied by the independent pricing agent, as well as their pricing methodologies, are reviewed by the Company for reasonableness and to ensure such prices are aligned with market values. On a quarterly basis, prices supplied by the pricing agent are validated by comparison to the prices obtained from other third party sources.
Interest rate swap positions, both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their basis readily observable market parameters. This valuation process considers various factors including interest rate yield curves, time value and volatility factors. Validation of third party agent valuations is accomplished by comparing those values to the Company’s swap counterparty valuations. Management believes an adjustment is required to “mid-market” valuations for derivatives tied to its performing loan portfolio to recognize the imprecision and related exposure inherent in the process of estimating expected credit losses as well as velocity of deterioration evident with systemic risks embedded in these portfolios. Any change in the mid-market derivative valuation adjustment will be recognized immediately through the Consolidated Statements of Income.
The following table shows the balance of assets and liabilities measured at fair value on a recurring basis.
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||||||||||||||
| U.S. Treasury and Federal agencies securities | $ | 590,484 | $ | 490,461 | $ | — | $ | 1,080,945 | ||||||||||||||||||
| U.S. States and political subdivisions securities | — | 93,824 | 4,529 | 98,353 | ||||||||||||||||||||||
| Mortgage-backed securities — Federal agencies | — | 655,010 | — | 655,010 | ||||||||||||||||||||||
| Corporate debt securities | — | 22,525 | — | 22,525 | ||||||||||||||||||||||
| Foreign government and other securities | — | 598 | — | 598 | ||||||||||||||||||||||
| Total debt securities available-for-sale | 590,484 | 1,262,418 | 4,529 | 1,857,431 | ||||||||||||||||||||||
| Mortgages held for sale | — | 4,757 | — | 4,757 | ||||||||||||||||||||||
| Accrued income and other assets (interest rate swap agreements) | — | 7,806 | — | 7,806 | ||||||||||||||||||||||
| Total | $ | 590,484 | $ | 1,274,981 | $ | 4,529 | $ | 1,869,994 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Accrued expenses and other liabilities (interest rate swap agreements) | $ | — | $ | 8,006 | $ | — | $ | 8,006 | ||||||||||||||||||
| Total | $ | — | $ | 8,006 | $ | — | $ | 8,006 | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||||||||||||||
| U.S. Treasury and Federal agencies securities | $ | 561,950 | $ | 522,056 | $ | — | $ | 1,084,006 | ||||||||||||||||||
| U.S. States and political subdivisions securities | — | 93,852 | 1,849 | 95,701 | ||||||||||||||||||||||
| Mortgage-backed securities — Federal agencies | — | 659,727 | — | 659,727 | ||||||||||||||||||||||
| Corporate debt securities | — | 23,009 | — | 23,009 | ||||||||||||||||||||||
| Foreign government and other securities | — | 598 | — | 598 | ||||||||||||||||||||||
| Total debt securities available-for-sale | 561,950 | 1,299,242 | 1,849 | 1,863,041 | ||||||||||||||||||||||
| Mortgages held for sale | — | 13,284 | — | 13,284 | ||||||||||||||||||||||
| Accrued income and other assets (interest rate swap agreements) | — | 20,735 | — | 20,735 | ||||||||||||||||||||||
| Total | $ | 561,950 | $ | 1,333,261 | $ | 1,849 | $ | 1,897,060 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Accrued expenses and other liabilities (interest rate swap agreements) | $ | — | $ | 21,172 | $ | — | $ | 21,172 | ||||||||||||||||||
| Total | $ | — | $ | 21,172 | $ | — | $ | 21,172 | ||||||||||||||||||
25
The following table shows changes in Level 3 assets measured at fair value on a recurring basis for the quarter ended March 31, 2022 and 2021.
| (Dollars in thousands) | U.S. States and political subdivisions securities | |||||||
| Beginning balance January 1, 2022 | $ | 1,849 | ||||||
| Total gains or losses (realized/unrealized): | ||||||||
| Included in earnings | — | |||||||
| Included in other comprehensive income (loss) | (155) | |||||||
| Purchases | 3,000 | |||||||
| Issuances | — | |||||||
| Sales | — | |||||||
| Settlements | — | |||||||
| Maturities | (165) | |||||||
| Transfers into Level 3 | — | |||||||
| Transfers out of Level 3 | — | |||||||
| Ending balance March 31, 2022 | $ | 4,529 | ||||||
| Beginning January 1, 2021 | $ | 2,152 | ||||||
| Total gains or losses (realized/unrealized): | ||||||||
| Included in earnings | — | |||||||
| Included in other comprehensive income (loss) | (80) | |||||||
| Purchases | — | |||||||
| Issuances | — | |||||||
| Sales | — | |||||||
| Settlements | — | |||||||
| Maturities | (165) | |||||||
| Transfers into Level 3 | — | |||||||
| Transfers out of Level 3 | — | |||||||
| Ending balance March 31, 2021 | $ | 1,907 | ||||||
There were no gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2022 or 2021.
The following table shows the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring basis.
| (Dollars in thousands) | Fair Value | Valuation Methodology | Unobservable Inputs | Range of Inputs | Weighted Average | |||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||
| Debt securities available-for sale | ||||||||||||||||||||||||||||||||
Direct placement municipal securities | $ | 4,529 | Discounted cash flows | Credit spread assumption | 2.36% - 3.95% | 2.88 | % | |||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
Debt securities available-for sale | ||||||||||||||||||||||||||||||||
Direct placement municipal securities | $ | 1,849 | Discounted cash flows | Credit spread assumption | 0.04% - 2.31% | 1.58 | % | |||||||||||||||||||||||||
Financial Instruments on Non-recurring Basis:
The Company may be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or market accounting or impairment charges of individual assets.
26
The Credit Policy Committee (CPC), a management committee, is responsible for overseeing the valuation processes and procedures for Level 3 measurements of impaired loans, other real estate and repossessions. The CPC reviews these assets on a quarterly basis to determine the accuracy of the observable inputs, generally third party appraisals, auction values, values derived from trade publications and data submitted by the borrower, and the appropriateness of the unobservable inputs, generally discounts due to current market conditions and collection issues. The CPC establishes discounts based on asset type and valuation source; deviations from the standard are documented. The discounts are reviewed periodically, annually at a minimum, to determine they remain appropriate. Consideration is given to current trends in market values for the asset categories and gains and losses on sales of similar assets. The Loan and Funds Management Committee of the Board of Directors is responsible for overseeing the CPC.
Discounts vary depending on the nature of the assets and the source of value. Aircraft are generally valued using quarterly trade publications adjusted for engine time, condition, maintenance programs, discounted by 10%. Likewise, autos are valued using current auction values, discounted by 10%; medium and heavy duty trucks are valued using trade publications and auction values, discounted by 15%. Construction equipment is generally valued using trade publications and auction values, discounted by 20%. Real estate is valued based on appraisals or evaluations, discounted by 20% with higher discounts for property in poor condition or property with characteristics which may make it more difficult to market. Commercial loans subject to borrowing base certificates are generally discounted by 20% for receivables and 40% - 75% for inventory with higher discounts when monthly borrowing base certificates are not required or received.
Collateral-dependent impaired loans and related write-downs are based on the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are reviewed quarterly and estimated using customized discounting criteria, appraisals and dealer and trade magazine quotes which are used in a market valuation approach. In accordance with fair value measurements, only impaired loans for which an allowance for loan loss has been established based on the fair value of collateral require classification in the fair value hierarchy. As a result, only a portion of the Company’s impaired loans are classified in the fair value hierarchy.
The Company has established MSRs valuation policies and procedures based on industry standards and to ensure valuation methodologies are consistent and verifiable. MSRs and related adjustments to fair value result from application of lower of cost or fair value accounting. For purposes of impairment, MSRs are stratified based on the predominant risk characteristics of the underlying servicing, principally by loan type. The fair value of each tranche of the servicing portfolio is estimated by calculating the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. Prepayment rates and discount rates are derived through a third party pricing agent. Changes in the most significant inputs, including prepayment rates and discount rates, are compared to the changes in the fair value measurements and appropriate resolution is made. A fair value analysis is also obtained from an independent third party agent and compared to the internal valuation for reasonableness. MSRs do not trade in an active, open market with readily observable prices and though sales of MSRs do occur, precise terms and conditions typically are not readily available and the characteristics of the Company’s servicing portfolio may differ from those of any servicing portfolios that do trade.
Other real estate is based on the fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and reflect a market value approach. Fair values are reviewed quarterly, and new appraisals are obtained annually. Repossessions are similarly valued.
For assets measured at fair value on a nonrecurring basis the following represents impairment charges (recoveries) recognized on these assets during the quarter ended March 31, 2022: collateral-dependent impaired loans - $0.00 million; mortgage servicing rights - $0.00 million; repossessions - $0.00 million; and other real estate - $0.00 million.
27
The following table shows the carrying value of assets measured at fair value on a non-recurring basis.
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Collateral-dependent impaired loans | $ | — | $ | — | $ | 986 | $ | 986 | ||||||||||||||||||
| Accrued income and other assets (mortgage servicing rights) | — | — | 4,625 | 4,625 | ||||||||||||||||||||||
| Accrued income and other assets (repossessions) | — | — | 73 | 73 | ||||||||||||||||||||||
| Accrued income and other assets (other real estate) | — | — | — | — | ||||||||||||||||||||||
| Total | $ | — | $ | — | $ | 5,684 | $ | 5,684 | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Collateral-dependent impaired loans | $ | — | $ | — | $ | 571 | $ | 571 | ||||||||||||||||||
| Accrued income and other assets (mortgage servicing rights) | — | — | 4,671 | 4,671 | ||||||||||||||||||||||
| Accrued income and other assets (repossessions) | — | — | 861 | 861 | ||||||||||||||||||||||
| Accrued income and other assets (other real estate) | — | — | — | — | ||||||||||||||||||||||
| Total | $ | — | $ | — | $ | 6,103 | $ | 6,103 | ||||||||||||||||||
The following table below shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a non-recurring basis.
| (Dollars in thousands) | Carrying Value | Fair Value | Valuation Methodology | Unobservable Inputs | Range of Inputs | Weighted Average | ||||||||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Collateral-dependent impaired loans | $ | 986 | $ | 986 | Collateral based measurements including appraisals, trade publications, and auction values | Discount for lack of marketability and current conditions | 20% - 90% | 34.5 | % | |||||||||||||||||||||||||||||
| Mortgage servicing rights | 4,625 | 6,363 | Discounted cash flows | Constant prepayment rate (CPR) | 10.2% - 17.4% | 13.7 | % | |||||||||||||||||||||||||||||||
| Discount rate | 9.8% - 12.6% | 9.9 | % | |||||||||||||||||||||||||||||||||||
| Repossessions | 73 | 241 | Appraisals, trade publications and auction values | Discount for lack of marketability | 13% - 100% | 70 | % | |||||||||||||||||||||||||||||||
| Other real estate | — | — | Appraisals | Discount for lack of marketability | 0% - 0% | 0 | % | |||||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Collateral-dependent impaired loans | $ | 571 | $ | 571 | Collateral based measurements including appraisals, trade publications, and auction values | Discount for lack of marketability and current conditions | 20% - 90% | 43.1 | % | |||||||||||||||||||||||||||||
| Mortgage servicing rights | 4,671 | 5,640 | Discounted cash flows | Constant prepayment rate (CPR) | 11.8% - 18.5% | 16.4 | % | |||||||||||||||||||||||||||||||
| Discount rate | 8.6% - 11.5% | 8.8 | % | |||||||||||||||||||||||||||||||||||
| Repossessions | 861 | 942 | Appraisals, trade publications and auction values | Discount for lack of marketability | 0% - 21% | 2 | % | |||||||||||||||||||||||||||||||
| Other real estate | — | — | Appraisals | Discount for lack of marketability | 0% - 0% | 0 | % | |||||||||||||||||||||||||||||||
GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.
28
The following table shows the fair values of the Company’s financial instruments.
| (Dollars in thousands) | Carrying or Contract Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Cash and due from banks | $ | 69,195 | $ | 69,195 | $ | 69,195 | $ | — | $ | — | ||||||||||||||||||||||
| Federal funds sold and interest bearing deposits with other banks | 347,697 | 347,697 | 347,697 | — | — | |||||||||||||||||||||||||||
| Investment securities, available-for-sale | 1,857,431 | 1,857,431 | 590,484 | 1,262,418 | 4,529 | |||||||||||||||||||||||||||
| Other investments | 25,538 | 25,538 | 25,538 | — | — | |||||||||||||||||||||||||||
| Mortgages held for sale | 4,757 | 4,757 | — | 4,757 | — | |||||||||||||||||||||||||||
| Loans and leases, net of allowance for loan and lease losses | 5,264,044 | 5,280,472 | — | — | 5,280,472 | |||||||||||||||||||||||||||
| Mortgage servicing rights | 4,625 | 6,363 | — | — | 6,363 | |||||||||||||||||||||||||||
| Accrued interest receivable | 18,289 | 18,289 | — | 18,289 | — | |||||||||||||||||||||||||||
| Interest rate swaps | 7,806 | 7,806 | — | 7,806 | — | |||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Deposits | $ | 6,673,092 | $ | 6,666,398 | $ | 5,821,071 | $ | 845,327 | $ | — | ||||||||||||||||||||||
| Short-term borrowings | 199,158 | 199,158 | 192,146 | 7,012 | — | |||||||||||||||||||||||||||
| Long-term debt and mandatorily redeemable securities | 69,563 | 68,258 | — | 68,258 | — | |||||||||||||||||||||||||||
| Subordinated notes | 58,764 | 58,350 | — | 58,350 | — | |||||||||||||||||||||||||||
| Accrued interest payable | 2,084 | 2,084 | — | 2,084 | — | |||||||||||||||||||||||||||
| Interest rate swaps | 8,006 | 8,006 | — | 8,006 | — | |||||||||||||||||||||||||||
| Off-balance-sheet instruments * | — | 82 | — | 82 | — | |||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Cash and due from banks | $ | 54,420 | $ | 54,420 | $ | 54,420 | $ | — | $ | — | ||||||||||||||||||||||
| Federal funds sold and interest bearing deposits with other banks | 470,767 | 470,767 | 470,767 | — | — | |||||||||||||||||||||||||||
| Investment securities, available-for-sale | 1,863,041 | 1,863,041 | 561,950 | 1,299,242 | 1,849 | |||||||||||||||||||||||||||
| Other investments | 27,189 | 27,189 | 27,189 | — | — | |||||||||||||||||||||||||||
| Mortgages held for sale | 13,284 | 13,284 | — | 13,284 | — | |||||||||||||||||||||||||||
| Loans and leases, net of allowance for loan and lease losses | 5,218,722 | 5,269,551 | — | — | 5,269,551 | |||||||||||||||||||||||||||
| Mortgage servicing rights | 4,671 | 5,640 | — | — | 5,640 | |||||||||||||||||||||||||||
| Accrued interest receivable | 17,760 | 17,760 | — | 17,760 | — | |||||||||||||||||||||||||||
| Interest rate swaps | 20,735 | 20,735 | — | 20,735 | — | |||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Deposits | $ | 6,679,065 | $ | 6,680,163 | $ | 5,794,928 | $ | 885,235 | $ | — | ||||||||||||||||||||||
| Short-term borrowings | 200,027 | 200,027 | 192,801 | 7,226 | — | |||||||||||||||||||||||||||
| Long-term debt and mandatorily redeemable securities | 71,251 | 71,305 | — | 71,305 | — | |||||||||||||||||||||||||||
| Subordinated notes | 58,764 | 58,553 | — | 58,553 | — | |||||||||||||||||||||||||||
| Accrued interest payable | 1,885 | 1,885 | — | 1,885 | — | |||||||||||||||||||||||||||
| Interest rate swaps | 21,172 | 21,172 | — | 21,172 | — | |||||||||||||||||||||||||||
| Off-balance-sheet instruments * | — | 364 | — | 364 | — | |||||||||||||||||||||||||||
* Represents estimated cash outflows required to currently settle the obligations at current market rates.
These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. These estimates are subjective in nature and require considerable judgment to interpret market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange, nor are they intended to represent the fair value of the Company as a whole. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of the respective balance sheet date. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.
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Other significant assets, such as premises and equipment, other assets, and liabilities not defined as financial instruments, are not included in the above disclosures. Also, the fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis is presented to provide information concerning 1st Source Corporation and its subsidiaries’ (collectively referred to as “the Company”, “we”, and “our”) financial condition as of March 31, 2022, as compared to December 31, 2021, and the results of operations for the three months ended March 31, 2022 and 2021. This discussion and analysis should be read in conjunction with our consolidated financial statements and the financial and statistical data appearing elsewhere in this report and our 2021 Annual Report.
Except for historical information contained herein, the matters discussed in this document express “forward-looking statements.” Generally, the words “believe,” “contemplate,” “seek,” “plan,” “possible,” “assume,” “hope,” “expect,” “intend,” “targeted,” “continue,” “remain,” “estimate,” “anticipate,” “project,” “will,” “should,” “indicate,” “would,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Those statements, including statements, projections, estimates or assumptions concerning future events or performance, and other statements that are other than statements of historical fact, are subject to material risks and uncertainties. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. We may make other written or oral forward-looking statements from time to time. Readers are advised that various important factors could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected in such forward-looking statements. Such factors include, but are not limited to, changes in law, regulations or GAAP; our competitive position within the markets we serve; increasing consolidation within the banking industry; unforeseen changes in interest rates; unforeseen changes in loan prepayment assumptions; unforeseen downturns in or major events affecting the local, regional or national economies or the industries in which we have credit concentrations; potential impacts of the COVID-19 pandemic; and other matters discussed in our filings with the SEC, including our Annual Report on Form 10-K for 2021, which filings are available from the SEC. We undertake no obligation to publicly update or revise any forward-looking statements.
FINANCIAL CONDITION
Our total assets at March 31, 2022 were $8.01 billion, a decrease of $83.83 million or 1.04% from December 31, 2021. Total investment securities available-for-sale were $1.86 billion, a decrease of $5.61 million or 0.30% from December 31, 2021. The largest contributor to the decrease in investment securities available-for-sale was negative market value adjustments due to temporary, non-credit-related, net unrealized losses as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. Federal funds sold and interest bearing deposits with other banks were $347.70 million, a decrease of $123.07 million or 26.14% from December 31, 2021. The decrease in federal funds sold and interest bearing deposits with other banks was due to lower interest bearing deposits at the Federal Reserve Bank as a result of purchasing investment securities available for sale.
Total loans and leases were $5.39 billion, an increase of $47.79 million or 0.89% from December 31, 2021. The largest contributors to the increase in loans and leases was growth in the aircraft and auto and light truck portfolios offset by $36.61 million of Paycheck Protection Program loans forgiven by the SBA during the first quarter. As of March 31, 2022, total PPP loans were $37.94 million which is net of unearned fees of $1.24 million and located within the commercial and agricultural portfolio. Our foreign loan and lease balances, all denominated in U.S. dollars were $212.68 million and $193.31 million as of March 31, 2022 and December 31, 2021, respectively. Foreign loans and leases are in aircraft financing. Loan and lease balances to borrowers in Brazil and Mexico were $73.70 million and $127.73 million as of March 31, 2022, respectively, compared to $65.24 million and $117.90 million as of December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021 there was not a significant concentration in any other country.
Equipment owned under operating leases was $41.79 million, a decrease of $6.64 million, or 13.71% compared to December 31, 2021. The largest contributor to the decrease in equipment owned under operating leases was reduced leasing volume primarily due to a change in customer preferences.
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Total deposits were $6.67 billion, a decrease of $5.97 million or 0.09% from the end of 2021. The largest contributors to the decrease in total deposits was a reduction in interest-bearing checking accounts, time deposits with maturities less than twelve months and brokered deposits offset by increased time deposits with maturities greater than twelve months. Short-term borrowings were $199.16 million, a decrease of $0.87 million or 0.43% from December 31, 2021. Long-term debt and mandatorily redeemable securities were $69.56 million, a decrease of $1.69 million or 2.37% from December 31, 2021. Accrued expenses and other liabilities were $92.42 million, a decrease of $25.30 million or 21.49% from December 31, 2021 primarily due to a decrease in the fair value of interest rate swap contracts with customers and annual incentive related payments to employees.
The following table shows accrued income and other assets.
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Accrued income and other assets: | ||||||||||||||
| Bank owned life insurance cash surrender value | $ | 71,728 | $ | 71,466 | ||||||||||
| Operating lease right of use assets | 21,402 | 22,071 | ||||||||||||
| Accrued interest receivable | 18,289 | 17,760 | ||||||||||||
| Mortgage servicing rights | 4,625 | 4,671 | ||||||||||||
| Other real estate | — | — | ||||||||||||
| Repossessions | 73 | 861 | ||||||||||||
| Partnership investments carrying amount | 94,243 | 95,045 | ||||||||||||
| All other assets | 61,768 | 57,595 | ||||||||||||
| Total accrued income and other assets | $ | 272,128 | $ | 269,469 | ||||||||||
The largest contributor to the increase in accrued income and other assets from December 31, 2021 was an increase in deferred tax assets related to available-for-sale debt securities included in all other assets above offset by a decrease in the fair value of interest rate swap contracts with customers included in all other assets above.
CAPITAL
As of March 31, 2022, total shareholders’ equity was $864.85 million, down $51.41 million, or 5.61% from the $916.26 million at December 31, 2021. In addition to net income of $27.39 million, other significant changes in shareholders’ equity during the first three months of 2022 included $7.70 million of dividends paid and $2.18 million in common stock acquired for treasury. The accumulated other comprehensive loss component of shareholders’ equity increased to $80.54 million at March 31, 2022, compared to $9.86 million at December 31, 2021 due to changes in interest rates, market spreads and market conditions. Our shareholders’ equity-to-assets ratio was 10.79% as of March 31, 2022, compared to 11.32% at December 31, 2021. Book value per common share declined to $34.97 at March 31, 2022, from $37.04 at December 31, 2021 primarily due to an increase in accumulated other comprehensive losses.
We declared and paid cash dividends per common share of $0.31 during the first quarter of 2022. The trailing four quarters dividend payout ratio, representing cash dividends per common share divided by diluted earnings per common share, was 26.23%. The dividend payout is continually reviewed by management and the Board of Directors subject to the Company’s capital and dividend policy.
The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations.
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The actual capital amounts and ratios of 1st Source Corporation and 1st Source Bank as of March 31, 2022, are presented in the table below.
| Actual | Minimum Capital Adequacy | Minimum Capital Adequacy with Capital Buffer | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets): | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 1st Source Corporation | $ | 1,056,141 | 16.93 | % | $ | 499,129 | 8.00 | % | $ | 655,107 | 10.50 | % | $ | 623,911 | 10.00 | % | ||||||||||||||||||||||||||||||||||
| 1st Source Bank | 986,199 | 15.82 | 498,720 | 8.00 | 654,570 | 10.50 | 623,400 | 10.00 | ||||||||||||||||||||||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets): | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 1st Source Corporation | 977,450 | 15.67 | 374,347 | 6.00 | 530,325 | 8.50 | 499,129 | 8.00 | ||||||||||||||||||||||||||||||||||||||||||
| 1st Source Bank | 907,571 | 14.56 | 374,040 | 6.00 | 529,890 | 8.50 | 498,720 | 8.00 | ||||||||||||||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital (to Risk-Weighted Assets): | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 1st Source Corporation | 865,830 | 13.88 | 280,760 | 4.50 | 436,738 | 7.00 | 405,542 | 6.50 | ||||||||||||||||||||||||||||||||||||||||||
| 1st Source Bank | 852,951 | 13.68 | 280,530 | 4.50 | 436,380 | 7.00 | 405,210 | 6.50 | ||||||||||||||||||||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets): | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 1st Source Corporation | 977,450 | 12.25 | 319,190 | 4.00 | N/A | N/A | 398,988 | 5.00 | ||||||||||||||||||||||||||||||||||||||||||
| 1st Source Bank | 907,571 | 11.38 | 319,053 | 4.00 | N/A | N/A | 398,816 | 5.00 | ||||||||||||||||||||||||||||||||||||||||||
PPP loan balances have been assigned a zero percent risk weight and therefore had no impact on our total risk-weighted assets at March 31, 2022.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as our operating cash needs are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, access to the national brokered certificates of deposit market, national listing service certificates of deposit, Federal Home Loan Bank (FHLB) borrowings, Federal Reserve Bank (FRB) borrowings, and the capability to package loans for sale.
We have borrowing sources available to supplement deposits and meet our funding needs. 1st Source Bank has established relationships with several banks to provide short term borrowings in the form of federal funds purchased. At March 31, 2022, we had no borrowings in the federal funds market. We could borrow $245.00 million in additional funds for a short time from these banks on a collective basis. As of March 31, 2022, we had $43.98 million outstanding in FHLB advances and could borrow an additional $483.60 million contingent on the FHLB activity-based stock ownership requirement. We also had no outstandings with the FRB and could borrow $484.25 million as of March 31, 2022.
Our loan to asset ratio was 67.32% at March 31, 2022 compared to 66.03% at December 31, 2021 and 73.52% at March 31, 2021. Cash and cash equivalents totaled $416.89 million at March 31, 2022 compared to $525.19 million at December 31, 2021 and $335.95 million at March 31, 2021. The decrease in cash and cash equivalents was primarily due to a reduction in excess liquidity from fewer PPP loan forgiveness proceeds and marginal loan growth. At March 31, 2022, the Consolidated Statements of Financial Condition was rate sensitive by $152.84 million more assets than liabilities scheduled to reprice within one year, or approximately 1.05%. Management believes that the present funding sources provide adequate liquidity to meet our cash flow needs.
Under Indiana law governing the collateralization of public fund deposits, the Indiana Board of Depositories determines which financial institutions are required to pledge collateral based on the strength of their financial ratings. We have been informed that no collateral is required for our public fund deposits. However, the Board of Depositories could alter this requirement in the future and adversely impact our liquidity. Our potential liquidity exposure if we must pledge collateral is approximately $843 million.
RESULTS OF OPERATIONS
Net income available to common shareholders for the three month period ended March 31, 2022 was $27.39 million compared to $28.11 million for the same period in 2021. Diluted net income per common share was $1.10 for the three month period ended March 31, 2022, equal to the $1.10 earned for the same period in 2021. Return on average common shareholders’ equity was 12.20% for the three months ended March 31, 2022, compared to 12.74% in 2021. The return on total average assets was 1.39% for the three months ended March 31, 2022, compared to 1.55% in 2021.
Net income decreased for the three months ended March 31, 2022 compared to the first three months of 2021. Net interest income increased and the provision for credit losses decreased offset by a decrease to noninterest income and an increase to noninterest expense. Details of the changes in the various components of net income are discussed further below.
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NET INTEREST INCOME
The following tables provide an analysis of net interest income and illustrates the interest income earned and interest expense charged for each major component of interest earning assets and interest bearing liabilities. Yields/rates are computed on a tax-equivalent basis, using a 21% rate. Nonaccrual loans and leases are included in the average loan and lease balance outstanding.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | March 31, 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 | $ | 1,857,557 | $ | 6,344 | 1.39 | % | $ | 1,686,231 | $ | 5,091 | 1.20 | % | $ | 1,193,583 | $ | 3,987 | 1.35 | % | |||||||||||||||||||||||||||||||||||
Tax exempt(1) | 29,498 | 165 | 2.27 | % | 28,996 | 163 | 2.23 | % | 37,394 | 214 | 2.32 | % | |||||||||||||||||||||||||||||||||||||||||
| Mortgages held for sale | 8,791 | 67 | 3.09 | % | 28,693 | 188 | 2.60 | % | 14,285 | 86 | 2.44 | % | |||||||||||||||||||||||||||||||||||||||||
Loans and leases, net of unearned discount(1) | 5,324,344 | 55,218 | 4.21 | % | 5,311,964 | 58,218 | 4.35 | % | 5,499,009 | 57,860 | 4.27 | % | |||||||||||||||||||||||||||||||||||||||||
| Other investments | 400,058 | 363 | 0.37 | % | 659,954 | 430 | 0.26 | % | 216,280 | 266 | 0.50 | % | |||||||||||||||||||||||||||||||||||||||||
Total earning assets(1) | 7,620,248 | 62,157 | 3.31 | % | 7,715,838 | 64,090 | 3.30 | % | 6,960,551 | 62,413 | 3.64 | % | |||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 77,063 | 80,754 | 75,178 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses | (128,647) | (134,217) | (143,206) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other assets | 440,074 | 448,680 | 457,890 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 8,008,738 | $ | 8,111,055 | $ | 7,350,413 | |||||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits | $ | 4,587,242 | $ | 2,376 | 0.21 | % | $ | 4,628,802 | $ | 2,624 | 0.22 | % | $ | 4,261,207 | $ | 3,526 | 0.34 | % | |||||||||||||||||||||||||||||||||||
| Short-term borrowings: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase | 192,108 | 23 | 0.05 | % | 194,678 | 24 | 0.05 | % | 169,180 | 35 | 0.08 | % | |||||||||||||||||||||||||||||||||||||||||
| Other short-term borrowings | 5,372 | 1 | 0.08 | % | 5,474 | 1 | 0.07 | % | 7,546 | 1 | 0.05 | % | |||||||||||||||||||||||||||||||||||||||||
| Subordinated notes | 58,764 | 823 | 5.68 | % | 58,764 | 819 | 5.53 | % | 58,764 | 818 | 5.65 | % | |||||||||||||||||||||||||||||||||||||||||
Long-term debt and mandatorily redeemable securities | 69,967 | (792) | (4.59) | % | 71,604 | 446 | 2.47 | % | 80,967 | 500 | 2.50 | % | |||||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 4,913,453 | 2,431 | 0.20 | % | 4,959,322 | 3,914 | 0.31 | % | 4,577,664 | 4,880 | 0.43 | % | |||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | 2,029,627 | 2,071,773 | 1,719,264 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 101,502 | 113,897 | 115,034 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 910,793 | 918,950 | 894,553 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests | 53,363 | 47,113 | 43,898 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 8,008,738 | $ | 8,111,055 | $ | 7,350,413 | |||||||||||||||||||||||||||||||||||||||||||||||
| Less: Fully tax-equivalent adjustments | (108) | (109) | (121) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income/margin (GAAP-derived)(1) | $ | 59,618 | 3.17 | % | $ | 60,067 | 3.09 | % | $ | 57,412 | 3.35 | % | |||||||||||||||||||||||||||||||||||||||||
Fully tax-equivalent adjustments | 108 | 109 | 121 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income/margin - FTE(1) | $ | 59,726 | 3.18 | % | $ | 60,176 | 3.09 | % | $ | 57,533 | 3.35 | % | |||||||||||||||||||||||||||||||||||||||||
(1) See “Reconciliation of Non-GAAP Financial Measures” at the end of this section for additional information on this performance measure/ratio. | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Quarter Ended March 31, 2022 compared to the Quarter Ended March 31, 2021
The taxable-equivalent net interest income for the three months ended March 31, 2022 was $59.73 million, an increase of 3.81% over the same period in 2021. The net interest margin on a fully taxable-equivalent basis was 3.18% for the three months ended March 31, 2022, compared to 3.35% for the three months ended March 31, 2021.
During the three month period ended March 31, 2022, average earning assets increased $659.70 million, up 9.48% over the comparable period in 2021. Average interest-bearing liabilities increased $335.79 million or 7.34%. The yield on average earning assets decreased 33 basis points to 3.31% from 3.64% primarily due to higher average balances in investment securities and other investments, which include federal funds sold, time deposits with other banks, Federal Reserve Bank excess balances, Federal Reserve Bank and Federal Home Loan Bank (FHLB) stock and commercial paper. Total cost of average interest-bearing liabilities decreased 23 basis points to 0.20% from 0.43% as a result of the lower interest rate environment and lower interest expense on mandatorily redeemable securities. The result to the net interest margin, or the ratio of net interest income to average earning assets, was a decrease of 17 basis points.
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The average earning assets yield declined compared to the same quarter in the prior year as a strong economic recovery combined with pandemic related government policies that have kept interest rates low, generated a significant amount of excess liquidity and shifted the earning assets mix towards lower yielding instruments. Average investment securities increased $656.08 million or 53.30% with the largest increases in U.S. treasury and federal agency securities and mortgage-backed securities. Average other investments, primarily held at the Federal Reserve Bank, increased $183.78 million or 84.97%. The yield on net loans and leases decreased six basis points primarily due to the low interest rate environment. During the quarter, PPP loans had a positive eight basis point impact from the recognition of fees on PPP loans forgiven by the SBA compared to six basis point impact in first quarter 2021 and offset by PPP loan balances outstanding which earn interest at 1.00%. Average net loans and leases decreased $174.67 million or 3.18% primarily due to PPP loan forgiveness in the commercial and agricultural loan portfolio. Average loans and leases net PPP loans increased $185.66 million, up 3.65% compared to the first quarter of 2021.
Average interest-bearing deposits increased $326.04 million or 7.65% for the first quarter of 2022 over the same period in 2021 primarily due to the impact of government stimulus programs on consumer savings levels. The effective rate paid on average interest-bearing deposits decreased 13 basis points to 0.21% from 0.34%. The decrease in the average cost of interest-bearing deposits was primarily the result of lower rates and a shift in the deposit mix from the first quarter of 2021. Average noninterest-bearing deposits grew $310.36 million or 18.05% for the first quarter of 2022 over the same period in 2021 primarily due to business customers remaining cautious with their funds and spending.
Average short-term borrowings increased $20.75 million or 11.74% for the first quarter of 2022 compared to the same period in 2021. Interest paid on short-term borrowings decreased three basis points. Interest paid on subordinated notes increased three basis points during the first quarter of 2022 from the same period a year ago due to a variable rate increase on one tranche. Average long-term debt and mandatorily redeemable securities balances decreased $11.00 million or 13.59%. Interest paid on long-term debt and mandatorily redeemable securities decreased 709 basis points during the first quarter of 2022 from the same period in 2021 primarily due to lower rates on mandatorily redeemable securities from a reduction in book value per share during the quarter.
The accounting and reporting policies of 1st Source conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components) and net interest margin (including its individual components). Management believes that these measures provide users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities.
Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources.
| Three Months Ended | ||||||||||||||
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||
| Calculation of Net Interest Margin | ||||||||||||||
| (A) | Interest income (GAAP) | $ | 62,049 | $ | 63,981 | $ | 62,292 | |||||||
| Fully tax-equivalent adjustments: | ||||||||||||||
| (B) | - Loans and leases | 77 | 79 | 81 | ||||||||||
| (C) | - Tax-exempt investment securities | 31 | 30 | 40 | ||||||||||
| (D) | Interest income - FTE (A+B+C) | 62,157 | 64,090 | 62,413 | ||||||||||
| (E) | Interest expense (GAAP) | 2,431 | 3,914 | 4,880 | ||||||||||
| (F) | Net interest income (GAAP) (A–E) | 59,618 | 60,067 | 57,412 | ||||||||||
| (G) | Net interest income - FTE (D–E) | 59,726 | 60,176 | 57,533 | ||||||||||
| (H) | Annualization factor | 4.056 | 3.967 | 4.056 | ||||||||||
| (I) | Total earning assets | $ | 7,620,248 | $ | 7,715,838 | $ | 6,960,551 | |||||||
| Net interest margin (GAAP-derived) (F*H)/I | 3.17 | % | 3.09 | % | 3.35 | % | ||||||||
| Net interest margin - FTE (G*H)/I | 3.18 | % | 3.09 | % | 3.35 | % | ||||||||
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PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses for the three months ended March 31, 2022 was $2.23 million compared to $2.40 million during the three months ended March 31, 2021. Net recoveries of $0.23 million or 0.02% of average loans and leases were recorded for the first quarter 2022, compared to net charge-offs of $3.50 million or 0.26% of average loans and leases for the same quarter a year ago. Net recoveries in 2022 were principally in the aircraft portfolio.
The provision for credit losses for the three months ended March 31, 2022 was principally driven by an upward revision to the forecast adjustment stemming from increased risk during the forecast period due to the war in Ukraine along with loan growth during the first quarter of 2022. We remain concerned about the long-term prospects for our bus segment and potential risks in our small business portfolio as financial relief provided by government programs afforded to our lending clients dissipates and the return to normal revenue and employment levels slows. The $47.79 million increase in outstanding loan balances this quarter was attributable to an $82.94 million increase in our core loan products offset by a $35.15 million decrease in PPP loans. At March 31, 2022, PPP loans totaled $37.94 million and necessitated minimal reserves as the program carries a 100% SBA guarantee and a debt forgiveness component. Impairment reserves for assets individually evaluated further decreased this quarter and continue to be a small component of our overall allowance.
We continue to evaluate risks which may impact our loan portfolios. Most notably, the current hostilities in Ukraine and resultant increased uncertainty characterized by persistent inflation and the potential for further disruptions of an already tenuous supply chain. Pandemic and related economic disruptions which previously dominated our risk analysis over the past eight quarters, have somewhat lessened in the U.S. but are again increasing abroad, particularly in China. Pandemic-related economic disruption remains a concern, particularly the availability of raw materials and extreme price volatility across the supply chain. We remain concerned that geopolitical events and disruption from future pandemic waves raise the potential for adverse impacts to the U.S. economy. Congressional spending initiatives face multiple challenges and an uncompromising partisanship. Additional current concerns include slower growth projections in the U.S. and abroad and the potential for raw material shortages and prolonged interruption in global trade as a result of trade restrictions related to the war in Ukraine and the pandemic-related responses of our trade partners. Political uncertainty continues in Latin America, with governments facing increased pressures from escalating social tensions, persistently high unemployment, and double-digit inflation. Corruption scandals persist, fueling U.S. border concerns. Globally, concerns continue to be heightened due to actual and potential terrorist attacks.
Another area of concern continues to be our aircraft portfolio where we have a collateral concentration and $213 million of foreign exposure, the majority of which is in Mexico and Brazil. We review political and economic data for these countries on a regular basis to assess the impact the environment may have on our customers. Historically, we have experienced volatile and unanticipated losses in both the foreign and domestic segments of our aircraft portfolios. Losses have been primarily attributable to unexpected declines in the value of specific aircraft collateral at a time when the borrower is experiencing financial difficulties. We review and assess aircraft values on an ongoing basis and use a tiered approach to establish advance rates and amortization schedules in an effort to limit collateral exposure. We continue to monitor individual customer performance and assess risks in the portfolio as a whole.
On March 31, 2022, 30 day and over loan and lease delinquency as a percentage of loan and lease balances was 0.19%, compared to 0.12% on March 31, 2021. The allowance for loan and lease losses as a percentage of loans and leases outstanding at the end of the period was 2.41% compared to 2.53% one year ago. The allowance as a percentage of loans and leases outstanding, net of PPP loans, was 2.43% compared to 2.42% at December 31, 2021 and 2.74% at March 31, 2021. A summary of loan and lease loss experience during the three months ended March 31, 2022 and 2021 is located in Note 5 of the Consolidated Financial Statements.
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NONPERFORMING ASSETS
The following table shows nonperforming assets.
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| Loans and leases past due 90 days or more | $ | 274 | $ | 249 | $ | 66 | ||||||||||||||
| Nonaccrual loans and leases | 35,435 | 38,706 | 58,513 | |||||||||||||||||
| Other real estate | — | — | 369 | |||||||||||||||||
| Repossessions | 73 | 861 | 2,214 | |||||||||||||||||
| Equipment owned under operating leases | 343 | 1,518 | 1,647 | |||||||||||||||||
| Total nonperforming assets | $ | 36,125 | $ | 41,334 | $ | 62,809 | ||||||||||||||
Nonperforming assets as a percentage of loans and leases were 0.66% at March 31, 2022, 0.77% at December 31, 2021, and 1.12% at March 31, 2021. Excluding PPP loans, nonperforming assets as a percentage of loan and leases were 0.67% at March 31, 2022, 0.78% at December 31, 2021, and 1.22% at March 31, 2021. Nonperforming assets totaled $36.13 million at March 31, 2022, a decrease of 12.60% from the $41.33 million reported at December 31, 2021, and a 42.48% decrease from the $62.81 million reported at March 31, 2021. The decrease in nonperforming assets during the first three months of 2022 was related to continued recovery from the pandemic which has led to lower nonaccrual loans and leases and a decrease in equipment owned under operating leases. The decrease in nonperforming assets at March 31, 2022 from March 31, 2021 was related to a decrease in nonaccrual loans and leases, lower repossessions and decreased equipment owned under operating leases.
The decrease in nonaccrual loans and leases at March 31, 2022 from December 31, 2021 and March 31, 2021 occurred primarily in the auto and light truck and construction equipment portfolios. A summary of nonaccrual loans and leases and past due aging for the period ended March 31, 2022 and December 31, 2021 is located in Note 4 of the Consolidated Financial Statements.
Other real estate is the result of foreclosing on real estate in the local market for which we have a current appraisal and are well secured.
Repossessions consisted mainly of construction equipment as of March 31, 2022. At the time of repossession, the recorded amount of the loan or lease is written down to the fair value of the equipment or vehicle by a charge to the allowance for loan and lease losses or other income, if a positive adjustment, unless the equipment is in the process of immediate sale. Any subsequent fair value write-downs or write-ups, to the extent of previous write-downs, are included in noninterest expense. The decrease in repossession balances at March 31, 2022 compared to March 31, 2021 was primarily the result of the sale of repossessed buses in the auto and light truck portfolio.
The following table shows a summary of other real estate and repossessions.
| (Dollars in thousands) | March 31, 2022 | December 31, 2021 | March 31, 2021 | |||||||||||||||||
| Commercial and agricultural | $ | — | $ | — | $ | — | ||||||||||||||
| Solar | — | — | — | |||||||||||||||||
| Auto and light truck | 26 | 75 | 1,414 | |||||||||||||||||
| Medium and heavy duty truck | — | — | — | |||||||||||||||||
| Aircraft | — | — | 750 | |||||||||||||||||
| Construction equipment | 47 | 757 | — | |||||||||||||||||
| Commercial real estate | — | — | 369 | |||||||||||||||||
| Residential real estate and home equity | — | — | — | |||||||||||||||||
| Consumer | — | 29 | 50 | |||||||||||||||||
| Total | $ | 73 | $ | 861 | $ | 2,583 | ||||||||||||||
For financial statement purposes, nonaccrual loans and leases are included in loan and lease outstandings, whereas repossessions and other real estate are included in other assets.
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NONINTEREST INCOME
The following table shows the details of noninterest income.
| Three Months Ended March 31, | |||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Noninterest income: | |||||||||||||||||||||||
| Trust and wealth advisory | $ | 5,914 | $ | 5,481 | 433 | 7.90 | % | ||||||||||||||||
| Service charges on deposit accounts | 2,792 | 2,447 | 345 | 14.10 | % | ||||||||||||||||||
| Debit card | 4,194 | 4,182 | 12 | 0.29 | % | ||||||||||||||||||
| Mortgage banking | 1,377 | 3,901 | (2,524) | (64.70) | % | ||||||||||||||||||
| Insurance commissions | 1,905 | 2,152 | (247) | (11.48) | % | ||||||||||||||||||
| Equipment rental | 3,662 | 4,629 | (967) | (20.89) | % | ||||||||||||||||||
| Gains on investment securities available-for-sale | — | — | — | NM | |||||||||||||||||||
| Other | 3,301 | 3,077 | 224 | 7.28 | % | ||||||||||||||||||
| Total noninterest income | $ | 23,145 | $ | 25,869 | (2,724) | (10.53) | % | ||||||||||||||||
NM = Not Meaningful
Trust and wealth advisory fees (which include investment management fees, estate administration fees, mutual fund fees, annuity fees, and fiduciary fees) increased during the three months ended March 31, 2022 compared with the same periods a year ago. 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 March 31, 2022, December 31, 2021, and March 31, 2021 was $5.09 billion, $5.33 billion, and $4.90 billion, respectively. Strong stock market performance and new business results in 2021 helped improve the value of trust assets under management, however, stock and bond market declines in the first quarter of 2022 resulted in lower asset values under management compared to December 31, 2021.
Service charges on deposit accounts increased for the three months ended March 31, 2022 over the comparable period in 2021. The increase in service charges on deposit accounts primarily reflects a higher volume of business and consumer nonsufficient fund transactions.
Debit card income improved in the three months ended March 31, 2022 over the same period a year ago. The majority of the improvement in debit card income was the result of an increased volume of debit card transactions.
Mortgage banking income decreased in the three months ended March 31, 2022 as compared to the same period in 2021. Demand for mortgages declined as refinancing slowed and inventory of homes for sale remained low which led to a lower volume of sales of loans originated for the secondary market as well as a lower margin on those sales.
Insurance commissions were lower during the three months ended March 31, 2022 compared to the same period a year ago. The reduction during the first three months of 2022 was mainly due to fewer seasonal contingent commissions received.
Equipment rental income decreased for the three months ended March 31, 2022 over the comparable period in 2021. The decline was the result of a reduction in leasing volume primarily in the construction equipment and auto and light truck portfolios resulting in the average equipment rental portfolio decreasing by 23.2% over the same period a year ago due to changing customer preferences.
There were no gains on the sale of investment securities available-for-sale during the three months ended March 31, 2022 or 2021.
Other income increased for the three months ended March 31, 2022 compared to the comparable period in 2021. The increase during the first quarter of 2022 compared to the same period one year ago was primarily a result of larger bank owned life insurance policy claims and higher brokerage fees and commissions offset by a decrease in customer interest rate swap fees.
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NONINTEREST EXPENSE
The following table shows the details of noninterest expense.
| Three Months Ended March 31, | |||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Noninterest expense: | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 25,467 | $ | 25,196 | 271 | 1.08 | % | ||||||||||||||||
| Net occupancy | 2,811 | 2,719 | 92 | 3.38 | % | ||||||||||||||||||
| Furniture and equipment | 1,295 | 1,474 | (179) | (12.14) | % | ||||||||||||||||||
| Data processing | 5,208 | 4,984 | 224 | 4.49 | % | ||||||||||||||||||
| Depreciation – leased equipment | 3,015 | 3,773 | (758) | (20.09) | % | ||||||||||||||||||
| Professional fees | 1,608 | 1,613 | (5) | (0.31) | % | ||||||||||||||||||
| FDIC and other insurance | 850 | 665 | 185 | 27.82 | % | ||||||||||||||||||
Business development and marketing | 1,268 | 997 | 271 | 27.18 | % | ||||||||||||||||||
Loan and lease collection and repossession | 134 | 129 | 5 | 3.88 | % | ||||||||||||||||||
| Other | 3,680 | 2,590 | 1,090 | 42.08 | % | ||||||||||||||||||
| Total noninterest expense | $ | 45,336 | $ | 44,140 | 1,196 | 2.71 | % | ||||||||||||||||
NM = Not Meaningful
Salaries and employee benefits increased during the three months ended March 31, 2022 compared to the same period in 2021. The increase was mainly due to a reduction in deferred salary expense on loan production, higher base salaries as a result of normal merit increases offset by reduced incentive compensation and a slight decline in staffing levels.
Net occupancy expense was higher during the three months ended March 31, 2022 compared to the same period a year ago due primarily to higher snow removal costs due to seasonal weather conditions.
Furniture and equipment expense, including depreciation, declined during the three months ended March 31, 2022 compared to the same period a year ago mainly due to depreciation.
Data processing expense increased during the first quarter of 2022 compared to the same period a year ago due primarily to higher computer processing charges.
Depreciation on leased equipment decreased for the three months ended March 31, 2022 compared to the same period in 2021. Depreciation on leased equipment correlates with the decrease in equipment rental income.
Professional fees were relatively flat during the first quarter of 2022 compared to the same period a year ago.
FDIC and other insurance was higher during the three months ended March 31, 2022 compared to the same period in 2021. The increase was mainly due to higher assessments for FDIC premiums.
Business development and marketing expense rose during the first quarter of 2022 compared to the same period a year ago. The increase was mainly due to increased business meals, entertainment and travel opportunities tied to fewer COVID-19 restrictions and higher marketing promotions.
Loan and lease collection and repossession expense increased slightly during the first quarter of 2022 compared to the same period in 2021. The increase was mainly due to fewer gains on the sale of repossessed assets.
Other expenses were higher during the first quarter of 2022 compared to the same period in 2021. The increase during the first quarter was primarily the result of a rise in the loan loss provision for unfunded loan commitments and a one-time state sales tax adjustment offset by lower postage and printing costs.
INCOME TAXES
The provision for income taxes for the three month period ended March 31, 2022 was $7.79 million compared to $8.64 million for the same period in 2021. The effective tax rate was 22.14% and 23.51% for the quarter ended March 31, 2022 and 2021, respectively. The decrease in the quarterly effective tax rate was due to a slight decrease in the tax provision for state income taxes during the first quarter of 2022 in comparison to the first quarter of 2021.
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risks faced by 1st Source since December 31, 2021. For information regarding our market risk, refer to 1st Source’s Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 4.
CONTROLS AND PROCEDURES
As of the end of the period covered by this report an evaluation was carried out, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, at March 31, 2022, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by 1st Source in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
In addition, there were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the first fiscal quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
1st Source and its subsidiaries are involved in various legal proceedings that are inherent risks of, or incidental to, the conduct of our businesses. Management does not expect the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations. One such proceeding involves the consolidated bankruptcy cases of IOI Integrated Systems, Inc., its affiliates (collectively, “IOI”) and the owner of IOI, Najeeb Khan. The consolidated cases commenced in August 2019 and are pending in the United States Bankruptcy Court, Western District of Michigan, Southern Division. IOI and Mr. Khan were customers of 1st Source Bank. Mr. Khan was also a director of 1st Source and 1st Source Bank until his resignation on July 9, 2019. The liquidating trustee of the consolidated bankruptcy estates has alleged Mr. Khan misappropriated funds of IOI over many years for his own benefit and to the detriment of IOI creditors. The trustee is investigating whether various banks and other third parties, including 1st Source Bank, may have liability because of prior business relationships with IOI and/or Mr. Khan. The trustee’s focus regarding the Bank is on transaction activity in respective deposit accounts of Mr. Khan and entities controlled by Mr. Khan at the Bank. The Bank is fully cooperating with the trustee’s information requests. The trustee has variously asserted that the Bank received avoidable transfers under applicable federal bankruptcy and state law by virtue of transactions involving deposit accounts of Mr. Khan and IOI, and that the Bank had actual knowledge of and aided and abetted Mr. Khan's fraudulent activity. No claims have previously been formally served on the Bank. Management anticipates the trustee may formally commence litigation against various parties including the Bank sometime in 2022. The Bank will vigorously defend any claim that it was involved with and/or benefited from the alleged misconduct of Mr. Khan and/or IOI.
ITEM 1A. Risk Factors.
There have been no material changes in risks faced by 1st Source since December 31, 2021. For information regarding our risk factors, refer to 1st Source’s Annual Report on Form 10-K for the year ended December 31, 2021.
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
| 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 | ||||||||||||||||||||||
| January 01 - 31, 2022 | — | $ | — | — | 1,726,084 | |||||||||||||||||||||
| February 01 - 28, 2022 | 16,700 | 48.74 | 16,700 | 1,709,384 | ||||||||||||||||||||||
| March 01 - 31, 2022 | 28,719 | 47.41 | 28,719 | 1,680,665 | ||||||||||||||||||||||
* 1st Source maintains a stock repurchase plan that was authorized by the Board of Directors on July 22, 2021. 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 319,335 shares.
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Mine Safety Disclosures.
None
ITEM 5. Other Information.
None
ITEM 6. Exhibits.
The following exhibits are filed with this report:
| 101.INS | XBRL Instance Document — The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| 1st Source Corporation | |||||||||||
| DATE | April 21, 2022 | /s/ CHRISTOPHER J. MURPHY III | |||||||||
| Christopher J. Murphy III Chairman of the Board, President and CEO | |||||||||||
| DATE | April 21, 2022 | /s/ BRETT A. BAUER | |||||||||
| Brett A. Bauer Treasurer and Chief Financial Officer Principal Accounting Officer | |||||||||||
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