1ST SOURCE CORPORATION The following management's discussion and analysis is presented to provide information concerning1st Source Corporation and its subsidiaries' (collectively referred to as "the Company", "we", and "our") financial condition as ofMarch 31, 2023 , as compared toDecember 31, 2022 , and the results of operations for the three months endedMarch 31, 2023 and 2022. 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 2022 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 theSEC , including our Annual Report on Form 10-K for 2022, 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 atMarch 31, 2023 were$8.33 billion , a decrease of$9.61 million or 0.12% fromDecember 31, 2022 . Total investment securities available-for-sale were$1.71 billion , a decrease of$61.65 million or 3.47% fromDecember 31, 2022 . The largest contributor to the decrease in investment securities available-for-sale was securities sales during the first quarter to support liquidity and fund loan growth. Federal funds sold and interest bearing deposits with other banks were$27.17 million , a decrease of$10.92 million or 28.67% fromDecember 31, 2022 . The decrease in federal funds sold and interest bearing deposits with other banks was due to lower interest bearing deposits at other banks which were used to fund loan growth. Total loans and leases were$6.12 billion , an increase of$105.55 million or 1.76% fromDecember 31, 2022 . The largest contributors to the increase in loans and leases was growth in the auto and light truck and construction equipment portfolios. Our foreign loan and lease balances, all denominated inU.S. dollars were$294.76 million and$297.46 million as ofMarch 31, 2023 andDecember 31, 2022 , respectively. Foreign loans and leases are in aircraft financing. Loan and lease balances to borrowers inBrazil andMexico were$131.13 million and$135.23 million as ofMarch 31, 2023 , respectively, compared to$129.98 million and$136.68 million as ofDecember 31, 2022 , respectively. As ofMarch 31, 2023 andDecember 31, 2022 there was not a significant concentration in any other country. Equipment owned under operating leases was$30.08 million , a decrease of$1.62 million , or 5.10% compared toDecember 31, 2022 . The largest contributor to the decrease in equipment owned under operating leases was reduced leasing volume primarily due to a change in customer preferences and competitive pricing pressure for new business. Total deposits were$6.80 billion , a decrease of$126.80 million or 1.83% from the end of 2022. Balances were modestly lower primarily due to expected first quarter seasonal outflows which aligned with movements experienced in pre-pandemic years, greater utilization of excess funds by our business customers, drawdown of stimulus monies in consumer accounts, and a heightened rate sensitivity in our entire customer base given the overall level of market yields. Rate competition for deposits increased during the quarter from various areas including traditional bank and credit union competitors, money market funds, bond markets, and other non-bank alternatives. 31 -------------------------------------------------------------------------------- Table of Contents Our deposits are well-diversified with a stable profile which is largely representative of the local communities we serve inNorthern Indiana andSouthwestern Michigan . Our specialty finance niche, which operates among diverse industries nationally, only accounted for 3.46% of total deposits atMarch 31, 2023 . For the full bank, we had approximately 225,500 total accounts with an average balance of$30,150 . Uninsured deposits net of public fund deposits represented 29.14% of total deposits atMarch 31, 2023 compared to 30.07% atDecember 31, 2022 . Uninsured deposits as a percentage of total deposits, including public funds, was 45.95% atMarch 31, 2023 , compared to 47.67% atDecember 31, 2022 . Short-term borrowings were$303.04 million , an increase of$87.51 million or 40.60% fromDecember 31, 2022 due primarily to increased short-term FHLB borrowings largely to support strong loan growth. Long-term debt and mandatorily redeemable securities were$46.71 million , an increase of$0.16 million or 0.34% fromDecember 31, 2022 due primarily to an increase in mandatorily redeemable securities. Accrued expenses and other liabilities were$151.38 million , a decrease of$15.16 million or 9.10% fromDecember 31, 2022 primarily due to annual incentive related payments to employees and the fair value of interest rate swap contracts with customers.
The following table shows accrued income and other assets.
March 31 ,December 31 , (Dollars in thousands) 2023
2022
Accrued income and other assets: Bank owned life insurance cash surrender value$ 83,016 $ 83,046 Operating lease right of use assets 22,633 20,916 Accrued interest receivable 24,872 24,747 Mortgage servicing rights 4,007 4,137 Other real estate 117 104 Repossessions 445 327 Partnership investments carrying amount 119,485
137,149
All other assets 108,127
109,584
Total accrued income and other assets$ 362,702 $
380,010
The largest contributor to the decrease in accrued income and other assets fromDecember 31, 2022 was lower partnership investments carrying amounts due to tax equity credit reductions on renewable energy tax equity investments during the period. CAPITAL As ofMarch 31, 2023 , total shareholders' equity was$909.16 million , up$45.09 million , or 5.22% from the$864.07 million atDecember 31, 2022 . In addition to net income of$31.12 million , other significant changes in shareholders' equity during the first three months of 2023 included$7.92 million of dividends paid and$0.77 million in common stock repurchased. The accumulated other comprehensive loss component of shareholders' equity decreased to$127.47 million atMarch 31, 2023 , compared to$147.69 million atDecember 31, 2022 due to changes in market conditions on our available-for-sale investment portfolio. Our shareholders' equity-to-assets ratio was 10.91% as ofMarch 31, 2023 , compared to 10.36% atDecember 31, 2022 . Book value per common share increased to$36.81 atMarch 31, 2023 , from$35.04 atDecember 31, 2022 primarily due to a decrease in accumulated other comprehensive losses. We declared and paid cash dividends per common share of$0.32 during the first quarter of 2023. The trailing four quarters dividend payout ratio, representing cash dividends per common share divided by diluted earnings per common share, was 25.40%. 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 forU.S. banking organizations. 32 -------------------------------------------------------------------------------- Table of Contents The actual capital amounts and ratios of1st Source Corporation and1st Source Bank as ofMarch 31, 2023 remained at their historically strong and conservative levels and are presented in the table below. Minimum Capital Adequacy with To Be Well Capitalized Under Prompt Corrective Actual Minimum Capital Adequacy Capital Buffer Action Provisions (Dollars in thousands) AmountRatio AmountRatio AmountRatio AmountRatio Total Capital (to Risk-Weighted Assets):1st Source Corporation $ 1,162,713 16.41 %$ 566,710 8.00 %$ 743,807 10.50 % $ 708,387 10.00 %1st Source Bank 1,080,913 15.26 566,491 8.00 743,520 10.50 708,114 10.00 Tier 1 Capital (to Risk-Weighted Assets):1st Source Corporation 1,073,416 15.15 425,032 6.00 602,129 8.50 566,710 8.001st Source Bank 991,650 14.00 424,869 6.00 601,897 8.50 566,491 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets):1st Source Corporation 957,131 13.51 318,774 4.50 495,871 7.00 460,452 6.501st Source Bank 932,365 13.17 318,651 4.50 495,680 7.00 460,274 6.50 Tier 1 Capital (to Average Assets):1st Source Corporation 1,073,416 12.72 337,626 4.00 N/A N/A 422,033 5.001st Source Bank 991,650 11.75 337,501 4.00 N/A N/A 421,876 5.00 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 maintain prudent strategies to support a strong liquidity position. The
following table represents our expanded sources of liquidity as of
(Dollars in thousands) Total Available Utilized Net Available Internal Sources Free securities $ 1,713,480$ 284,671 $ 1,428,809 External Sources FHLB advances(1) 631,811 245,896 385,915 FRB borrowings(2) 401,312 - 401,312 Fed funds purchased(3) 245,000 - 245,000 Brokered deposits(4) 833,491 468,956 364,535 Listing services deposits(4) 416,745 24,197 392,548 Total liquidity $ 4,241,839 $
1,023,720
51.01 %
(1) Availability contingent on the FHLB activity-based stock ownership requirement
(2) Includes access to discount window and Bank Term Funding Program
(3) Availability contingent on correspondent bank approvals at time of borrowing
(4) Availability contingent on internal borrowing guidelines
External sources as listed in the table above are managed to approved guidelines
by our Board of Directors. FHLB and FRB capacities were secured borrowings
backed by pledged collateral primarily from our loan and lease portfolios. Total
net available liquidity was $3.22 billion at March 31, 2023 , which accounted for
51.01% of total deposits net of brokered and listing services certificates of
deposit.
Our loan to asset ratio was 73.43% at March 31, 2023 compared to 72.08% at
December 31, 2022 and 67.32% at March 31, 2022 . Cash and cash equivalents
totaled $94.04 million at March 31, 2023 compared to $122.80 million at
December 31, 2022 and $416.89 million at March 31, 2022 . The decrease in cash
and cash equivalents was primarily due to funding loan growth. At March 31,
2023 , the Consolidated Statements of Financial Condition was rate sensitive by
$359.30 million more liabilities than assets scheduled to reprice within one
year, or approximately 0.90%. Management believes that the present funding
sources provide adequate liquidity to meet our cash flow needs.
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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 $1.06 billion .
RESULTS OF OPERATIONS
Net income available to common shareholders for the three month period ended
March 31, 2023 was $31.12 million compared to $27.39 million for the same period
in 2022. Diluted net income per common share was $1.25 for the three month
period ended March 31, 2023 , compared to $1.10 earned for the same period in
2022. Return on average common shareholders' equity was 14.18% for the three
months ended March 31, 2023 , compared to 12.20% in 2022. The return on total
average assets was 1.52% for the three months ended March 31, 2023 , compared to
1.39% in 2022.
Net income increased for the three months ended March 31, 2023 compared to the
first three months of 2022. Net interest income and noninterest income increased
offset by increases to the provision for credit losses and 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.
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