1st Source (SRCE) - 2023 Q4 - Annual Report

Part I Business 1st Source Corporation is an Indiana-based bank holding company with $8.73 billion in assets as of December 31, 2023, offering diverse financial services through its subsidiary, 1st Source Bank, and its nationwide Specialty Finance Group, all subject to extensive federal and state regulation Company Overview (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Total Assets | $8.73 billion | | Total Loans and Leases | $6.52 billion | | Total Deposits | $7.04 billion | | Total Shareholders' Equity | $989.57 million | | Banking Centers | 78 | | Full-time Equivalent Colleagues | ~1,170 | - The company's primary subsidiary, 1st Source Bank, provides a broad range of services including commercial, consumer, trust, and wealth advisory services through its 78 banking centers in Indiana, Michigan, and Florida[12] - The Specialty Finance Group operates nationwide, offering specialized financing for construction equipment, private and cargo aircraft, and various fleet vehicles[12][18] - 1st Source and its bank subsidiary are extensively regulated by multiple agencies, including the Federal Reserve, the Indiana Department of Financial Institutions (DFI), the FDIC, and the CFPB[34][35][36] - The company emphasizes its commitment to Diversity, Equity, and Inclusion, noting that 42% of its Board Members are women or minorities and that it has been recognized by Forbes and Newsweek as a top employer[31][37] Risk Factors The company faces a range of material risks categorized as credit, market, liquidity, operational, legal/compliance, and reputational, with key exposures in commercial and specialty finance loan portfolios, interest rate fluctuations, technology security, and extensive government regulation - Credit Risks: The company is exposed to credit risks from its loan portfolios. Commercial and commercial real estate loans carry higher risks, and the Specialty Finance Group's portfolio is sensitive to economic slowdowns, fuel costs, and other destabilizing events. The aircraft portfolio has foreign exposure, particularly in Mexico and Brazil[58][62][63] - Market Risks: Profitability is sensitive to interest rate fluctuations, which affect net interest income. The company is also impacted by general economic conditions, inflation, and market volatility, which can affect loan demand, asset quality, and trust and wealth advisory fees[68][70][72] - Liquidity Risks: The company's ability to meet financial obligations depends on maintaining adequate liquidity. A sudden inability to obtain funds, as seen in the Spring 2023 bank failures, could have a material adverse effect. The parent company also relies heavily on dividends from its subsidiaries, which are subject to regulatory limits[73][74] - Operational Risks: The company faces significant risk from technology security breaches, including hacking, phishing, and ransomware. It is also dependent on its senior management team and its ability to keep pace with rapid technological changes in the financial services industry[76][77][81] - Legal/Compliance and Reputational Risks: The business is subject to extensive and changing government regulations, which can increase costs and limit services. Reputational threats arise from competition, potential unethical practices, data security failures, and negative perceptions regarding Environmental, Social, and Governance (ESG) issues[83][86][87] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[90] Cybersecurity The company's cybersecurity risk management is overseen by the Audit, Finance & Risk Committee of the Board, based on FFIEC guidance and the CRI Profile framework, with multi-layered governance, regular third-party assessments, and robust third-party risk management - Oversight for cybersecurity risk is delegated to the Audit, Finance & Risk Committee of the Board, which receives quarterly reports from the Chief Information Security Officer (CISO) and Chief Risk Officer (CRO)[91] - The company's risk management processes are based on the Federal Financial Institution Examination Council (FFIEC) guidance and the Cybersecurity Risk Institute (CRI) Profile, which is tailored for financial institutions and based on the NIST framework[92] - Governance involves a multi-layered committee structure, including an Information Security Committee and an Enterprise Risk Management Committee, to ensure issues are assessed, remediated, and escalated appropriately[94] - The company regularly engages third-party assessors for penetration testing, technology 'health checks,' and social engineering tests to evaluate the effectiveness of its cyber defenses and employee training[95] Properties The company's headquarters is located in a leased office complex in downtown South Bend, Indiana, and as of December 31, 2023, it operated 78 banking centers across Indiana, Michigan, and Florida, with plans to develop an operations and training facility on a portion of its 35 acres in St. Joseph County - The main headquarters is in a leased building in South Bend, Indiana, with the lease running through September 2027[98] - As of year-end 2023, the company owned or leased 78 banking center locations across 18 counties in Indiana and Michigan, and Sarasota County in Florida[99] - 1st Source Bank owns 35 acres in St. Joseph County and plans to construct a new operations and training facility on 29 acres, subject to approvals and market conditions[99] Legal Proceedings The company and its subsidiaries are involved in various legal proceedings incidental to their business operations, none of which management anticipates will have a material adverse effect on the company's consolidated financial position or results of operations - Management does not expect any ongoing legal proceedings to have a material adverse effect on the company's financial position or results[101] Mine Safety Disclosures This item is not applicable to the company - None[103] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 1st Source Corporation's common stock trades on the NASDAQ Global Select Market under the symbol 'SRCE', with 1,593 holders of record as of February 16, 2024, and the company has an authorized stock repurchase plan for up to 1,000,000 shares though no shares were repurchased under this plan in Q4 2023, with dividend payments subject to federal and state regulations - The company's common stock is traded on the NASDAQ under the symbol 'SRCE', with 1,593 holders of record as of February 16, 2024[104] - A stock repurchase plan was authorized in October 2023 for up to 1,000,000 shares. No shares were repurchased under this plan during the fourth quarter of 2023[107] - Dividend payments are subject to restrictions outlined in federal and state regulations[108] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, net income available to common shareholders increased to $124.93 million ($5.03 per diluted share) from $120.51 million in 2022, driven by a 5.76% increase in net interest income and a lower provision for credit losses, with the net interest margin (FTE) improving slightly to 3.51%, total loans and leases growing by $507.34 million (8.44%) to $6.52 billion, and the company maintaining a strong liquidity position and 'well capitalized' status Key Performance Indicators (2021-2023) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Income (millions) | $124.93 | $120.51 | $118.53 | | Diluted EPS | $5.03 | $4.84 | $4.70 | | Return on Average Assets | 1.48% | 1.49% | 1.53% | | Return on Average Equity | 13.48% | 13.81% | 13.07% | | Dividends per Share | $1.30 | $1.26 | $1.21 | - The increase in 2023 net income was primarily driven by a $15.18 million rise in net interest income and a $7.38 million decrease in the provision for credit losses, partially offset by a $17.03 million increase in noninterest expense[124] - The fully taxable-equivalent net interest margin increased by six basis points to 3.51% in 2023, as the 141 basis point increase in the yield on earning assets outpaced the 189 basis point increase in the cost of interest-bearing liabilities[127][128] - Total loans and leases grew by $507.34 million (8.44%) to $6.52 billion at year-end 2023, driven by strong performance in the Auto and Light Truck, Construction Equipment, and Commercial Real Estate portfolios[167][168] - Nonperforming assets decreased to $24.24 million (0.37% of loans and leases) at year-end 2023 from $26.93 million at year-end 2022[204][207] Quantitative and Qualitative Disclosures About Market Risk This section refers to the 'Interest Rate Risk Management' discussion within Item 7, Management's Discussion and Analysis, where the company models the impact of hypothetical interest rate changes on its pre-tax net interest income, projecting a 1.40% decrease over 12 months but a 3.01% increase over 24 months from an immediate 200 basis point rate increase as of December 31, 2023 - The information for this section is contained within the 'Interest Rate Risk Management' section of Item 7[240] Hypothetical Impact of Interest Rate Changes on Pre-Tax Net Interest Income (Dec 31, 2023) | Basis Point Change | 12-Month Impact | 24-Month Impact | | :--- | :--- | :--- | | Up 200 | (1.40)% | 3.01% | | Up 100 | (0.66)% | 1.52% | | Down 100 | (0.18)% | (2.42)% | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the fiscal year ended December 31, 2023, and the preceding two years, including unqualified opinions from FORVIS, LLP on both the financial statements and the effectiveness of internal control over financial reporting, with the Allowance for Credit Losses identified as a critical audit matter - The independent registered public accounting firm, FORVIS, LLP, issued an unqualified opinion on the consolidated financial statements, stating they present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[245] - FORVIS, LLP also issued an unqualified opinion on the company's internal control over financial reporting as of December 31, 2023, based on the COSO framework[256] - The firm identified the Allowance for Credit Losses as a critical audit matter due to the significant judgment and subjectivity involved in management's estimates, particularly regarding economic conditions and qualitative factor adjustments[251][253] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $8,727,958 | $8,339,416 | | Net Loans and Leases | $6,370,953 | $5,871,894 | | Total Deposits | $7,038,581 | $6,928,265 | | Total Shareholders' Equity | $989,568 | $864,068 | Consolidated Income Statement Highlights (in thousands) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income | $278,647 | $263,469 | | Provision for Credit Losses | $5,866 | $13,245 | | Noninterest Income | $90,623 | $91,262 | | Noninterest Expense | $201,724 | $184,699 | | Net Income | $124,934 | $120,532 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[517] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023, and internal control over financial reporting was also effective with no material changes during the fourth quarter of 2023 - The CEO and CFO concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective[518] - Management's assessment, based on the COSO framework, concluded that internal control over financial reporting was effective as of December 31, 2023[522] - No material changes were made to internal control over financial reporting during the fourth quarter of 2023[519] Other Information The company reports that during the fourth quarter of 2023, no director or officer adopted, modified, or terminated a 'Rule 10b5-1 trading plan' or a 'non-Rule 10b5-1 trading arrangement' - No director or officer adopted, modified, or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements in Q4 2023[525] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[527] Part III Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance matters is incorporated by reference from its 2024 Proxy Statement - The required information is incorporated by reference from the 2024 Proxy Statement, specifically under the headings 'Proposal Number 1: Election of Directors,' 'Board Committees and Other Corporate Governance Matters,' and 'Delinquent Section 16(a) Reports'[530] Executive Compensation Information regarding executive compensation is incorporated by reference from the 'Compensation Discussion & Analysis' section of the company's 2024 Proxy Statement - The required information is incorporated by reference from the 'Compensation Discussion & Analysis' section of the 2024 Proxy Statement[532] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, as well as details on equity compensation plans, is incorporated by reference from the company's 2024 Proxy Statement, with 828,611 securities remaining available for future issuance under all equity compensation plans as of December 31, 2023 - The required information is incorporated by reference from the 'Voting Securities and Principal Holders Thereof' and 'Proposal Number 1: Election of Directors' sections of the 2024 Proxy Statement[533] Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Approved by Shareholders | 8,308 | 766,830 | | Not Approved by Shareholders | 0 | 61,781 | | Total | 8,308 | 828,611 | Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's 2024 Proxy Statement - The required information is incorporated by reference from the 'Proposal Number 1: Election of Directors', 'Board Committees and Other Corporate Governance Matters,' and 'Transactions with Related Persons' sections of the 2024 Proxy Statement[536] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 'Relationship with Independent Registered Public Accounting Firm' section of the company's 2024 Proxy Statement - The required information is incorporated by reference from the 'Relationship with Independent Registered Public Accounting Firm' section of the 2024 Proxy Statement[538] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the annual report, including corporate governance documents, employment agreements, compensation plans, a list of subsidiaries, consent of the independent auditor, and various SEC-required certifications - The Consolidated Financial Statements and Notes are filed as part of this report[541] - Exhibits filed include Articles of Incorporation, By-Laws, employment agreements for key executives, various stock and incentive plans, a list of subsidiaries, consent of the independent auditor, and CEO/CFO certifications[542][543] Form 10-K Summary A summary of the Form 10-K was not provided - Not provided[545]