What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-02-16 compared with 2022-02-17 · 96 added, 112 removed, 1616 unchanged (11% of the section changed)

1 unchanged sentence

Index to Consolidated Financial Statements

Reports of BKD, LLP, Independent Registered Public Accounting Firm ( BKD, LLP , Fort Wayne, Indiana , Auditor Firm ID:

Reports of FORVIS , LLP, Independent Registered Public Accounting Firm ( FORVIS, LLP , Fort Wayne, Indiana , Auditor Firm ID:

Consolidated Statements of Financial Condition

5 unchanged sentences

Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors and Audit Committee

To the Shareholders, Board of Directors and Audit, Finance and Risk Committee

1st Source Corporation

South Bend, Indiana

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of 1st Source Corporation (Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the financial statements).

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial condition of 1st Source Corporation (Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the financial statements).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 17, 2022, expressed an unqualified opinion of the effectiveness of the Company’s internal control over financial reporting.

Adoption of New Accounting Standard

As discussed in Notes 1, 4 and 5 to the consolidated financial statements, the Company has changed its method of accounting for the allowance for credit losses in 2020 due to the adoption of Topic 326.

As discussed below, a component of the allowance for credit losses is considered a critical audit matter.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 16, 2023, expressed an unqualified opinion thereon.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that:

Critical Audit Matters

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan and Lease Losses

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• Identifying fields in the various loan systems that defined the loan pools and tested the design and operating effectiveness of internal controls surrounding the input and maintenance of those fields.

/s/ FORVIS, LLP (Formerly, BKD, LLP)

We have served as the Company’s auditor since 2015

2 unchanged sentences

Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors and Audit Committee

To the Shareholders, Board of Directors and Audit, Finance and Risk Committee

1st Source Corporation

5 unchanged sentences

(2013) issued by COSO .

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2022 and 2021, and for each of the three years in the period ended December 31, 2022 and our report dated February 16, 2023, expressed an unqualified opinion on those financial statements.

Basis for Opinion

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Definitions and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

/s/ FORVIS, LLP (Formerly, BKD, LLP)

Fort Wayne, Indiana

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( 119,642 ) ( 114,209 )

Accumulated other comprehensive (loss) income ( 9,861 ) 18,371

Accumulated other comprehensive loss ( 147,690 ) ( 9,861 )

Total shareholders’ equity 864,068 916,255

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Net interest income 263,469 236,638 225,820

(Recovery of) provision for credit losses* ( 4,303 ) 36,001 15,833

Provision (recovery of provision) for credit losses 13,245 ( 4,303 ) 36,001

Net interest income after provision for credit losses 250,224 240,941 189,819

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Furniture and equipment 5,448 5,977 6,541

Data processing 22,375 19,877 19,147

Depreciation — leased equipment 10,023 13,694 20,203

Professional fees 7,280 8,676 6,317

Supplies and communication 5,942 5,563 6,454

FDIC and other insurance 3,625 2,677 2,606

Business development and marketing 5,823 8,013 4,157

Loan and lease collection and repossession 30 3,099 3,402

Other 14,287 10,902 16,564

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Diluted net income per common share $ 4.84 $ 4.70 $ 3.17

* ASU 2016-13 adopted during 2020 therefore 2019 provision amount reflects the incurred method.

The accompanying notes are a part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Year Ended December 31 (Dollars in thousands)

1 unchanged sentence

Net income $ 120,532 $ 118,557 $ 81,461

Other comprehensive income (loss):

Other comprehensive (loss) income:

Unrealized (depreciation) appreciation of investment securities available-for-sale ( 181,237 ) ( 37,867 ) 17,666

2 unchanged sentences

Other comprehensive (loss) income, net of tax ( 137,829 ) ( 28,232 ) 13,199

Comprehensive income 90,325 94,660 107,863

Comprehensive (loss) income ( 17,297 ) 90,325 94,660

Comprehensive (income) loss attributable to noncontrolling interests ( 23 ) ( 23 ) ( 24 )

Comprehensive income available to common shareholders $ 90,302 $ 94,636 $ 107,808

Comprehensive (loss) income available to common shareholders $ ( 17,320 ) $ 90,302 $ 94,636

The accompanying notes are a part of the consolidated financial statements.

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Balance at December 31, 2020 $ — $ 436,538 $ 514,176 $ ( 82,240 ) $ 18,371 $ 886,845 $ 43,825 $ 930,670

Cumulative-effect adjustment — — ( 2,552 ) — — ( 2,552 ) — ( 2,552 )

Balance at January 1, 2020, adjusted — 436,538 460,717 ( 76,702 ) 5,172 825,725 20,359 846,084

Net income — — 118,534 — — 118,534 23 118,557

Other comprehensive income — — — — 13,199 13,199 — 13,199

Other comprehensive loss — — — — ( 28,232 ) ( 28,232 ) — ( 28,232 )

Issuance of 63,527 common shares under

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Adjustments to reconcile net income to net cash provided by operating activities:

(Recovery of) provision for credit losses ( 4,303 ) 36,001 15,833

Provision (recovery of provision) for credit losses 13,245 ( 4,303 ) 36,001

Depreciation of premises and equipment 4,596 5,093 5,673

11 unchanged sentences

Net gains on sale of other real estate and repossessions ( 410 ) ( 672 ) ( 138 )

Net gain on sale of premises and equipment — — ( 1,251 )

Change in interest receivable ( 6,987 ) 2,482 ( 1,117 )

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Proceeds from disposal of premises and equipment 49 129 23

Purchases of bank owned life insurance policies ( 10,000 ) — —

Proceeds from sales of other real estate and repossessions 2,648 4,279 10,271

8 unchanged sentences

Acquisition of treasury stock ( 6,836 ) ( 33,136 ) ( 6,415 )

Net change in noncontrolling interests 9,361 23,442 18,796

Net contributions from (distributions to) noncontrolling interests 6,466 9,361 23,442

Cash dividends paid on common stock ( 32,102 ) ( 31,340 ) ( 29,764 )

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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.

Only those costs incurred as a direct result of closing a lease transaction are capitalized and all initial direct costs are expensed immediately.

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.

Effective January 1, 2019, as part of the new leasing standard, only those costs incurred as a direct result of closing a lease transaction are capitalized.

All existing deferrals will continue to be amortized over the estimated life of the lease while all new initial direct costs are expensed immediately.

Accrued interest is included in Accrued Income and Other Assets on the Consolidated Statements of Financial Condition.

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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.

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides entities with optional temporary relief from certain accounting and financial reporting requirements under U.S.

Section 4013 of the CARES Act allows financial institutions to suspend application of certain TDR accounting guidance for loan and lease modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met.

Section 4013 of the CARES Act was amended on December 27, 2020 to extend this relief until January 1, 2022.

The relief can be applied to loan and lease modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan and lease modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan.

The Company chose to apply this relief to eligible loan and lease modifications.

At December 31, 2021 and December 31, 2020, loan and lease modification balances related to the COVID-19 pandemic were $ 0 million and $ 129 million, respectively.

The Company sells mortgage loans to the Government National Mortgage Association (GNMA) in the normal course of business and retains the servicing rights.

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Once the Company has the unconditional ability to repurchase a delinquent loan, the Company is deemed to have regained effective control over the loan and the Company is required to recognize the loan on its balance sheet and record an offsetting liability, regardless of its intent to repurchase the loan.

At December 31, 2021 and 2020, residential real estate portfolio loans included $ 1.33 million and $ 2.31 million, respectively, of loans available for repurchase under the GNMA optional repurchase programs with the offsetting liability recorded within other short-term borrowings.

At December 31, 2022 and 2021, residential real estate portfolio loans included $ 1.00 million and $ 1.33 million, respectively, of loans available for repurchase under the GNMA optional repurchase programs with the offsetting liability recorded within Other Short-term Borrowings on the Consolidated Statements of Financial Position.

Mortgage Banking Activities — Loans held for sale are composed of performing one-to-four family residential mortgage loans originated for resale.

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Income Taxes — 1st Source and its subsidiaries file a consolidated Federal income tax return.

The provision for incomes taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax return.

The provision for income taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax return.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

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Under this method, the investment tax credits are recognized as a reduction to the related asset.

The expense on certain qualified affordable housing investments is included in Tax Expense on the Consolidated Statements of Income.

The expense on certain qualified affordable housing investments is included in Income Tax Expense on the Consolidated Statements of Income.

Positions taken in the tax returns may be subject to challenge by the taxing authorities upon examination.

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Note 2 — Recent Accounting Pronouncements

Presentation of Financial Statements:

In August 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2021-06 “Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946):

Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.

33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.” This ASU amends the SEC sections of the Codification related to Final Rule Releases No.

33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33-10835, Update to Statistical Disclosures for Bank and Savings and Loan Registrants.

The guidance is effective upon its addition to the FASB codification.

The adoption of ASU 2021-06 did not have a material impact on its disclosures.

Fair Value Measurements :

In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2022-03 “Fair Value Measurements (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

This guidance is effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023.

Early adoption is permitted.

The Company has assessed ASU 2022-03 and does not expect it to have a material impact on its accounting and disclosures.

Financial Instruments–Credit Losses :

In March 2022, the FASB issued 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 write-offs 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 adopted ASU 2022-02 on January 1, 2023 and it did not have a material impact on its accounting and disclosures.

Reference Rate Reform:

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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.

In December of 2022, the FASB issued ASU No.

2022-06 which extended the period of time prepares can utilize the reference rate reform relief guidance in Topic 848.

The guidance ensures the relief in Topic 848 covers the period of time during which a significant number of modifications may take place and the ASU defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024.

The Company continues to implement its transition plan towards 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.

The Company expects to utilize the LIBOR transition relief allowed under ASU 2020-04, ASU 2021-01 and ASU 2022-06, 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 progresses.

Note 3 — Investment Securities Available-For-Sale

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Total loans and leases outstanding were recorded net of unearned income and deferred loan fees and costs at December 31, 2022 and 2021, and totaled $ 6.01 billion and $ 5.35 billion, respectively.

At December 31, 2021 and 2020, net deferred loan and lease (fees) costs were $( 0.09 ) million and $( 3.73 ) million, respectively.

At December 31, 2022 and 2021, net deferred loan and lease costs (fees) were $ 2.00 million and $( 0.09 ) million, respectively.

At December 31, 2022 and 2021, there were $ 0.01 million and $ 2.71 million, respectively, in deferred loan fees related to Paycheck Protection Program (PPP) loans.

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This portfolio sector also includes PPP loans, which are fully guaranteed by the SBA.

Total PPP loan originations during 2021 and 2020 amounted to $ 261.46 million and $ 597.45 million, respectively.

There were no PPP originations during 2022 and PPP loan originations during 2021 amounted to $ 261.46 million.

As of December 31, 2022 and 2021, PPP loan balances were $ 0.90 million and $ 73.08 million, respectively, which is net of an unearned discount of $ 0.01 million and $ 2.71 million, respectively.

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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 .

Loan terms 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, three to seven years and match the underlying leases.

Risks in both these segments include economic risks and collateral risks, principally used vehicle values.

Risks include economic risks and collateral risks, principally used vehicle values.

Specialty vehicle loans are also of longer duration, generally six years but up to 104 months for new motor coaches.

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Interest income for the years ended December 31, 2022, 2021, and 2020, would have increased by approximately $ 2.68 million, $ 2.62 million, and $ 3.49 million, respectively, if the nonaccrual loans and leases had earned interest at their full contract rate.

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by portfolio segment, for the year ending December 31, 2019.

(Dollars in thousands) Average

Investment Interest

Commercial and agricultural $ 5,983 $ 242

Auto and light truck 2,721 —

Medium and heavy duty truck 244 —

Aircraft 2,409 8

Construction equipment 1,664 —

Commercial real estate 1,715 —

Residential real estate and home equity 340 19

Consumer loans — —

Total $ 15,076 $ 269

The following table shows the number of loans and leases classified as troubled debt restructuring (TDR) during 2021, 2020 and 2019, by portfolio segment, as well as the recorded investment as of December 31.

The following table shows the number of loans and leases classified as troubled debt restructurings (TDRs) during 2022, 2021 and 2020, by portfolio segment, as well as the recorded investment as of December 31.

The classification between nonperforming and performing is shown at the time of modification.

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The TDRs during 2020 were the result of issues that predated the COVID-19 pandemic.

There was one modification during 2021, two modification during 2020, and one modification during 2019 that resulted in an interest rate reduction below market rate.

There was no modifications during 2022, one modification during 2021, and two modification during 2020 that resulted in an interest rate reduction below market rate.

Consequently, the financial impact of the modifications was immaterial.

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Total TDR modifications — $ — 1 $ 5,729 2 $ 10,733

There were no TDRs which had payment defaults within the twelve months following modification for the year ended December 31, 2021, one nonperforming commercial and agriculture TDR with a recorded investment of $ 0.41 million which had a payment default within the twelve months following modification for the year ended December 31, 2020, and one nonperforming auto and light truck TDR with a recorded investment of $ 0.00 million which had a payment default within the twelve months following modification during the year ended December 31, 2019.

There was one nonperforming construction equipment TDR with a recorded investment of $ 3.07 million which had a payment default within the twelve months following modification for the year ended December 31, 2022, no TDRs which had payment defaults within the twelve months following modification for the year ended December 31, 2021, and one nonperforming commercial and agricultural TDR with a recorded investment of $ 0.41 million which had a payment default within the twelve months following modification during the year ended December 31, 2020.

The classification between nonperforming and performing is shown at the time of modification.

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Balance, beginning of year $ 16,680 $ 5,549 $ 28,926 $ 6,400 $ 34,053 $ 19,166 $ 22,758 $ 5,374 $ 1,748 $ 140,654

Impact of ASC 326 adoption ( 939 ) 284 ( 1,303 ) 2,414 484 372 ( 649 ) 1,688 233 2,584

Adjusted balance, beginning of year 19,987 3,029 13,097 7,026 31,542 14,492 17,701 5,297 1,667 113,838

Charge-offs 2,930 — 7,797 — — 856 — 228 712 12,523

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Balance, beginning of year $ 20,926 $ 2,745 $ 14,400 $ 4,612 $ 31,058 $ 14,120 $ 18,350 $ 3,609 $ 1,434 $ 111,254

Impact of ASC 326 adoption ( 939 ) 284 ( 1,303 ) 2,414 484 372 ( 649 ) 1,688 233 2,584

Adjusted balance, beginning of year 19,987 3,029 13,097 7,026 31,542 14,492 17,701 5,297 1,667 113,838

Charge-offs 903 — 7,107 15 855 4,090 37 74 893 13,974

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Balance, end of year $ 16,680 $ 5,549 $ 28,926 $ 6,400 $ 34,053 $ 19,166 $ 22,758 $ 5,374 $ 1,748 $ 140,654

The allowance for loan and lease losses decreased year-over-year in 2021 for most portfolio segments due to improvements in credit quality, attributable in large part to government stimulus payments which provided much needed relief to our customers during the pandemic.

The 2020 allowance includes the impact of adopting ASC 326 for each loan segment.

Generally, a decrease in the allowance upon adoption was related to shorter duration assets in the loan class and likewise, an increase was generally due to longer duration assets.

Commercial and agricultural – loans declined year-over-year due to PPP debt forgiveness partially offset by modest loan growth in our core businesses.

The decline in the allowance was principally due to improved credit quality as reflected by lower special attention loan balances.

Solar – allowance increased due to loan growth.

Credit quality is stable to improving.

Auto and light truck – allowance decreased as a result of charge-offs and lower outstanding loan balances in the higher risk bus segment of the portfolio, which was significantly impacted by the pandemic.

The decline in balances in the bus segment was more than offset by increases in the auto rental and leasing segments, which carry lower loss ratios.

Medium and heavy duty truck – allowance decrease was principally attributable to a decrease in portfolio outstanding balances.

The allowance for loan and lease losses increased year-over-year in 2022 as most portfolio segments experienced loan growth along with an adjustment to forecast due to increased risk during the forecast period attributable to a weakened domestic GDP outlook, persistent inflation, markedly higher interest rates and continued geopolitical uncertainty.

Allowance increases were offset by a sizeable decline in the highly reserved bus segment of the auto and light truck portfolio due to continued pay downs and the removal of multiple qualitative adjustments specific to the segment.

The bus segment was severely impacted by the pandemic and experienced sizeable credit losses in each of the previous two years.

Credit quality within the bus segment is stabilizing with minimal delinquency and minimal new special attention activity in 2022.

The year-over-year decline in reserves experienced in 2021 was due to improvements in credit quality attributable in large part to government stimulus payments which provided much needed relief to the Company’s customers during the pandemic.

Commercial and agricultural – the decline in loan balances year-over-year was primarily attributable to PPP debt forgiveness along with a modest decline in core business balances.

The allowance was flat year-over-year as lowly reserved PPP loans were offset by core business loans which carry higher reserves.

Credit quality is stable.

Solar – allowance increased due to loan growth offset by a reduction in qualitative adjustments given stable credit quality and no loss history since portfolio inception.

Auto and light truck – allowance decreased due to declining balances and reduced qualitative adjustments in the highly reserved bus segment, partially offset by strong loan growth in the core auto rental and leasing segments which carry lower loss ratios.

Medium and heavy duty truck – allowance increased due to loan growth.

Credit quality metrics continued to be relatively strong for this portfolio.

Aircraft – the allowance was principally impacted by improved credit quality metrics and strengthening collateral values somewhat offset by loan growth and heightened economic concerns related to foreign loans.

Aircraft – the allowance was principally impacted by strong loan growth in both the domestic and foreign aircraft segments.

Credit quality metrics remain stable, offset by heightened economic and political concerns related to foreign loans.

The Company has historically carried a higher allowance in this portfolio due to risk volatility.

Construction equipment – allowance increase was driven by loan growth.

Commercial real estate – allowance decrease was a result of declines in outstanding loan balances and also qualitative adjustments to the loss ratios for the hotel segment which was hard hit by the pandemic but is currently performing better than anticipated.

Residential real estate and home equity – decreased allowance due to decline in loan balances.

Consumer – segment saw an increase in allowance due to forecast adjustments and slight loan growth.

Construction equipment – allowance increase was driven by strong loan growth during the year.

Commercial real estate – the allowance decrease was a result of the removal of qualitative adjustments related to the COVID-19 pandemic during the year, primarily in the hotel segment, offset by modest loan growth in the portfolio.

Residential real estate and home equity – increased allowance due to forecast adjustments and loan growth.

Consumer – the segment saw an increase in allowance due to forecast adjustments and loan growth.

Economic Outlook

As of December 31, 2021, the most significant economic factors impacting our loan portfolios are the pandemic and the Omicron COVID variant surge, ongoing supply chain disruptions, and increasing inflation.

The forecast considers global and domestic economic effects from the pandemic as well as other key economic factors such as unemployment and inflation which may impact our clients.

The Company’s assumption was that economic growth will slow in 2022 and 2023 and inflation will remain 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 the unprecedented economic uncertainty caused by the COVID-19 pandemic, the Company’s future loss estimates may vary considerably from the December 31, 2021 assumptions.

As of December 31, 2022, the most significant economic factors impacting the Company’s loan portfolios was a weakened domestic growth outlook, exacerbated by persistent inflation, higher interest rates and the protracted war in Ukraine and resultant increased geopolitical uncertainty.

The forecast considers global and domestic impacts from these factors as well as other key economic factors such as changes in unemployment, commodity prices, and the housing market which may impact the Company’s clients.

The Company’s assumption was that economic growth will be weak in 2023 and exhibit below trend growth during 2024 with inflation slowly moving back towards 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 risk and economic uncertainty, the Company’s future loss estimates may vary considerably from the December 31, 2022 assumptions.

Liability for Credit Losses on Unfunded Loan Commitments

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Adjusted balance, beginning of year 4,196 4,499 3,949

(Recovery of) provision ( 303 ) 550 97

Provision (recovery of provision) 1,420 ( 303 ) 550

Balance, end of year $ 5,616 $ 4,196 $ 4,499

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To mitigate the risk of loss, the Company seeks to diversify both the type of equipment leased and the industries in which the lessees participate.

In addition, a portion of our leases are terminal rental adjustment clause or “TRAC” leases where the lessee effectively guarantees the full residual value through a rental adjustment at the end of term or those where partial value is guaranteed (“split-TRAC”), which has a limited residual risk.

In addition, a portion of the Company’s leases are terminal rental adjustment clause or “TRAC” leases where the lessee effectively guarantees the full residual value through a rental adjustment at the end of term or those where partial value is guaranteed (“split-TRAC”), which has a limited residual risk.

Under a split-TRAC structure, the limited residual risk would be satisfied first by the net sale proceeds of the leased asset.

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Expense related to personal property tax payments on operating leased equipment for the year ended December 31, 2022, 2021 and 2020 were $ 0.35 million, $ 0.46 million and $ 0.61 million, respectively.

During the year ended December 31, 2021, the Company did not record any impairment charges.

Impairment charges, if any, are recorded as a result of the annual review of operating lease residual values and are recognized in Depreciation - Leased Equipment on the Consolidated Statements of Income.

During the year ended December 31, 2022, the Company recorded impairment charges of $ 0.06 million.

The impairment charges were recorded as a result of the annual review of operating lease residual values and was recognized in Depreciation — Leased Equipment on the Consolidated Statements of Income.

Note 7 — Premises and Equipment

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Balance at beginning of year — ( 812 )

Impairment recoveries (charges) 812 ( 812 )

Impairment recoveries — 812

Balance at end of year $ — $ —

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and $ 18.04 million.

At December 31, 2021, the Federal Home Loan Bank borrowings represented a source of funding for community economic development activities, agricultural loans and general funding for the bank and consisted of 16 fixed rate notes with maturities ranging from 2022 to 2030.

At December 31, 2022, the Federal Home Loan Bank borrowings represented a source of funding for community economic development activities, agricultural loans and general funding for the bank and consisted of eight fixed rate notes with maturities ranging from 2023 to 2026.

These notes were collateralized by $ 29.73 million of certain real estate loans.

3 unchanged sentences

Total interest expense recorded for 2022, 2021, and 2020 was $( 0.35 ) million, $ 1.79 million, and $ 2.14 million, respectively.

Negative interest expense recognized during 2022 was due to a decrease in book value per share during the year.

The following table shows the details of short-term borrowings as of December 31, 2022 and 2021.

76 unchanged sentences

Diluted earnings per common share $ 4.84 $ 4.70 $ 3.17

Note 14 — Accumulated Other Comprehensive Income

The following table presents reclassifications out of accumulated other comprehensive income related to unrealized gains and losses on available-for-sale securities for the two years ending December 31.

Note 14 — Accumulated Other Comprehensive Loss

The following table presents reclassifications out of accumulated other comprehensive loss related to unrealized gains and losses on available-for-sale securities for the two years ending December 31.

(Dollars in thousands) 2022 2021 Affected Line Item in the Statements of Income

Realized (losses) gains included in net income $ ( 680 ) $ 279 (Losses) gains on investment securities available-for-sale

Realized losses included in net income $ ( 184 ) $ ( 680 ) (Losses) gains on investment securities available-for-sale

( 184 ) ( 680 ) Income before income taxes

103 unchanged sentences

Allowance for credit losses $ 33,237 $ 32,431

Tax credit carryforward — 8,606

Operating lease liability 4,728 5,145

9 unchanged sentences

Tax advantaged partnerships 3,823 9,502

Net unrealized gains on securities available-for-sale — 5,827

Other 245 713

26 unchanged sentences

Short-term lease cost Net occupancy expense 18 20 8

Variable lease (recovery of) cost Net occupancy expense — ( 30 ) —

Variable lease cost (recovery of cost) Net occupancy expense 8 — ( 30 )

Total operating lease cost $ 3,553 $ 3,500 $ 3,450

11 unchanged sentences

Operating cash flows from operating leases $ 4,298 $ 4,006 $ 3,794

During the year ended December 31, 2019, the Company recognized a net gain on the sale of an office building in the amount of $ 1.31 million.

The Company commenced an operating lease with the buyer of the building to lease a portion of it for office space resulting in a new right of use asset and operating lease liability.

There were no new significant leases that had not yet commenced as of December 31, 2022.

35 unchanged sentences

Loan commitments 2,638 Mortgages held for sale 67 N/A —

Forward contracts - mortgage loan 22,000 N/A — Mortgages held for sale 11

Forward contracts - mortgage loan 3,750 Mortgages held for sale 24 N/A —

Total - December 31, 2022 $ 887,988 $ 24,929 $ 25,307

109 unchanged sentences

Local direct placement municipal securities, with very little market activity, are priced using an appropriate market yield curve which incorporates 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.

Mortgages held for sale and the related loan commitments and forward contracts (economic 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.

40 unchanged sentences

Included in other comprehensive income ( 135 )

Purchases 3,000

Settlements —

7 unchanged sentences

Included in other comprehensive income ( 15 )

Purchases 3,100

Settlements —

166 unchanged sentences

Net income $ 120,532 $ 118,557 $ 81,461

Comprehensive income $ 90,325 $ 94,660 $ 107,863

Comprehensive (loss) income $ ( 17,297 ) $ 90,325 $ 94,660

STATEMENTS OF CASH FLOWS

13 unchanged sentences

Net change in partnership investments 102 ( 74 ) ( 182 )

Capital contribution to subsidiary — — ( 325 )

Net change in investing activities 102 ( 74 ) ( 182 )

13 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data