1ST SOURCE CORP 10-K

Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements Page Reports of FORVIS , LLP, Independent Registered Public Accounting Firm ( FORVIS, LLP , Fort Wayne, Indiana , Auditor Firm ID: 686 ) 42 Consolidated Statements of Financial Condition 45 Consolidated Statements of Income 46 Consolidated Statements of Comprehensive Income 47 Consolidated Statements of Shareholders’ Equity 47 Consolidated Statements of Cash Flows 48 Notes to Consolidated Financial Statements 49 40 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors and Audit, Finance and Risk Committee 1st Source Corporation South Bend, Indiana 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, 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters 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, Finance and Risk Committee and that: (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 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 As described in Note 5 to the consolidated financial statements, the Company’s consolidated allowance for loan and lease losses (ALLL) was $139.27 million at December 31, 2022. The Company also describes in Note 1 of the consolidated financial statements the “Allowance for Loan and Lease Losses” accounting policy around this estimate. The ALLL is an estimate of current expected credit losses in the loan and lease portfolio. The determination of the allowance for loan and lease losses requires significant judgment reflecting the Company’s best estimate of expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate. 41 Table of Contents This assessment is made on a loan pool basis in most instances, with the expected credit losses estimates by using a combination of models that measures the probability of default, probability of attrition, loss given defaults and exposure at default. The assessments of probability of default and probability of attrition are based on internal data that relates to the historical performance of each loan pool over a complete economic cycle. Adjustments were then applied, if needed, to reflect the current impact of macroeconomic variables and to account for other expected changes that could occur in the future. These assumptions are analyzed for a reasonable and supportable forecast period, after which, the forecasted macroeconomic assumptions reverted to their historical average, using a rational and systematic basis. The loss given default is based on an analysis of historical recoveries for each loan pool, with adjustments to reflect the current impact of macroeconomic variables and to account for other expected changes that could occur in the future, if considered necessary. The exposure at default was estimated by using a transitional matrix that estimates the average percentage of the loan balance that remains at the time of default. Additional qualitative adjustments were applied in certain circumstances, to account for other factors not evaluated in the initial model. In certain instances, loans were evaluated on an individual basis due to the management’s conclusion that they exhibited unique risk characteristics which prevented them from being similar to the identified loan pools. The primary reason for our determination that the allowance for loan losses is a critical audit matter is that auditing the estimated allowance for loan losses involved significant judgment and high degree of subjectivity, due to the number of relevant assumptions and the nature of the qualitative factor adjustments. Areas that contained subjectivity in evaluating management’s estimate, included evaluating management’s assessment of current and expected economic conditions and other environmental factors, evaluating assumptions utilized in determining cohort loss rates, probability of default and loss given default, evaluating the adequacy of specific allowances associated with individually evaluated loans and assessing the appropriateness of loan grades. Our audit procedures related to the estimated allowance for loan losses at December 31, 2022, included: • Testing the design and operating effectiveness of internal controls, including those related to technology, over the ALLL, the establishment of qualitative adjustments for current and expected conditions, grading and risk classification of loans and establishment of specific reserves on individually evaluated loans and management’s review controls over the ALLL balance as a whole including attending internal Company Credit Policy Committee meetings and Audit Committee discussions and analysis. • Testing clerical and computational accuracy of the formulas within the calculation. • Testing of completeness and accuracy of the information and reports utilized in the ALLL, including reports used in management review controls over the ALLL. • Evaluating the precision of management review of the adequacy of the ALLL. • Evaluating the current and expected qualitative adjustments, including assessing the basis for the adjustments and the reasonableness of the significant assumptions including growth in gross domestic product, unemployment rates, housing market trends, commodity prices, and inflation rates. • Evaluating the forecast adjustment, including assessing that it is reasonable and supportable. • Evaluating significant assumptions utilized in the probability of default/loss given default model including probability of default run-out frequency, length, and look-back period and loss given default months of delay, look-back period and loss horizon. • Evaluating significant assumptions utilized in the cohort model including look-back period, months of delay, and loss horizon. • Evaluating the relevance and reliability of data and assumptions. • Testing of the loan review function and the accuracy of loan grades determined. Specifically, utilizing internal professionals to assist us in evaluating the appropriateness of loan grades and to assess the reasonableness of specific impairments on loans. • Evaluating the overall reasonableness of qualitative factors and the appropriateness of their direction and magnitude and the Company’s support for the direction and magnitude compared to previous years. • Evaluating credit quality indicators such as trends in delinquencies, nonaccruals, charge-offs, and loan grades. • 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 Fort Wayne, Indiana February 16, 2023 42 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors and Audit, Finance and Risk Committee 1st Source Corporation South Bend, Indiana Opinion on the Internal Control over Financial Reporting We have audited 1st Source Corporation’s (Company) 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). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework: (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 The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 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 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; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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 February 16, 2023 43 Table of Contents CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31 (Dollars in thousands) 2022 2021 ASSETS Cash and due from banks $ 84,703 $ 54,420 Federal funds sold and interest bearing deposits with other banks 38,094 470,767 Investment securities available-for-sale 1,775,128 1,863,041 Other investments 25,293 27,189 Mortgages held for sale 3,914 13,284 Loans and leases, net of unearned discount: Commercial and agricultural 812,031 918,712 Solar 381,163 348,302 Auto and light truck 808,117 603,775 Medium and heavy duty truck 313,862 259,740 Aircraft 1,077,722 898,401 Construction equipment 938,503 754,273 Commercial real estate 943,745 929,341 Residential real estate and home equity 584,737 500,590 Consumer 151,282 133,080 Total loans and leases 6,011,162 5,346,214 Allowance for loan and lease losses ( 139,268 ) ( 127,492 ) Net loans and leases 5,871,894 5,218,722 Equipment owned under operating leases, net 31,700 48,433 Net premises and equipment 44,773 47,038 Goodwill and intangible assets 83,907 83,926 Accrued income and other assets 380,010 269,469 Total assets $ 8,339,416 $ 8,096,289 LIABILITIES Deposits: Noninterest-bearing demand $ 1,998,151 $ 2,052,981 Interest-bearing deposits: Interest-bearing demand 2,591,464 2,455,580 Savings 1,198,191 1,286,367 Time 1,140,459 884,137 Total interest-bearing deposits 4,930,114 4,626,084 Total deposits 6,928,265 6,679,065 Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 141,432 194,727 Other short-term borrowings 74,097 5,300 Total short-term borrowings 215,529 200,027 Long-term debt and mandatorily redeemable securities 46,555 71,251 Subordinated notes 58,764 58,764 Accrued expenses and other liabilities 166,537 117,718 Total liabilities 7,415,650 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 shares at December 31, 2022 and 2021 436,538 436,538 Retained earnings 694,862 603,787 Cost of common stock in treasury ( 3,543,388 shares at December 31, 2022 and 3,466,162 shares at December 31, 2021) ( 119,642 ) ( 114,209 ) Accumulated other comprehensive loss ( 147,690 ) ( 9,861 ) Total shareholders’ equity 864,068 916,255 Noncontrolling interests 59,698 53,209 Total equity 923,766 969,464 Total liabilities and equity $ 8,339,416 $ 8,096,289 The accompanying notes are a part of the consolidated financial statements. 44 Table of Contents CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (Dollars in thousands, except per share amounts) 2022 2021 2020 Interest income: Loans and leases $ 263,894 $ 235,031 $ 242,772 Investment securities, taxable 26,294 17,767 18,080 Investment securities, tax-exempt 1,049 601 895 Other 2,579 1,373 1,284 Total interest income 293,816 254,772 263,031 Interest expense: Deposits 25,231 12,276 30,459 Short-term borrowings 1,497 115 517 Subordinated notes 3,550 3,267 3,367 Long-term debt and mandatorily redeemable securities 69 2,476 2,868 Total interest expense 30,347 18,134 37,211 Net interest income 263,469 236,638 225,820 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 Noninterest income: Trust and wealth advisory 23,107 23,782 21,114 Service charges on deposit accounts 12,146 10,589 9,485 Debit card 18,052 18,125 14,983 Mortgage banking 4,122 11,822 15,674 Insurance commissions 6,703 7,247 7,025 Equipment rental 12,274 16,647 23,380 (Losses) gains on investment securities available-for-sale ( 184 ) ( 680 ) 279 Other 15,042 12,560 11,949 Total noninterest income 91,262 100,092 103,889 Noninterest expense: Salaries and employee benefits 105,110 105,808 101,556 Net occupancy 10,728 10,524 10,276 Furniture and equipment 5,448 5,977 6,541 Data processing 22,375 19,877 19,147 Depreciation — leased equipment 10,023 13,694 20,203 Professional fees 7,280 8,676 6,317 FDIC and other insurance 3,625 2,677 2,606 Business development and marketing 5,823 8,013 4,157 Other 14,287 10,902 16,564 Total noninterest expense 184,699 186,148 187,367 Income before income taxes 156,787 154,885 106,341 Income tax expense 36,255 36,328 24,880 Net income 120,532 118,557 81,461 Net (income) loss attributable to noncontrolling interests ( 23 ) ( 23 ) ( 24 ) Net income available to common shareholders $ 120,509 $ 118,534 $ 81,437 Basic net income per common share $ 4.84 $ 4.70 $ 3.17 Diluted net income per common share $ 4.84 $ 4.70 $ 3.17 The accompanying notes are a part of the consolidated financial statements. 45 Table of Contents CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME Year Ended December 31 (Dollars in thousands) 2022 2021 2020 Net income $ 120,532 $ 118,557 $ 81,461 Other comprehensive (loss) income: Unrealized (depreciation) appreciation of investment securities available-for-sale ( 181,237 ) ( 37,867 ) 17,666 Reclassification adjustment for realized losses (gains) included in net income 184 680 ( 279 ) Income tax effect 43,224 8,955 ( 4,188 ) Other comprehensive (loss) income, net of tax ( 137,829 ) ( 28,232 ) 13,199 Comprehensive (loss) income ( 17,297 ) 90,325 94,660 Comprehensive (income) loss attributable to noncontrolling interests ( 23 ) ( 23 ) ( 24 ) Comprehensive (loss) income available to common shareholders $ ( 17,320 ) $ 90,302 $ 94,636 The accompanying notes are a part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 1st Source Corporation Shareholders (Dollars in thousands, except per share amounts) 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, 2020 $ — $ 436,538 $ 463,269 $ ( 76,702 ) $ 5,172 $ 828,277 $ 20,359 $ 848,636 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 — — 81,437 — — 81,437 24 81,461 Other comprehensive income — — — — 13,199 13,199 — 13,199 Issuance of 46,089 common shares under stock based compensation awards — — 962 877 — 1,839 — 1,839 Cost of 166,446 shares of common stock acquired for treasury — — — ( 6,415 ) — ( 6,415 ) — ( 6,415 ) Common stock dividend ($ 1.13 per share) — — ( 28,940 ) — — ( 28,940 ) — ( 28,940 ) Contributions from noncontrolling interests — — — — — — 24,098 24,098 Distributions to noncontrolling interests — — — — — — ( 656 ) ( 656 ) Balance at December 31, 2020 $ — $ 436,538 $ 514,176 $ ( 82,240 ) $ 18,371 $ 886,845 $ 43,825 $ 930,670 Net income — — 118,534 — — 118,534 23 118,557 Other comprehensive loss — — — — ( 28,232 ) ( 28,232 ) — ( 28,232 ) Issuance of 63,527 common shares under stock based compensation awards — — 1,547 1,167 — 2,714 — 2,714 Cost of 713,132 shares of common stock acquired for treasury — — — ( 33,136 ) — ( 33,136 ) — ( 33,136 ) Common stock dividend ($ 1.21 per share) — — ( 30,470 ) — — ( 30,470 ) — ( 30,470 ) Contributions from noncontrolling interests — — — — — — 10,358 10,358 Distributions to noncontrolling interests — — — — — — ( 997 ) ( 997 ) Balance at December 31, 2021 $ — $ 436,538 $ 603,787 $ ( 114,209 ) $ ( 9,861 ) $ 916,255 $ 53,209 $ 969,464 Net income — — 120,509 — — 120,509 23 120,532 Other comprehensive loss — — — — ( 137,829 ) ( 137,829 ) — ( 137,829 ) Issuance of 72,593 common shares under stock based compensation awards — — 1,762 1,403 — 3,165 — 3,165 Cost of 149,819 shares of common stock acquired for treasury — — — ( 6,836 ) — ( 6,836 ) — ( 6,836 ) Common stock dividend ($ 1.26 per share) — — ( 31,196 ) — — ( 31,196 ) — ( 31,196 ) Contributions from noncontrolling interests — — — — — — 7,700 7,700 Distributions to noncontrolling interests — — — — — — ( 1,234 ) ( 1,234 ) Balance at December 31, 2022 $ — $ 436,538 $ 694,862 $ ( 119,642 ) $ ( 147,690 ) $ 864,068 $ 59,698 $ 923,766 The accompanying notes are a part of the consolidated financial statements. 46 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (Dollars in thousands) 2022 2021 2020 Operating activities: Net income $ 120,532 $ 118,557 $ 81,461 Adjustments to reconcile net income to net cash provided by operating activities: Provision (recovery of provision) for credit losses 13,245 ( 4,303 ) 36,001 Depreciation of premises and equipment 4,596 5,093 5,673 Depreciation of equipment owned and leased to others 10,023 13,694 20,203 Stock-based compensation 3,587 4,214 3,293 Amortization of investment securities premiums and accretion of discounts, net 3,951 6,684 6,057 Amortization of mortgage servicing rights 1,287 2,117 2,361 Mortgage servicing rights (recoveries) impairments — ( 812 ) 812 Amortization of right of use assets 3,181 3,095 2,842 Deferred income taxes ( 9,461 ) 15,396 ( 24,160 ) Losses (gains) on investment securities available-for-sale 184 680 ( 279 ) Originations of loans held for sale, net of principal collected ( 86,185 ) ( 261,558 ) ( 330,991 ) Proceeds from the sales of loans held for sale 97,166 268,226 351,039 Net gains on sale of loans held for sale ( 1,611 ) ( 7,067 ) ( 12,656 ) Net gains on sale of other real estate and repossessions ( 410 ) ( 672 ) ( 138 ) Change in interest receivable ( 6,987 ) 2,482 ( 1,117 ) Change in interest payable 4,115 ( 2,111 ) ( 9,923 ) Change in other assets 413 17,757 12,782 Change in other liabilities 21,910 ( 14,990 ) 10,293 Other ( 4,006 ) 279 940 Net change in operating activities 175,530 166,761 154,493 Investing activities: Proceeds from sales of investment securities available-for-sale 23,795 99,208 8,403 Proceeds from maturities and paydowns of investment securities available-for-sale 206,426 336,364 443,617 Purchases of investment securities available-for-sale ( 327,496 ) ( 1,145,697 ) ( 597,296 ) Net change in partnership investments ( 18,292 ) ( 24,897 ) ( 54,981 ) Net change in other investments 1,896 240 985 Loans sold or participated to others 57,473 54,623 17,462 Proceeds from principal payments on direct finance leases 58,654 40,751 54,771 Net change in loans and leases ( 784,355 ) 36,414 ( 489,477 ) Net change in equipment owned under operating leases 6,710 2,913 26,414 Purchases of premises and equipment ( 2,380 ) ( 2,886 ) ( 2,850 ) 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 Net change in investing activities ( 784,872 ) ( 598,559 ) ( 582,658 ) Financing activities: Net change in demand deposits and savings accounts ( 7,122 ) 1,016,257 1,069,843 Net change in time deposits 256,322 ( 283,220 ) ( 481,141 ) Net change in short-term borrowings 15,502 49,386 4,748 Proceeds from issuance of long-term debt — — 10,000 Payments on long-term debt ( 25,530 ) ( 13,460 ) ( 2,905 ) Stock issued under stock purchase plans 252 90 39 Acquisition of treasury stock ( 6,836 ) ( 33,136 ) ( 6,415 ) 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 ) Net change in financing activities 206,952 713,938 587,847 Net change in cash and cash equivalents ( 402,390 ) 282,140 159,682 Cash and cash equivalents, beginning of year 525,187 243,047 83,365 Cash and cash equivalents, end of year $ 122,797 $ 525,187 $ 243,047 Supplemental Information: Non-cash transactions: Loans transferred to other real estate and repossessions $ 1,811 $ 2,440 $ 4,317 Common stock matching contribution to Employee Stock Ownership and Profit Sharing Plan 683 715 622 Right of use assets obtained in exchange for lease obligation 2,027 1,344 2,612 Cash paid for: Interest $ 26,233 $ 20,245 $ 47,134 Income taxes 23,258 15,360 13,461 The accompanying notes are a part of the consolidated financial statements. 47 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 1st Source Bank (“Bank”), its banking subsidiary, offers commercial and consumer banking services, trust and wealth advisory services, and insurance to individual and business clients. The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements. Basis of Presentation — The financial statements consolidate 1st Source, its subsidiaries (principally the Bank) and any variable interest entities (“VIEs”) for which the Company has concluded it has significant involvement in and the ability to direct the activities that impact the entity’s economic performance. All significant intercompany balances and transactions have been eliminated. For purposes of the parent company only financial information presented in Note 22, investments in subsidiaries are carried at equity in the underlying net assets. Use of Estimates in the Preparation of Financial Statements — Financial statements prepared in accordance with U.S. generally accepted accounting principles (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 expenses during the reporting period. Actual results could differ from those estimates. Business Combinations — Business combinations are accounted for under the purchase method of accounting. Under the purchase method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition. Cash Flows — For purposes of the consolidated and parent company only statements of cash flows, the Company considers cash and due from banks, federal funds sold and interest bearing deposits with other banks with original maturities of three months or less as cash and cash equivalents. Securities — Securities that the Company has the ability and positive intent to hold to maturity are classified as investment securities held-to-maturity. Held-to-maturity investment securities, when present, are carried at amortized cost. As of December 31, 2022 and 2021, the Company held no securities classified as held-to-maturity. Securities that may be sold in response to, or in anticipation of, changes in interest rates and resulting prepayment risk, or for other factors, are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on debt securities are reported, net of applicable taxes, as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity. Unrealized gains and losses on equity securities are reflected, net of applicable taxes, in earnings. For available-for-sale securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value in Other Income on the Consolidated Statements of Income. For debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, nature of the security, the underlying collateral, and the financial condition of the issuer, among other factors. If this assessment indicates a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for available-for-sale securities losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for available-for-sale securities losses is recognized in other comprehensive income. Changes in the allowance for available-for-sale securities are recorded as a component of credit loss expense. Losses are charged against the allowance for available-for-sale securities losses when management believes the uncollectibility of an available-for-sale security is confirmed or when either criteria regarding intent or requirement to sell is met. Debt and equity securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading account securities and are carried at fair value with unrealized gains and losses reported in earnings. Realized gains and losses on the sales of all securities are reported in earnings and computed using the specific identification cost basis. 48 Table of Contents Other investments consist of shares of Federal Home Loan Bank of Indianapolis (FHLBI) and Federal Reserve Bank stock. As restricted member stocks, these investments are carried at cost. Both cash and stock dividends received on the stocks are reported as income. Quarterly, the Company reviews its investment in FHLBI for impairment. Factors considered in determining impairment are: history of dividend payments; determination of cause for any net loss; adequacy of capital; and review of the most recent financial statements. As of December 31, 2022 and 2021, it was determined that the Company’s investment in FHLBI stock is appropriately valued at cost, which equates to par value. In addition, other investments include interest bearing deposits with other banks with original maturities of greater than three months. These investments are in denominations, including accrued interest, that are fully insured by the FDIC. 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. 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. Accrued interest is included in Accrued Income and Other Assets on the Consolidated Statements of Financial Condition. 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. 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. The Company sells mortgage loans to the Government National Mortgage Association (GNMA) in the normal course of business and retains the servicing rights. The GNMA programs under which the loans are sold allow the Company to repurchase individual delinquent loans that meet certain criteria from the securitized loan pool. At its option, and without GNMA’s prior authorization, the Company may repurchase a delinquent loan for an amount equal to 100 % of the remaining principal balance on the loan. 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, 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. Mortgage loans originated with the intent to sell are carried at fair value. 49 Table of Contents The Company recognizes the rights to service 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. These assets are amortized as reductions of mortgage servicing fee income over the estimated servicing period in proportion to the estimated servicing income to be received. The balance of MSRs is located in Accrued Income and Other Assets on the Consolidated Statements of Financial Condition and the gains and losses on the sale of MSRs are recognized in Noninterest Income on the Consolidated Statements of Income in the period in which such rights are sold. 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. MSRs are also reviewed for permanent impairment. Permanent impairment exists when recoverability of a recorded valuation allowance is determined to be remote considering historical and projected interest rates, prepayments, and loan pay-off activity. When this situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the MSRs. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the MSRs and the valuation allowance, precluding subsequent recoveries. As part of mortgage banking operations, the Company enters into commitments to originate loans whereby the interest rate on these loans is determined prior to funding (“rate lock commitments”). Similar to loans held for sale, the fair value of rate lock commitments is subject to change primarily due to changes in interest rates. Under the Company’s risk management policy, these fair values are hedged primarily by selling forward contracts on agency securities at the time the interest rate locks are issued to the customers. The rate lock commitments on mortgage loans intended to be sold and the related hedging instruments are recorded at fair value with changes in fair value recorded in current earnings. Allowance for Credit Losses: Loans and leases — Accrued interest on loans and leases is excluded from the calculation of the allowance for credit losses due to the Company’s charge-off policy to reverse accrued interest on nonperforming loans against interest income in a timely manner. Expected credit losses on net investments in leases, including any unguaranteed residual asset, are included in the allowance for loan and lease losses. Allowance for Loan and Lease Losses — Effective January 1, 2020, the allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolio. Prior to January 1, 2020, the allowance was established based on an incurred loss model. It is the Company’s policy to maintain the allowance at a level believed to be adequate to absorb estimated credit losses within its portfolio of loans and leases. 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). The cohort methodology is applied to ungraded portfolios, portfolios where receipt of financial statements is generally less timely, and portfolios where there are numerous small dollar accounts that are credit scored. Loans are broken out by internal risk rating (loan grade) bands: 1-6 and 7-12 (special attention). For ungraded portfolios, there is only one pool. The cohort methodology has a steady state assumption; qualitative adjustments capture any differences that may exist between the current and historical conditions. 50 Table of Contents The PD/LGD methodology is applied to graded portfolios due to the quantitative nature of the Company’s risk rating system and is consistent with the Company’s definition of risk, downgrading a credit where and when appropriate and recognizing losses in a timely manner. Loans are broken out by risk rating (loan grade) bands: 1-3, 4-6, 7-8, and 9-12. The amortized cost loan balances (rather than counts) are used for determining the transition and default probabilities. The Company uses risk rating bands as the active state to track the movement of loans through the transition matrix. The transition frequency is quarterly. Default is defined as the point at which a loan is placed on non-accrual status. In addition, a charge-off is assumed to be a default (i.e. a loan goes from accruing to charge-off, without ever being on non-accrual status). The PD is the cumulative probability of default estimated by use of a transition matrix (based on a Markov transition matrix methodology) which captures the migration of a loan from one risk rating band to another. The LGD is the ratio of loss relative to the exposure (amortized cost) at default. The current expected credit loss methodology has a factor for reasonable and supportable forecasts. Generally, reasonable and supportable forecasts are for two years or less and have a reversion period of a similar duration, reverting expected credit losses to a level that is consistent with our historical loss experience. Forecast adjustments are added via basis points for the cohort methodology. For the PD/LGD methodology, adjustments to the probability of default factor are applied through forecast adjustments to the PD factor used as the baseline transition matrix runout, thus impacting the historical loss ratio. The Company developed its reasonable and supportable forecasts using relevant data including, but not limited to, growth in gross domestic product, unemployment rates, housing market trends, commodity prices, inflation, and other factors associated with credit losses on the financial statements. For both the cohort and the PD/LGD methodologies, the Company uses qualitative adjustments to capture differences that may exist between the current and historical conditions. Qualitative factors include but are not limited to current market risk assessment by industry, recent loss experience in particular segments of the portfolios, movement in equipment values collateralizing specialized industry portfolios, concentrations of credit risk, delinquencies, trends in volume, experience and depth of relationship managers and division management, and the effects of changes in lending policies and practices, including changes in quality of the loan and lease origination, servicing and risk management process. Loans which exhibit different risk characteristics than the pool are evaluated individually for impairment. Loans evaluated individually are not included in the collective evaluation. These loans can be identified from a variety of sources including delinquency, non-accrual status and troubled debt restructurings (TDRs). The scope may include accruing loans that exhibit risk characteristics which differ from their pool or non-performing loans with risk characteristics not similar to other special attention loans in their pool. Individual reserves are determined based on an analysis of the loan’s expected future cash flows, the loan’s observable market value, or the fair value of the collateral less costs to sell. When foreclosure is probable, impairment is determined based on the collateral’s fair value less costs to sell. As a practical expedient, fair value less costs to sell may be used when developing the estimate of credit losses. Similarly, for a going concern analysis, a discounted cash method may be used. Liability for Credit Losses on Unfunded Loan Commitments — The liability for credit losses on commitments to originate loans and standby letters of credit is included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition. Expected credit losses are estimated over the contractual period in which the Company is exposed to credit risk via a contractual obligation unless the obligation is unconditionally cancellable by the Company. The liability for credit losses on unfunded loan commitments is adjusted as a provision for credit losses in Other Noninterest Expense on the Consolidated Statements of Income. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated useful life. Because business processes and credit risks associated with unfunded credit commitments are essentially the same as for loans, the Company utilizes similar processes to estimate its liability for unfunded credit commitments. 51 Table of Contents Equipment Owned Under Operating Leases — As a lessor, the Company finances various types of construction equipment, medium and heavy duty trucks, automobiles and other equipment under leases classified as operating leases. The equipment underlying the operating leases is reported at cost, net of accumulated depreciation, on the Consolidated Statements of Financial Condition. These operating lease arrangements require the lessee to make a fixed monthly rental payment over a specified lease term generally ranging from three years to seven years . Revenue consists of the contractual lease payments and is recognized on a straight-line basis over the lease term and reported in Noninterest Income on the Consolidated Statements of Income. Leased assets are depreciated on a straight-line method over the lease term to the estimate of the equipment’s fair market value at lease termination, also referred to as “residual” value. The depreciation of these operating lease assets is reported in Noninterest Expense on the Consolidated Statements of Income. For automobile leases, fair value is based upon published industry market guides. For other equipment leases, fair value may be based upon observable market prices, third-party valuations, or prices received on sales of similar assets at the end of the lease term. These residual values are reviewed annually to ensure the recorded amount does not exceed the fair market value at the lease termination. At the end of the lease, the operating lease asset is either purchased by the lessee or returned to the Company. The Company is responsible for the payment of personal property taxes which is reported in Other Expense on the Consolidated Statements of Income. The lessee is responsible for reimbursing the Company for personal property taxes which is reported in Other Income on the Consolidated Statements of Income. The Company excludes sales taxes and other similar taxes from being reported as lease revenue with an associated expense. Lease Commitments — The Company leases certain banking center locations, office space, land and billboards. In determining whether a contract contains a lease, the Company examines the contract to ensure an asset was specifically identified and that the Company has control of use over the asset. To determine whether a lease is classified as operating or finance, the Company performs an economic life test on all building leases with greater than a twenty years term. Further, the Company performs a fair value test to identify any leases that have a present value of future lease payments over the lease term that is greater than 90 % of the fair value of the building. The Company only capitalizes leases with an initial lease liability of $ 2,000 or greater. At lease inception, the Company determines the lease term by adding together the minimum lease term and all optional renewal periods that it is reasonably certain to renew. The Company determines this on each lease by considering all relevant contract-based, asset-based, market-based, and entity-based economic factors. Generally, the exercise of lease renewal options is at the Company’s sole discretion. The lease term is used to determine whether a lease is operating or finance and is used to calculate straight-line rent expense. Additionally, the depreciable life of leasehold improvements is limited by the expected lease term. Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the date the Company takes possession of the property. Rent expense and variable lease costs are included in Net Occupancy Expense on the Consolidated Statements of Income. Included in variable lease costs are leases with rent escalations based on recent financial indices, such as the Consumer Price Index, where the Company initially measures lease payments using the index on the commencement date and records future changes in rent payments resulting from changes in the index to variable costs in the period the changes occur. Certain leases require the Company to pay common area maintenance, real estate taxes, insurance and other operating expenses associated with the leases premises. These expenses are classified in Net Occupancy Expense on the Consolidated Statements of Income, consistent with similar costs for owned locations. There are no residual value guarantees, restrictions or covenants imposed by leases. The Company accounts for lease and nonlease components together as a single lease component by class of underlying asset. Operating lease obligations with an initial term longer than 12 months are recorded with a right of use asset and a lease liability on the Consolidated Statements of Financial Condition. The discount rate used in determining the lease liability and related right of use asset is based upon what would be obtained by the Company for similar loans as an incremental rate as of the date of origination or renewal. Other Real Estate — Other real estate acquired through partial or total satisfaction of nonperforming loans is included in Other Assets on the Consolidated Statements of Financial Condition and recorded at fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property less cost to sell, and the carrying value of the loan charged to the allowance for loan and lease losses or other income, if a positive adjustment. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs, property maintenance costs, and gains or losses recognized upon the sale of other real estate are recognized in Noninterest Expense on the Consolidated Statements of Income. Gains or losses resulting from the sale of other real estate are recognized on the date of sale. As of December 31, 2022 and 2021, other real estate had carrying values of $ 0.10 million and $ 0.00 million , respectively, and is included in Other Assets on the Consolidated Statements of Financial Condition. 52 Table of Contents Repossessed Assets — Repossessed assets may include fixtures and equipment, inventory and receivables, aircraft, construction equipment, and vehicles acquired from business banking and specialty finance activities. Repossessed assets are included in Other Assets on the Consolidated Statements of Financial Condition at fair value of the equipment or vehicle less estimated selling costs. 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. Subsequent fair value write-downs or write-ups, to the extent of previous write-downs, equipment maintenance costs, and gains or losses recognized upon the sale of repossessions are recognized in Noninterest Expense on the Consolidated Statements of Income. Gains or losses resulting from the sale of repossessed assets are recognized on the date of sale. Repossessed assets totaled $ 0.33 million and $ 0.86 million, as of December 31, 2022 and 2021, respectively, and are included in Other Assets on the Consolidated Statements of Financial Condition. Premises and Equipment — Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed by the straight-line method, primarily with useful lives ranging from three years to 31.5 years. Maintenance and repairs are charged to expense as incurred, while improvements, which extend the useful life, are capitalized and depreciated over the estimated remaining life. Goodwill and Intangibles — Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Goodwill is reviewed for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the carrying amount. Goodwill is allocated into two reporting units. Fair value for each reporting unit is estimated using stock price multiples or earnings before interest, tax, depreciation and amortization (EBITDA) multiples. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to impairment testing. All of the Company’s other intangible assets have finite lives and are amortized on a straight-line basis over varying periods not exceeding twenty-five years . The Company has historically evaluated goodwill for impairment during the fourth quarter of each year, with financial data as of September 30. During the first quarter of 2021, management determined that the deterioration in general economic conditions as a result of the COVID-19 pandemic and responses thereto represented a triggering event prompting an evaluation of goodwill impairment. The Company performed impairment analyses in each quarter of 2021. In 2022, management determined conditions no longer represented a triggering event requiring quarterly analyses and returned to its historical practice of evaluating goodwill during the fourth quarter of the year. Based on the analyses performed each quarter of 2021 and the fourth quarter of 2022, the Company determined that goodwill was no t impaired. Partnership Investments — The Company accounts for its investments in partnerships for which it owns less than fifty percent and has the ability to exercise significant influence over the partnership on the equity method. The Company accounts for its investments in partnerships for which it does not have the ability to exercise significant influence at fair value less impairment, if any, or cost less any impairment if the fair value is not readily determinable. The Company has elected to use the practical expedient to estimate fair value of an investment in an investment company using the net asset value of its partnership interest. The Company uses the hypothetical liquidation book value (HLBV) method for equity investments when the liquidation rights and priorities as defined by an equity investment agreement differ from what is reflected by the underlying percentage ownership interests. The HLBV method is commonly applied to equity investments in the renewable energy industry, where the economic benefits corresponding to an equity investment may vary at different points in time and/or are not directly linked to an investor’s ownership percentage. A calculation is prepared at each balance sheet date to determine the amount that the Company would receive if an equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is 1st Source’s share of the earnings or losses from the equity investment for the period. Investments in partnerships are included in Other Assets on the Consolidated Statements of Financial Condition. The balances as of December 31, 2022 and 2021 were $ 137.15 million and $ 95.05 million, respectively. Short-Term Borrowings — Short-term borrowings consist of Federal funds purchased, securities sold under agreements to repurchase, commercial paper, Federal Home Loan Bank notes, and borrowings from non-affiliated banks. Federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings mature within one day to 365 days of the transaction date. Commercial paper matures within seven days to 270 days. Other short-term borrowings on the Consolidated Statements of Financial Condition include the Company’s liability related to mortgage loans available for repurchase under GNMA optional repurchase programs. Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third-party is continually monitored and additional collateral obtained or requested to be returned to the Company as deemed appropriate. 53 Table of Contents Revenue Recognition — The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial services offered primarily through 1st Source Bank and its subsidiaries. Interest Income — The largest source of revenue for the Company is interest income which is primarily recognized on an accrual basis according to nondiscretionary formulas in written contracts, such as loan and lease agreements or investment securities contracts. Noninterest Income — The Company earns noninterest income through a variety of financial and transaction services provided to corporate and consumer clients such as trust and wealth advisory, deposit account, debit card, mortgage banking, insurance, and equipment rental services. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses. Trust and Wealth Advisory Fees — Trust and wealth advisory fees are recognized on the accrual basis. Income Taxes — 1st Source and its subsidiaries file a consolidated Federal 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, the Company believes it is more likely than not that all of the deferred tax assets will be realized. The Company uses the deferral method of accounting on investments that generate investment tax credits. 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 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. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 % likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within Income Tax Expense on the Consolidated Statements of Income. Net Income Per Common Share — Earnings per 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 shares of common stock outstanding, excluding participating securities. Diluted earnings per common share is computed by using the weighted-average number of shares determined for the basic earnings per share calculation plus the dilutive effect of stock compensation using the treasure stock method. Stock-Based Employee Compensation — The Company recognizes stock-based compensation as compensation cost on the Consolidated Statements of Income based on their fair values on the measurement date, which, for its purposes, is the date of grant. The Company recognizes forfeitures as they occur. Segment Information — 1st Source has one principal business segment, commercial banking. While our chief decision makers monitor the revenue streams of various products and services, the identifiable segments’ operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company’s financial service operations are considered to be aggregated in one reportable operating segment. 54 Table of Contents Derivative Financial Instruments — The Company occasionally enters into derivative financial instruments as part of its interest rate risk management strategies. These derivative financial instruments consist primarily of interest rate swaps. All derivative instruments are recorded on the Consolidated Statements of Financial Condition, as either an asset or liability, at their fair value. The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the derivative. For a derivative used to hedge changes in fair value of a recognized asset or liability, or an unrecognized firm commitment, the gain or loss on the derivative will be recognized in earnings together with the offsetting loss or gain on the hedged item. This results in an earnings impact only to the extent that the hedge is ineffective in achieving offsetting changes in fair value. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in earnings. For a derivative used to hedge changes in cash flows associated with forecasted transactions, the gain or loss on the effective portion of the derivative will be deferred, and reported as accumulated other comprehensive income, a component of shareholders’ equity, until such time the hedged transaction affects earnings. For derivative instruments not accounted for as hedges, changes in fair value are recognized in noninterest income/expense on the Consolidated Statements of Income. Deferred gains and losses from derivatives that are terminated and were in a cash flow hedge are amortized over the shorter of the original remaining term of the derivative or the remaining life of the underlying asset or liability. 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. Securities available for sale, mortgage loans held for sale, and derivative instruments are carried at fair value on a recurring basis. 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 are 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. Reclassifications — Certain amounts in the prior periods consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on total assets, shareholders’ equity or net income as previously reported. 55 Table of Contents Note 2 — Recent Accounting Pronouncements 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: 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. 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, 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. 56 Table of Contents 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 December 31, 2022 U.S. Treasury and Federal agencies securities $ 1,090,743 $ — $ ( 92,145 ) $ 998,598 U.S. States and political subdivisions securities 130,670 591 ( 8,499 ) 122,762 Mortgage-backed securities - Federal agencies 730,672 60 ( 93,674 ) 637,058 Corporate debt securities 16,486 — ( 355 ) 16,131 Foreign government securities 600 — ( 21 ) 579 Total investment securities available-for-sale $ 1,969,171 $ 651 $ ( 194,694 ) $ 1,775,128 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 securities 600 — ( 2 ) 598 Total investment 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 December 31, 2022 and 2021, accrued interest receivable on investment securities available for sale was $ 5.98 million and $ 4.80 million, respectively. At December 31, 2022, 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 Company did not hold any marketable equity securities at December 31, 2022 and 2021. The following table shows the contractual maturities of investments in debt securities available-for-sale at December 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 $ 63,325 $ 62,318 Due after one year through five years 1,112,166 1,016,225 Due after five years through ten years 21,835 18,204 Due after ten years 41,173 41,323 Mortgage-backed securities 730,672 637,058 Total debt securities available-for-sale $ 1,969,171 $ 1,775,128 57 Table of Contents The following table summarizes gross unrealized losses and fair value by investment category and age. At December 31, 2022, the Company’s available-for-sale securities portfolio consisted of 745 securities, 690 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 December 31, 2022 U.S. Treasury and Federal agencies securities $ 164,481 $ ( 6,299 ) $ 834,117 $ ( 85,846 ) $ 998,598 $ ( 92,145 ) U.S. States and political subdivisions securities 57,592 ( 2,126 ) 38,834 ( 6,373 ) 96,426 ( 8,499 ) Mortgage-backed securities - Federal agencies 198,469 ( 13,482 ) 426,989 ( 80,192 ) 625,458 ( 93,674 ) Corporate debt securities 16,132 ( 355 ) — — 16,132 ( 355 ) Foreign government securities 484 ( 16 ) 95 ( 5 ) 579 ( 21 ) Total debt securities available-for-sale $ 437,158 $ ( 22,278 ) $ 1,300,035 $ ( 172,416 ) $ 1,737,193 $ ( 194,694 ) 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 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 December 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. (Dollars in thousands) 2022 2021 2020 Gross realized gains $ — $ 221 $ 285 Gross realized losses ( 184 ) ( 901 ) ( 6 ) Net realized (losses) gains $ ( 184 ) $ ( 680 ) $ 279 At December 31, 2022 and 2021, investment securities with carrying values of $ 282.87 million and $ 351.13 million, respectively, were pledged as collateral for security repurchase agreements and for other purposes. Note 4 — Loan and Lease Financings 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, 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. Accrued interest receivable on loans and leases at December 31, 2022 and 2021 was $ 18.75 million and $ 12.94 million, respectively. In the ordinary course of business, the Company has extended loans to certain directors, executive officers, and principal shareholders of equity securities of 1st Source and to their affiliates. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Company and did not involve more than the normal risk of collectability, or present other unfavorable features. The loans are consistent with sound banking practices and within applicable regulatory and lending limitations. The aggregate dollar amounts of these loans were $ 12.53 million and $ 14.05 million at December 31, 2022 and 2021, respectively. During 2022, $ 0.45 million of new loans and other additions were made and $ 1.97 million of repayments and other reductions occurred. 58 Table of Contents 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. 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 our 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 our 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 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 three 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. 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. 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 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 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. 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 three to four years of debt amortization to reach an equity position in the collateral. 59 Table of Contents 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 ten 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. 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. 60 Table of Contents 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, 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 $ 159,317 $ 107,232 $ 71,365 $ 35,874 $ 17,192 $ 13,860 $ 370,553 $ — $ 775,393 Grades 7-12 4,491 5,934 60 2,094 1,644 1,040 21,375 — 36,638 Total commercial and agricultural 163,808 113,166 71,425 37,968 18,836 14,900 391,928 — 812,031 Solar Grades 1-6 109,393 113,276 35,660 72,652 18,518 20,654 — — 370,153 Grades 7-12 — — 1,091 5,678 701 3,540 — — 11,010 Total Solar 109,393 113,276 36,751 78,330 19,219 24,194 — — 381,163 Auto and light truck Grades 1-6 521,399 155,508 62,063 32,975 10,946 3,476 — — 786,367 Grades 7-12 5,972 3,366 5,836 2,836 1,792 1,948 — — 21,750 Total auto and light truck 527,371 158,874 67,899 35,811 12,738 5,424 — — 808,117 Medium and heavy duty truck Grades 1-6 158,296 66,533 43,711 31,980 10,053 3,274 — — 313,847 Grades 7-12 — — — — — 15 — — 15 Total medium and heavy duty truck 158,296 66,533 43,711 31,980 10,053 3,289 — — 313,862 Aircraft Grades 1-6 438,481 273,726 213,661 57,379 31,085 35,012 3,687 — 1,053,031 Grades 7-12 12,962 4,253 6,190 — — 1,286 — — 24,691 Total aircraft 451,443 277,979 219,851 57,379 31,085 36,298 3,687 — 1,077,722 Construction equipment Grades 1-6 475,854 213,349 106,409 59,204 17,834 4,593 23,310 2,754 903,307 Grades 7-12 20,709 7,757 2,483 1,878 313 32 583 1,441 35,196 Total construction equipment 496,563 221,106 108,892 61,082 18,147 4,625 23,893 4,195 938,503 Commercial real estate Grades 1-6 271,526 164,173 121,685 97,470 102,271 168,391 251 — 925,767 Grades 7-12 1,532 1,716 7,824 5,789 47 1,070 — — 17,978 Total commercial real estate 273,058 165,889 129,509 103,259 102,318 169,461 251 — 943,745 Residential real estate and home equity Performing 115,154 100,690 97,205 34,498 6,864 81,653 142,724 4,115 582,903 Nonperforming — 131 693 — — 725 180 105 1,834 Total residential real estate and home equity 115,154 100,821 97,898 34,498 6,864 82,378 142,904 4,220 584,737 Consumer Performing 74,258 34,619 12,924 7,375 2,977 692 18,098 — 150,943 Nonperforming 148 65 49 53 12 12 — — 339 Total consumer $ 74,406 $ 34,684 $ 12,973 $ 7,428 $ 2,989 $ 704 $ 18,098 $ — $ 151,282 61 Table of Contents 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 62 Table of Contents 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 December 31, 2022 Commercial and agricultural $ 810,223 $ 944 $ — $ — $ 811,167 $ 864 $ 812,031 Solar 381,163 — — — 381,163 — 381,163 Auto and light truck 793,610 353 1 — 793,964 14,153 808,117 Medium and heavy duty truck 313,845 — 2 — 313,847 15 313,862 Aircraft 1,075,865 223 1,063 — 1,077,151 571 1,077,722 Construction equipment 932,603 431 — — 933,034 5,469 938,503 Commercial real estate 940,516 — — — 940,516 3,229 943,745 Residential real estate and home equity 582,053 562 288 49 582,952 1,785 584,737 Consumer 150,328 416 199 5 150,948 334 151,282 Total $ 5,980,206 $ 2,929 $ 1,553 $ 54 $ 5,984,742 $ 26,420 $ 6,011,162 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 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. 63 Table of Contents 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. Modification programs focused on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. The modifications did not result in the contractual forgiveness of principal or interest. The TDRs during 2020 were the result of issues that predated the COVID-19 pandemic. 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. 2022 2021 2020 (Dollars in thousands) Number of Modifications Recorded Investment Number of Modifications Recorded Investment Number of Modifications Recorded Investment Performing TDRs: 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 performing TDR modifications — — — — — — Nonperforming TDRs: Commercial and agricultural — — — — — — Solar — — — — — — Auto and light truck — — — — — — Medium and heavy duty truck — — — — — — Aircraft — — — — 1 828 Construction equipment — — 1 5,729 1 9,905 Commercial real estate — — — — — — Residential real estate and home equity — — — — — — Consumer — — — — — — Total nonperforming TDR modifications — — 1 5,729 2 10,733 Total TDR modifications — $ — 1 $ 5,729 2 $ 10,733 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. 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 December 31. Year Ended December 31 (Dollars in thousands) 2022 2021 Performing TDRs $ — $ 319 Nonperforming TDRs 3,640 6,742 Total TDRs $ 3,640 $ 7,061 64 Table of Contents Note 5 — Allowance for Credit Losses Allowance for Loan and Lease Losses The methodology used to estimate the appropriate level of the allowance for loan and lease losses is described in Note 1, under the heading “Allowance for Credit Losses.” The allowance for loan and lease losses at December 31, 2022 and 2021, represents the Company’s current estimate of lifetime credit losses inherent in the loan and lease portfolio. The following table shows the changes in the allowance for loan and lease losses, segregated by portfolio segment, for each of the three years ended December 31. (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 2022 Balance, beginning of year $ 15,409 $ 6,585 $ 19,624 $ 6,015 $ 33,628 $ 19,673 $ 19,691 $ 5,084 $ 1,783 $ 127,492 Charge-offs 625 — 118 — — 1,114 538 284 730 3,409 Recoveries 56 — 417 — 785 17 45 160 460 1,940 Net charge-offs (recoveries) 569 — ( 299 ) — ( 785 ) 1,097 493 124 270 1,469 Provision (recovery of provision) ( 205 ) 632 ( 1,289 ) 1,551 6,680 5,463 ( 1,767 ) 1,518 662 13,245 Balance, end of year $ 14,635 $ 7,217 $ 18,634 $ 7,566 $ 41,093 $ 24,039 $ 17,431 $ 6,478 $ 2,175 $ 139,268 2021 Balance, beginning of year $ 16,680 $ 5,549 $ 28,926 $ 6,400 $ 34,053 $ 19,166 $ 22,758 $ 5,374 $ 1,748 $ 140,654 Charge-offs 2,930 — 7,797 — — 856 — 228 712 12,523 Recoveries 812 — 1,316 — 687 473 19 16 341 3,664 Net charge-offs (recoveries) 2,118 — 6,481 — ( 687 ) 383 ( 19 ) 212 371 8,859 Provision (recovery of provision) 847 1,036 ( 2,821 ) ( 385 ) ( 1,112 ) 890 ( 3,086 ) ( 78 ) 406 ( 4,303 ) Balance, end of year $ 15,409 $ 6,585 $ 19,624 $ 6,015 $ 33,628 $ 19,673 $ 19,691 $ 5,084 $ 1,783 $ 127,492 2020 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 Recoveries 663 — 499 18 1,800 1,415 58 33 303 4,789 Net charge-offs (recoveries) 240 — 6,608 ( 3 ) ( 945 ) 2,675 ( 21 ) 41 590 9,185 Provision (recovery of provision) ( 3,067 ) 2,520 22,437 ( 629 ) 1,566 7,349 5,036 118 671 36,001 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 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 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 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, 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 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 for each of the three years ended December 31. (Dollars in thousands) 2022 2021 2020 Balance, beginning of year $ 4,196 $ 4,499 $ 3,172 Impact of ASC 326 adoption — — 777 Adjusted balance, beginning of year 4,196 4,499 3,949 Provision (recovery of provision) 1,420 ( 303 ) 550 Balance, end of year $ 5,616 $ 4,196 $ 4,499 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 the components of the investment in direct finance and operating leases as of December 31. (Dollars in thousands) 2022 2021 Direct finance leases: Minimum lease payments $ 224,816 $ 172,017 Estimated unguaranteed residual values — — Less: Unearned income ( 50,633 ) ( 22,552 ) Net investment in direct finance leases $ 174,183 $ 149,465 Operating leases: Gross investment in operating leases $ 60,999 $ 95,046 Accumulated depreciation ( 29,299 ) ( 46,613 ) Net investment in operating leases $ 31,700 $ 48,433 65 Table of Contents The following table shows future minimum lease payments due from clients on direct finance and operating leases at December 31, 2022. (Dollars in thousands) Direct Finance Leases Operating Leases 2023 $ 48,011 $ 9,192 2024 32,764 5,526 2025 31,472 3,071 2026 25,890 1,489 2027 23,221 599 Thereafter 63,458 223 Total $ 224,816 $ 20,100 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 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. The lessee’s at-risk portion, or top risk, is satisfied last and is subject to repayment as additional rent, if the TRAC amount is not satisfied by the net sale proceeds. The carrying amount of residual assets covered by residual value guarantees was $ 29.65 million and $ 27.33 million at December 31, 2022 and December 31, 2021, respectively. The following table shows interest income recognized from direct finance lease payments and operating lease equipment rental income and related depreciation expense. (Dollars in thousands) 2022 2021 2020 Direct finance leases: Interest income on lease receivable $ 9,008 $ 6,634 $ 8,258 Operating leases: Income related to lease payments $ 12,274 $ 16,647 $ 23,380 Depreciation expense 10,023 13,694 20,203 Income related to reimbursements from lessees for personal property tax on operating leased equipment for the years ended December 31, 2022, 2021 and 2020 were $ 0.35 million, $ 0.46 million and $ 0.61 million, respectively. 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, 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 The following table shows premises and equipment as of December 31. (Dollars in thousands) 2022 2021 Land $ 15,500 $ 15,500 Buildings and improvements 61,860 61,257 Furniture and equipment 40,404 39,418 Total premises and equipment 117,764 116,175 Accumulated depreciation and amortization ( 72,991 ) ( 69,137 ) Net premises and equipment $ 44,773 $ 47,038 Depreciation and amortization of properties and equipment totaled $ 4.60 million in 2022, $ 5.09 million in 2021, and $ 5.67 million in 2020. Note 8 — Mortgage Servicing Rights The unpaid principal balance of residential mortgage loans serviced for third parties was $ 848.96 million at December 31, 2022, compared to $ 883.90 million at December 31, 2021, and $ 838.45 million at December 31, 2020. 66 Table of Contents Amortization expense on MSRs is expected to total $ 0.67 million, $ 0.58 million, $ 0.50 million, $ 0.42 million, and $ 0.36 million in 2023, 2024, 2025, 2026, and 2027, respectively. Projected amortization excludes the impact of future asset additions or disposals. The following table shows changes in the carrying value of MSRs and the associated valuation allowance. (Dollars in thousands) 2022 2021 Mortgage servicing rights: Balance at beginning of year $ 4,671 $ 4,616 Additions 753 2,172 Amortization ( 1,287 ) ( 2,117 ) Sales — — Carrying value before valuation allowance at end of year 4,137 4,671 Valuation allowance: Balance at beginning of year — ( 812 ) Impairment recoveries — 812 Balance at end of year $ — $ — Net carrying value of mortgage servicing rights at end of year $ 4,137 $ 4,671 Fair value of mortgage servicing rights at end of year $ 8,007 $ 5,640 At December 31, 2022, the fair value of MSRs exceeded the carrying value reported on the Consolidated Statements of Financial Condition by $ 3.87 million. This difference represents increases in the fair value of certain MSRs that could not be recorded above cost basis. Funds held in trust at 1st Source for the payment of principal, interest, taxes and insurance premiums applicable to mortgage loans being serviced for others, were approximately $ 8.57 million and $ 13.76 million at December 31, 2022 and December 31, 2021, respectively. Mortgage loan contractual servicing fees, including late fees and ancillary income, were $ 2.79 million, $ 3.17 million, and $ 3.13 million for 2022, 2021, and 2020, respectively. Mortgage loan contractual servicing fees are included in Mortgage Banking Income on the Consolidated Statements of Income. Note 9 — Intangible Assets and Goodwill At December 31, 2022, intangible assets consisted of goodwill of $ 83.87 million and other intangible assets of $ 0.04 million, which was net of accumulated amortization of $ 0.10 million. At December 31, 2021, intangible assets consisted of goodwill of $ 83.87 million and other intangible assets of $ 0.06 million, which was net of accumulated amortization of $ 0.08 million. Intangible asset amortization was $ 0.02 million, $ 0.02 million, and $ 0.02 million for 2022, 2021, and 2020, respectively. Amortization on other intangible assets is expected to total $ 0.02 million, $ 0.02 million, $ 0.00 million , $ 0.00 million , and $ 0.00 million in 2023, 2024, 2025, 2026, and 2027, respectively. The following table shows a summary of other intangible assets as of December 31. (Dollars in thousands) 2022 2021 Other intangibles: Gross carrying amount $ 146 $ 146 Less: accumulated amortization ( 106 ) ( 86 ) Net carrying amount $ 40 $ 60 Note 10 — Deposits The aggregate amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more outstanding at December 31, 2022 and 2021 was $ 600.37 million and $ 290.89 million, respectively. The following table shows the amount of certificates of deposit of $250,000 or more and other time deposits of $250,000 or more outstanding at December 31, 2022, by time remaining until maturity. (Dollars in thousands) Under 3 months $ 149,632 4 – 6 months 71,595 7 – 12 months 175,229 Over 12 months 203,911 Total $ 600,367 67 Table of Contents The following table shows scheduled maturities of time deposits, including both private and public funds, at December 31, 2022. (Dollars in thousands) 2023 $ 796,947 2024 154,656 2025 82,635 2026 51,355 2027 33,229 Thereafter 21,637 Total $ 1,140,459 Note 11 — Borrowed Funds and Mandatorily Redeemable Securities The following table shows the details of long-term debt and mandatorily redeemable securities as of December 31, 2022 and 2021. (Dollars in thousands) 2022 2021 Federal Home Loan Bank borrowings ( 1.04 % – 2.80 %) $ 21,315 $ 44,150 Mandatorily redeemable securities 17,905 20,598 Other long-term debt 7,335 6,503 Total long-term debt and mandatorily redeemable securities $ 46,555 $ 71,251 Annual maturities of long-term debt outstanding at December 31, 2022, for the next five years and thereafter beginning in 2023, are as follows: $ 3.16 million; $ 12.29 million; $ 1.25 million; $ 11.14 million; $ 0.68 million; and $ 18.04 million. 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. Mandatorily redeemable securities as of December 31, 2022 and 2021, of $ 17.91 million and $ 20.60 million, respectively reflected the “book value” shares under the 1st Source Executive Incentive Plan. See Note 16 - Stock Based Compensation (Stock Award Plans) for additional information. Dividends paid on these shares and changes in book value per share are recorded as Other interest expense on the Consolidated Statements of Income. 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. 2022 2021 (Dollars in thousands) Amount Weighted Average Rate Amount Weighted Average Rate Federal funds purchased $ — — % $ — — % Securities sold under agreements to repurchase 141,432 0.05 194,727 0.05 Commercial paper 3,096 0.03 3,967 0.04 Federal Home Loan Bank advances 70,000 4.16 — — Other short-term borrowings 1,001 — 1,333 — Total short-term borrowings $ 215,529 1.39 % $ 200,027 0.05 % Note 12 — 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. 68 Table of Contents • 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. These tax credits are recognized as a reduction of tax expense or, for investments qualifying as investment tax credits, as a reduction to the related investment asset. The Company recognized federal and state income tax credits related to its affordable housing and community development tax-advantaged investments in tax expense of $ 2.06 million, $ 2.02 million and $ 1.72 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company also recognized $ 9.83 million, $ 3.53 million and $ 31.08 million of investment tax credits for the years ended December 31, 2022, 2021 and 2020, 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, we are 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 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 as of December 31, 2022 and 2021. (Dollars in thousands) 2022 2021 Investment carrying amount $ 70,887 $ 35,968 Unfunded capital and other commitments 64,520 29,670 Maximum exposure to loss 45,020 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 a third party. At December 31, 2022 and 2021, approximately $ 66.26 million and $ 59.08 million, respectively, of the Company’s assets and $ 0.00 million and $ 0.00 million , respectively, of its liabilities included on the Consolidated Statements of Financial Condition were related to tax-advantaged investment VIEs which the Company has consolidated. The assets of the consolidated VIE 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. 69 Table of Contents 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 on the Consolidated Statements of Financial Condition with the corresponding interest distributions reflected as Interest Expense on the Consolidated Statements of Income. The common shares issued by the Capital Trust are included in Other Assets on the Consolidated Statements of Financial Condition. 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 December 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 6.25 % 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 13 — 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. No stock options were considered antidilutive as of December 31, 2022, 2021 and 2020. The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share for the three years ending December 31. (Dollars in thousands - except per share amounts) 2022 2021 2020 Distributed earnings allocated to common stock $ 31,095 $ 30,369 $ 28,859 Undistributed earnings allocated to common stock 88,419 87,237 52,044 Net earnings allocated to common stock 119,514 117,606 80,903 Net earnings allocated to participating securities 995 928 534 Net income allocated to common stock and participating securities $ 120,509 $ 118,534 $ 81,437 Weighted average shares outstanding for basic earnings per common share 24,687,324 25,038,127 25,525,154 Dilutive effect of stock compensation — — — Weighted average shares outstanding for diluted earnings per common share 24,687,324 25,038,127 25,525,154 Basic earnings per common share $ 4.84 $ 4.70 $ 3.17 Diluted earnings per common share $ 4.84 $ 4.70 $ 3.17 70 Table of Contents 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 included in net income $ ( 184 ) $ ( 680 ) (Losses) gains on investment securities available-for-sale ( 184 ) ( 680 ) Income before income taxes Tax effect 43 160 Income tax expense Net of tax $ ( 141 ) $ ( 520 ) Net income Note 15 — Employee Benefit Plans The 1st Source Corporation Employee Stock Ownership and Profit Sharing Plan (as amended, the “Plan”) includes an employee stock ownership component, which is designed to invest in and hold 1st Source common stock, and a 401(k) plan component, which holds all Plan assets not invested in 1st Source common stock. The Plan encourages diversification of investments with opportunities to change investment elections and contribution levels. Employees are eligible to participate in the Plan the first of the month following 90 days of employment. The Company matches dollar for dollar on the first 4 % of deferred compensation, plus 50 cents on the dollar of the next 2 % deferrals. The Company will also contribute to the Plan an amount designated as a fixed 2 % employer contribution. The amount of fixed contribution is equal to two percent of the participant’s eligible compensation. Additionally, each year the Company may, in its sole discretion, make a discretionary profit sharing contribution. As of December 31, 2022 and 2021, there were 730,151 and 751,447 shares, respectively, of 1st Source Corporation common stock held in relation to employee benefit plans. The Company contributions are allocated among the participants on the basis of compensation. Each participant’s account is credited with cash and/or shares of 1st Source common stock based on that participant’s compensation earned during the year. After completing 5 years of service in which they worked at least 1,000 hours per year, a participant will be completely vested in the Company’s contribution. An employee is always 100 % vested in their deferral. Plan participants are entitled to receive distributions from their Plan accounts in-service and upon termination of service, retirement, or death. Contribution expense for the years ended December 31, 2022, 2021, and 2020, amounted to $ 6.22 million, $ 6.31 million, and $ 5.70 million, respectively. Note 16 — Stock Based Compensation As of December 31, 2022, the Company had four active stock-based employee compensation plans. 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 (ESPP). The 2011 Stock Option Plan was approved by the shareholders on April 21, 2011 but the Company had not made any grants through December 31, 2022. These stock-based employee compensation plans were established to help retain and motivate key employees. All of the plans have been approved by the shareholders of 1st Source Corporation. The Executive Compensation and Human Resources Committee (the “Committee”) of the 1st Source Corporation Board of Directors has sole authority to select the employees, establish the awards to be issued, and approve the terms and conditions of each award under the stock-based compensation plans. Stock-based compensation to employees is recognized as compensation cost on the Consolidated Statements of Income based on their fair values on the measurement date, which, for 1st Source, is the date of grant. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. The total fair value of share awards vested was $ 4.08 million during 2022, $ 3.45 million in 2021, and $ 2.67 million in 2020. 71 Table of Contents The following table shows the combined summary of activity regarding active stock option and stock award plans. Non-Vested Stock Awards Outstanding Shares Available for Grant Number of Shares Weighted-Average Grant-Date Fair Value Balance, January 1, 2020 664,502 218,991 $ 29.60 Shares authorized - 2020 EIP 60,233 — — Granted ( 147,576 ) 147,576 37.41 Stock awards vested — ( 74,203 ) 28.95 Forfeited 49 ( 870 ) 31.82 Balance, December 31, 2020 577,208 291,494 33.71 Shares authorized - 2021 EIP 62,369 — — Granted ( 79,072 ) 79,072 36.22 Stock awards vested — ( 92,622 ) 32.53 Forfeited 250 ( 3,798 ) 32.12 Balance, December 31, 2021 560,755 274,146 34.86 Shares authorized - 2022 EIP 287,503 — — Granted ( 127,198 ) 127,198 40.44 Stock awards vested — ( 97,640 ) 34.92 Forfeited 9,131 ( 15,179 ) 36.53 Balance, December 31, 2022 730,191 288,525 $ 37.03 Stock Option Plans — Incentive stock option plans include the 2011 Stock Option Plan (the “2011 Plan”). Each award from the plan is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Committee determines. The option price is equal to the fair market value of a share of 1st Source Corporation’s common stock on the date of grant. Options granted expire at such time as the Committee determines at the date of grant and in no event does the exercise period exceed a maximum of ten years . Upon merger, consolidation, or other corporate consolidation in which 1st Source Corporation is not the surviving corporation, as defined in the plans, all outstanding options immediately vest. There were zero stock options exercised during 2022, 2021 or 2020. All shares issued in connection with stock option exercises and non-vested stock awards are issued from available treasury stock. No stock-based compensation expense related to stock options was recognized in 2022, 2021 or 2020. The fair value of each option on the date of grant is estimated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility estimated over a period equal to the expected life of the options. In estimating the fair value of stock options under the Black-Scholes valuation model, separate groups of employees that have similar historical exercise behavior are considered separately. The expected life of the options granted is derived based on past experience and represents the period of time that options granted are expected to be outstanding. Stock Award Plans — Incentive stock award plans include the EIP, the SDP and the RSAP. The EIP is administered by the Committee. Awards under the EIP and SDP include “book value” shares and “market value” shares of common stock. These shares are awarded annually based on weighted performance criteria and generally vest over a period of five years . The EIP book value shares may only be sold to 1st Source and such sale is mandatory in the event of death, retirement, disability, or termination of employment. The RSAP is designed for key employees. Awards under the RSAP are made to employees recommended by the Chief Executive Officer and approved by the Committee. Shares granted under the RSAP vest over a period of up to ten years and vesting is based upon meeting certain various criteria, including continued employment with 1st Source. Stock-based compensation expense relating to the EIP, SDP and RSAP totaled $ 3.59 million in 2022, $ 4.21 million in 2021, and $ 3.29 million in 2020. The total income tax benefit recognized in the accompanying Consolidated Statements of Income related to stock-based compensation was $ 0.83 million in 2022, $ 0.99 million in 2021, and $ 0.77 million in 2020. Unrecognized stock-based compensation expense related to non-vested stock awards (EIP/SDP/RSAP) was $ 7.90 million at December 31, 2022. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 3.11 years. The fair value of non-vested stock awards for the purposes of recognizing stock-based compensation expense is market price of the stock on the measurement date, which, for the Company’s purposes is the date of the award. 72 Table of Contents Employee Stock Purchase Plan — The Company offers an ESPP for substantially all employees with at least two years of service on the effective date of an offering under the plan. Eligible employees may elect to purchase any dollar amount of stock, so long as such amount does not exceed 25 % of their base rate of pay and the aggregate stock accrual rate for all offerings does not exceed $ 25,000 in any calendar year. The purchase price for shares offered is the lower of the closing market bid price for the offering date or the average market bid price for the five business days preceding the offering date. The purchase price and premium/(discount) to the actual market closing price on the offering date for the 2022, 2021, and 2020 offerings were $ 46.78 (- 0.34 %), $ 49.98 (- 0.42 %), and $ 34.35 ( 1.78 %), respectively. Payment for the stock is made through payroll deductions over the offering period, and employees may discontinue the deductions at any time and exercise the option or take the funds out of the program. The most recent offering began June 1, 2022 and runs through June 1, 2024, with $ 209,200 in stock value to be purchased at $ 46.78 per share. Note 17 — Income Taxes The following table shows the composition of income tax expense. Year Ended December 31 (Dollars in thousands) 2022 2021 2020 Current: Federal $ 38,779 $ 16,346 $ 42,411 State 6,937 4,586 6,629 Total current 45,716 20,932 49,040 Deferred: Federal ( 7,936 ) 14,206 ( 21,865 ) State ( 1,525 ) 1,190 ( 2,295 ) Total deferred ( 9,461 ) 15,396 ( 24,160 ) Total provision $ 36,255 $ 36,328 $ 24,880 The following table shows the reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate ( 21 %) to income before income taxes. 2022 2021 2020 Year Ended December 31 (Dollars in thousands) Amount Percent of Pretax Income Amount Percent of Pretax Income Amount Percent of Pretax Income Statutory federal income tax $ 32,925 21.0 % $ 32,526 21.0 % $ 22,332 21.0 % (Decrease) increase in income taxes resulting from: Tax-exempt interest income ( 504 ) ( 0.3 ) ( 373 ) ( 0.2 ) ( 439 ) ( 0.4 ) State taxes, net of federal income tax benefit 4,275 2.7 4,563 2.9 3,424 3.2 Other ( 441 ) ( 0.3 ) ( 388 ) ( 0.2 ) ( 437 ) ( 0.4 ) Total $ 36,255 23.1 % $ 36,328 23.5 % $ 24,880 23.4 % The tax expense related to (losses) gains on investment securities available-for-sale for the years 2022, 2021, and 2020 was approximately $( 39,000 ), $( 164,000 ), and $ 67,000 , respectively. 73 Table of Contents The following table shows the composition of deferred tax assets and liabilities as of December 31, 2022 and 2021. (Dollars in thousands) 2022 2021 Deferred tax assets: Allowance for credit losses $ 33,237 $ 32,431 Operating lease liability 4,728 5,145 Accruals for employee benefits 3,752 3,837 Capitalized loan costs — 15 Net unrealized losses on securities available-for-sale 46,353 3,128 Other 426 1,015 Total deferred tax assets 88,496 45,571 Deferred tax liabilities: Differing depreciable bases in premises and leased equipment 7,373 10,796 Right of use assets - leases 5,037 5,315 Differing bases in assets related to acquisitions 4,305 4,219 Tax advantaged partnerships 3,823 9,502 Other 245 713 Total deferred tax liabilities 20,783 30,545 Net deferred tax asset $ 67,713 $ 15,026 No valuation allowance for deferred tax assets was recorded at December 31, 2022 and 2021 as the Company believes it is more likely than not that all of the deferred tax assets will be realized. Additionally, the tax credit carryforward generated in 2020 was fully utilized in 2021. Tax years that remain open and subject to audit include the federal 2019-2022 years and the Indiana 2019-2022 years. The Company does not anticipate a significant change in the amount of uncertain tax positions within the next 12 months. Note 18 — Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk Contingent Liabilities —1st Source and its subsidiaries are defendants in various legal proceedings arising in the normal course of business. In the opinion of management, based upon present information including the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Company’s consolidated financial position or results of operations. 1st Source Bank sells residential mortgage loans to Fannie Mae as well as FHA-insured, USDA-insured and VA-guaranteed loans in Ginnie Mae mortgage-backed securities. Additionally, the Bank has sold loans on a service released basis to various other financial institutions in the past. The agreements under which the Bank sells these mortgage loans contain various representations and warranties regarding the acceptability of loans for purchase. On occasion, the Bank may be required to indemnify the loan purchaser for credit losses on loans that were later deemed ineligible for purchase or may be required to repurchase a loan. Both circumstances are collectively referred to as “repurchases.” The Company’s liability for repurchases, included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition, was $ 0.17 million and $ 0.22 million as of December 31, 2022 and 2021, respectively. The mortgage repurchase liability represents the Company’s best estimate of the loss that it may incur. The estimate is based on specific loan repurchase requests and a historical loss ratio with respect to origination dollar volume. Because the level of mortgage loan repurchase losses are dependent on economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. Lease Commitments — The Company and its subsidiaries are obligated under operating leases for certain office premises and equipment. The following table shows operating lease right of use assets and operating lease liabilities as of December 31. (Dollars in thousands) Statement of Financial Condition classification 2022 2021 Operating lease right of use assets Accrued income and other assets $ 20,916 $ 22,071 Operating lease liabilities Accrued expenses and other liabilities $ 19,634 $ 21,364 74 Table of Contents The following table shows the components of operating leases expense for the year ended December 31. (Dollars in thousands) Statement of Income classification 2022 2021 2020 Operating lease cost Net occupancy expense $ 3,527 $ 3,480 $ 3,472 Short-term lease cost Net occupancy expense 18 20 8 Variable lease cost (recovery of cost) Net occupancy expense 8 — ( 30 ) Total operating lease cost $ 3,553 $ 3,500 $ 3,450 The following table shows future minimum rental commitments for all noncancellable operating leases with an initial term longer than 12 months for the next five years and thereafter. (Dollars in thousands) 2023 $ 3,862 2024 3,281 2025 2,913 2026 2,620 2027 2,091 Thereafter 6,398 Total lease payments 21,165 Less: imputed interest ( 1,531 ) Present value of operating lease liabilities $ 19,634 The following table shows the weighted average remaining operating lease term, the weighted average discount rate and supplemental Consolidated Statement of Cash Flows information for operating leases at December 31. (Dollars in thousands) 2022 2021 2020 Weighted average remaining lease term 9.33 years 9.31 years 10.17 years Weighted average discount rate 1.85 % 1.75 % 1.80 % Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 4,298 $ 4,006 $ 3,794 There were no new significant leases that had not yet commenced as of December 31, 2022. Financial Instruments with Off-Balance-Sheet Risk — To meet the financing needs of our clients, 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. Financial instruments, whose contract amounts represent credit risk as of December 31, were as follows: (Dollars in thousands) 2022 2021 Amounts of commitments: Loan commitments to extend credit $ 1,234,866 $ 1,148,984 Standby letters of credit $ 18,055 $ 24,657 Commercial and similar letters of credit $ 2,368 $ 8,531 The Company’s 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. 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. 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. 75 Table of Contents Standby letters of credit are conditional commitments issued to guarantee the performance of a client to a third party. The credit risk involved in and collateral obtained when issuing standby letters of credit are essentially the same as those 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 19 — 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 18 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 institution 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 at December 31, 2022 and 2021. 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 Interest rate swap contracts $ 881,600 Other assets $ 24,838 Other liabilities $ 25,307 Loan commitments 2,638 Mortgages held for sale 67 N/A — Forward contracts - mortgage loan 3,750 Mortgages held for sale 24 N/A — Total - December 31, 2022 $ 887,988 $ 24,929 $ 25,307 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 - December 31, 2021 $ 1,101,807 $ 21,187 $ 21,183 The following table shows the amounts included on the Consolidated Statements of Income for non-hedging derivative financial instruments at December 31, 2022, 2021 and 2020. Gain (loss) (Dollars in thousands) Statement of Income classification 2022 2021 2020 Interest rate swap contracts Other expense $ ( 32 ) $ 591 $ ( 650 ) Interest rate swap contracts Other income 83 410 879 Loan commitments Mortgage banking ( 385 ) ( 1,035 ) 1,302 Forward contracts - mortgage loan Mortgage banking 35 279 ( 252 ) Total $ ( 299 ) $ 245 $ 1,279 76 Table of Contents The following table shows the offsetting of financial assets and derivative assets at December 31, 2022 and 2021. 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 December 31, 2022 Interest rate swaps $ 24,838 $ — $ 24,838 $ — $ 25,295 $ ( 457 ) 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 at December 31, 2022 and 2021. 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 December 31, 2022 Interest rate swaps $ 25,307 $ — $ 25,307 $ — $ — $ 25,307 Repurchase agreements 141,432 — 141,432 141,432 — — Total $ 166,739 $ — $ 166,739 $ 141,432 $ — $ 25,307 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 or derivative agreement occurs, each party will set-off property held, or loan indebtedness owing, in respect of transactions against obligations owing in respect of any other transactions. At December 31, 2022 and December 31, 2021, repurchase agreements had a remaining contractual maturity of $ 138.08 million and $ 191.47 million in overnight and $ 3.35 million and $ 3.26 million in up to 30 days, respectively and were collateralized by U.S. Treasury and Federal agencies securities. Note 20 — Regulatory Matters The Company is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total capital, Tier 1 capital, and common equity Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. The Company believes that it meets all capital adequacy requirements to which it is subject. The most recent notification from the Federal bank regulators categorized 1st Source Bank, the largest of its subsidiaries, as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that the Company believes will have changed the institution’s category. 77 Table of Contents As discussed in Note 12, the capital securities held by the Capital Trusts qualify as Tier 1 capital under Federal Reserve Board guidelines. The following table shows the actual and required capital amounts and ratios for 1st Source Corporation and 1st Source Bank as of December 31, 2022 and 2021. 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 2022 Total Capital (to Risk-Weighted Assets): 1st Source Corporation $ 1,137,984 16.10 % $ 565,314 8.00 % $ 741,975 10.50 % $ 706,643 10.00 % 1st Source Bank 1,060,292 15.01 565,119 8.00 741,718 10.50 706,398 10.00 Tier 1 Capital (to Risk-Weighted Assets): 1st Source Corporation 1,048,955 14.84 423,986 6.00 600,647 8.50 565,314 8.00 1st Source Bank 971,294 13.75 423,839 6.00 600,439 8.50 565,119 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): 1st Source Corporation 932,257 13.19 317,989 4.50 494,650 7.00 459,318 6.50 1st Source Bank 911,596 12.90 317,879 4.50 494,479 7.00 459,159 6.50 Tier 1 Capital (to Average Assets): 1st Source Corporation 1,048,955 12.63 332,287 4.00 N/A N/A 415,359 5.00 1st Source Bank 971,294 11.70 332,125 4.00 N/A N/A 415,156 5.00 2021 Total Capital (to Risk-Weighted Assets): 1st Source Corporation $ 1,034,605 16.76 % $ 493,751 8.00 % $ 648,048 10.50 % $ 617,189 10.00 % 1st Source Bank 969,228 15.71 493,412 8.00 647,603 10.50 616,765 10.00 Tier 1 Capital (to Risk-Weighted Assets): 1st Source Corporation 956,783 15.50 370,313 6.00 524,611 8.50 493,751 8.00 1st Source Bank 891,458 14.45 370,059 6.00 524,250 8.50 493,412 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): 1st Source Corporation 846,573 13.72 277,735 4.50 432,032 7.00 401,173 6.50 1st Source Bank 838,248 13.59 277,544 4.50 431,735 7.00 400,897 6.50 Tier 1 Capital (to Average Assets): 1st Source Corporation 956,783 11.89 321,925 4.00 N/A N/A 402,407 5.00 1st Source Bank 891,458 11.08 321,821 4.00 N/A N/A 402,277 5.00 The Bank was not required to maintain noninterest bearing cash balances with the Federal Reserve Bank as of December 31, 2022 and 2021. Dividends that may be paid by a subsidiary bank to the parent company are subject to certain legal and regulatory limitations and also may be affected by capital needs, as well as other factors. Due to the Company’s mortgage activities, 1st Source Bank is required to maintain minimum net worth capital requirements established by various governmental agencies. 1st Source Bank’s net worth requirements are governed by the Department of Housing and Urban Development and GNMA. As of December 31, 2022, 1st Source Bank met its minimum net worth capital requirements. Note 21 — Fair Value Measurements The Company determines the fair values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. 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 the derivatives or best-efforts forward sales commitments. At December 31, 2022 and 2021, all mortgages held for sale are carried at fair value. 78 Table of Contents The following table shows the differences between 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 on December 31, 2022 and 2021. (Dollars in thousands) Fair value carrying amount Aggregate unpaid principal Excess of fair value carrying amount over (under) unpaid principal December 31, 2022 Mortgages held for sale reported at fair value: Total Loans $ 3,914 $ 3,766 $ 148 (1) December 31, 2021 Mortgages held for sale reported at fair value: Total Loans $ 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. • 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 incorporates a credit spread assumption. 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. On a quarterly basis, prices supplied by the pricing agent are validated by comparison to the prices obtained from other third party sources. 79 Table of Contents 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 December 31, 2022 Assets: Investment securities available-for-sale: U.S. Treasury and Federal agencies securities $ 573,679 $ 424,919 $ — $ 998,598 U.S. States and political subdivisions securities — 121,298 1,464 122,762 Mortgage-backed securities - Federal agencies — 637,058 — 637,058 Corporate debt securities — 16,131 — 16,131 Foreign government and other securities — 579 — 579 Total debt securities available-for-sale 573,679 1,199,985 1,464 1,775,128 Mortgages held for sale — 3,914 — 3,914 Accrued income and other assets (interest rate swap agreements) — 24,838 — 24,838 Total $ 573,679 $ 1,228,737 $ 1,464 $ 1,803,880 Liabilities: Accrued expenses and other liabilities (interest rate swap agreements) $ — $ 25,307 $ — $ 25,307 Total $ — $ 25,307 $ — $ 25,307 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 80 Table of Contents The following table shows the changes in Level 3 assets and liabilities measured at fair value on a recurring basis. (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 ( 135 ) Purchases 3,000 Issuances — Sales — Settlements — Maturities ( 3,250 ) Transfers into Level 3 — Transfers out of Level 3 — Ending balance December 31, 2022 $ 1,464 Beginning balance January 1, 2021 $ 2,152 Total gains or losses (realized/unrealized): Included in earnings — Included in other comprehensive income ( 15 ) Purchases — Issuances — Sales — Settlements — Maturities ( 288 ) Transfers into Level 3 — Transfers out of Level 3 — Ending balance December 31, 2021 $ 1,849 There were no gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at December 31, 2022 or 2021. The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on a recurring basis. (Dollars in thousands) Fair value Valuation Methodology Unobservable Inputs Range of Inputs Weighted Average December 31, 2022 Debt securities available-for-sale Direct placement municipal securities $ 1,464 Discounted cash flows Credit spread assumption 0.22 % - 4.09 % 3.49 % 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. 81 Table of Contents 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 gain 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 % at a minimum 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 year ended December 31, 2022 and 2021, respectively: collateral-dependent impaired loans - $ 0.00 million and $ 2.76 million; MSRs - $ 0.00 million and $( 0.81 ) million; repossessions - $ 0.00 million and $ 0.27 million, and other real estate - $ 0.00 million and $ 0.06 million. 82 Table of Contents 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 December 31, 2022 Collateral-dependent impaired loans $ — $ — $ — $ — Accrued income and other assets (mortgage servicing rights) — — 4,137 4,137 Accrued income and other assets (repossessions) — — 327 327 Accrued income and other assets (other real estate) — — 104 104 Total $ — $ — $ 4,568 $ 4,568 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 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 December 31, 2022 Collateral-dependent impaired loans $ — $ — Collateral based measurements including appraisals, trade publications, and auction values Discount for lack of marketability and current conditions 0 % - 0 % 0 % Mortgage servicing rights 4,137 8,007 Discounted cash flows Constant prepayment rate (CPR) 7.6 % - 9.6 % 8.2 % Discount rate 11.4 % - 14.2 % 11.5 % Repossessions 327 370 Appraisals, trade publications and auction values Discount for lack of marketability 2 % - 9 % 7 % Other real estate 104 104 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. 83 Table of Contents 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 December 31, 2022 Assets: Cash and due from banks $ 84,703 $ 84,703 $ 84,703 $ — $ — Federal funds sold and interest bearing deposits with other banks 38,094 38,094 38,094 — — Investment securities, available-for-sale 1,775,128 1,775,128 573,679 1,199,985 1,464 Other investments 25,293 25,293 25,293 — — Mortgages held for sale 3,914 3,914 — 3,914 — Loans and leases, net of allowance for loan and lease losses 5,871,894 5,712,972 — — 5,712,972 Mortgage servicing rights 4,137 8,007 — — 8,007 Accrued interest receivable 24,747 24,747 — 24,747 — Interest rate swaps 24,838 24,838 — 24,838 — Liabilities: Deposits $ 6,928,265 $ 6,909,392 $ 5,787,806 $ 1,121,586 $ — Short-term borrowings 215,529 215,529 139,079 76,450 — Long-term debt and mandatorily redeemable securities 46,555 45,111 — 45,111 — Subordinated notes 58,764 51,398 — 51,398 — Accrued interest payable 5,999 5,999 — 5,999 — Interest rate swaps 25,307 25,307 — 25,307 — Off-balance-sheet instruments * — 108 — 108 — 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. 84 Table of Contents 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. Note 22 — 1st Source Corporation (Parent Company Only) Financial Information STATEMENTS OF FINANCIAL CONDITION December 31 (Dollars in thousands) 2022 2021 ASSETS Cash and cash equivalents $ 104,678 $ 94,543 Short-term investments with bank subsidiary 500 500 Investments in: Bank subsidiaries 842,707 907,238 Non-bank subsidiaries 1 1 Right of use assets 14,730 16,106 Other assets 6,234 6,877 Total assets $ 968,850 $ 1,025,265 LIABILITIES AND SHAREHOLDERS’ EQUITY Commercial paper $ 3,096 $ 3,967 Long-term debt and mandatorily redeemable securities 25,240 27,102 Subordinated notes 58,764 58,764 Operating lease liability 13,509 15,463 Other liabilities 4,173 3,714 Total liabilities 104,782 109,010 Total shareholders’ equity 864,068 916,255 Total liabilities and shareholders’ equity $ 968,850 $ 1,025,265 STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Year Ended December 31 (Dollars in thousands) 2022 2021 2020 Income: Dividends from bank subsidiary $ 49,588 $ 46,207 $ 46,207 Rental income from (reimbursements to) subsidiaries 1,740 1,873 ( 908 ) Other 148 146 293 Investment securities and other investment gains (losses) 353 342 ( 44 ) Total income 51,829 48,568 45,548 Expenses: Interest on subordinated notes 3,550 3,267 3,367 Interest on long-term debt and mandatorily redeemable securities ( 341 ) 1,799 2,151 Interest on commercial paper and other short-term borrowings 1 3 11 Occupancy 1,625 1,722 1,816 Other 890 711 667 Total expenses 5,725 7,502 8,012 Income before income tax benefit and equity in undistributed income of subsidiaries 46,104 41,066 37,536 Income tax benefit 1,099 998 1,747 Income before equity in undistributed income of subsidiaries 47,203 42,064 39,283 Equity in undistributed income of subsidiaries: Bank subsidiaries 73,329 76,493 42,178 Net income $ 120,532 $ 118,557 $ 81,461 Comprehensive (loss) income $ ( 17,297 ) $ 90,325 $ 94,660 85 Table of Contents STATEMENTS OF CASH FLOWS Year Ended December 31 (Dollars in thousands) 2022 2021 2020 Operating activities: Net income $ 120,532 $ 118,557 $ 81,461 Adjustments to reconcile net income to net cash provided by operating activities: Equity (undistributed) distributed in excess of income of subsidiaries ( 73,329 ) ( 76,493 ) ( 42,178 ) Depreciation of premises and equipment — 1 2 Amortization of right of use assets 1,376 1,346 1,107 Stock-based compensation 120 102 94 Realized/unrealized investment securities and other investment (gains) losses ( 353 ) ( 342 ) 44 Other ( 702 ) 1,556 ( 103 ) Net change in operating activities 47,644 44,727 40,427 Investing activities: Net change in partnership investments 102 ( 74 ) ( 182 ) Net change in investing activities 102 ( 74 ) ( 182 ) Financing activities: Net change in commercial paper ( 871 ) ( 800 ) 774 Proceeds from issuance of long-term debt and mandatorily redeemable securities 1,862 1,738 1,640 Payments on long-term debt and mandatorily redeemable securities ( 2,708 ) ( 2,427 ) ( 2,268 ) Stock issued under stock purchase plans 252 90 39 Net proceeds from issuance of treasury stock 2,792 2,523 1,706 Acquisition of treasury stock ( 6,836 ) ( 33,136 ) ( 6,415 ) Cash dividends paid on common stock ( 32,102 ) ( 31,340 ) ( 29,764 ) Net change in financing activities ( 37,611 ) ( 63,352 ) ( 34,288 ) Net change in cash and cash equivalents 10,135 ( 18,699 ) 5,957 Cash and cash equivalents, beginning of year 94,543 113,242 107,285 Cash and cash equivalents, end of year $ 104,678 $ 94,543 $ 113,242 86 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None